Thanks for the update. Will check
Mgt were conservative earlier even though 100% of loans are secured and LTV is low as loan book is full of new to credit borrowers.
As the book goes throught seasons, they are planning to get aggressive in using leverage to boost their ROE profile.
Rohit, Its a great coverage and thesis. Well articulated. Am new to value investing and learning. I have a question on the valuation. Given company’s 35% growth projection, how to determine current (under/overvalued) and projected target price. My rough calc, at a conservative 30% yoy, considering industry PE 30, it should reach close to 1700. Is that right way to project a NBFC!!!
That’s a good question & to be honest your guess is as good as mine in terms of what is the exact NPV of Five-Star business finance. That is as far as valuation goes.
As far as pricing goes - I think this goes back to the age old debate of should financials be “priced” at P/B or P/E. There are some who argue that P/B if there will be constant equity dilution, and P/E only if no plans to dilute (like Gruh back in the day) It could be argued Five-Star falls in the latter (Gruh finance) category.
Five- Star has stated in the October earnings call (if i am not mistaken), that they ideally should not need to raise capital (maybe ever, if not at least for the next 5 years) If you look at their CAR it is greater than 50% and they have high return ratios RoA (8%+ now should come down to 6.5% steady state in the next few years). So they should be able to finance growth for at least the next 5-6 years (may be more) through internal accruals while maintaining a max leverage ratio of 4x (current leverage little above 2x)
So if we assume P/E is the right metric and just crudely straight line their earnings at 35% (which is their stated guidance) 3 years out. They should conservatively be around 2,000 cr PAT. (They are currently close to 900-1,000 cr PAT annualizing last quarter’s number) Assign whatever P/E multiple you choose (based on growth expectation then & RoE at 4x leverage) & you will get your target market cap 3 years out. (current market cap 22,500 cr)
It must be said that the above calculation is extremely crude and i am sure flawed in many ways but it’s made just to illustrate a larger point.
Very good pointers. Thank you!!