Summary
Five-Star Business Finance Limited - Q3 FY2026 Earnings Call Summary Thursday, January 29, 2026 11:00 AM
Event Participants
Executives 2 Lakshmipathy Deenadayalan (Chairman & Managing Director), Srikanth Gopalakrishnan (Joint Managing Director & CFO)
Analysts 8 Abhijit Tibrewal (Motilal Oswal), Adityapal (MSA), Chirag Fialoke (MS Capital), Kunal Shah (Citigroup), Nischint Chawathe (Kotak Securities), Parag Jariwala (White Oak Capital), Renish Bhuva (ICICI Securities), Viral Shah (IIFL Capital)
Financials & KPIs
| Metric | Reported | Commentary |
|---|---|---|
| Disbursements | ₹976 crores | -18% QoQ, strategy to prioritize collections over growth during stress. |
| Stage-1 Assets | 81.77% | +10 bps QoQ from 81.67%, indicating stability in the current/softer bucket. |
| Stage-2 Assets | ₹1,249 crores | Stable QoQ, management noted lowest fresh slippages in 4-5 quarters. |
| Stage-3 (GNPA) | ~₹400 crores | Elevated slippages persist; management focusing on settlement/legal recovery. |
| Credit Cost | 1.44% | +10 bps QoQ from 1.34%, reflecting adequate provision coverage. |
| Net Interest Margin (NIM) | -50 bps YoY | Compression due to lower growth and elevated credit costs. |
| Cost of Funds (Book) | 9.12% | -51 bps YoY from 9.63%, driven by lower incremental borrowing costs. |
| Incremental Cost of Debt | 8.19% | Trending downward from previous quarters, helping protect spreads. |
| Spreads | 13.9% | Remained stable as falling cost of funds compensated for lower yields. |
| PAT | ₹277 crores | +1% YoY, -3% QoQ; impacted by one-offs and new labor code implementation. |
| ROA / ROE | 7% / 15.8% | Both remained healthy despite macro stress (ROA down from 8% YoY). |
| Net Worth | ₹7,083 crores | First time crossing the ₹7,000 crore milestone. |
Geographic & Segment Commentary
- Small-Ticket Secured Loans (LAP): Remains the core focus; however, management is intentionally slowing disbursements (₹976 crores) to fix collection issues and counter “behavioral stress” in borrower segments.
- Affordable Housing: Soft-launched in previous quarters with ~100 files sanctioned; management plans to accelerate this segment once the core LAP collection strategy stabilizes.
- South India Focus: Management noted regional holiday impacts (Pongal, Makar Sankranti) in January but reported resilient collection trends despite these seasonal factors.
Company-Specific & Strategic Commentary
- Collection Vertical: Scaling aggressively with 2,452 collection officers vs 1,329 YoY; building a senior-led vertical at the Head Office to separate recovery from business development.
- “Lender-Made Crisis”: Management characterizes current stress as a behavioral crisis caused by other lenders writing off loans, which destroys credit culture; Five-Star is choosing to “fight back” via physical collections rather than technical write-offs.
- Underwriting Tightening: Rejection rates have increased to 38-40% (from ~30%) as the company implements stricter filters to avoid MFI-overlap stress and over-leveraged households.
- Borrowing Diversification: Signed a $100 million loan agreement with Asian Development Bank (ADB) to diversify funding sources; fully loaded cost expected at 8.75% to 8.80%.
Guidance & Outlook
| Metric | Guidance / Outlook | Commentary |
|---|---|---|
| Cost of Funds | Additional 10-15 bps drop | Transmission of 25 bps November repo rate cut and lower incremental costs over next 3-6 months. |
| Disbursement Growth | Acceleration in Q1 FY27 | Management will provide specific FY27/28 targets after stabilizing collections in Q4 FY26. |
| Provisioning | 1.70% to 1.80% of AUM | Management views 1.5-1.6% as steady-state for secured books but will maintain higher buffers currently. |
| Yields | ~20 bps drop per quarter | Continuous trend due to higher competition and mix shift towards slightly larger/better-rated profiles. |
Risks & Constraints
| Risk | Context |
|---|---|
| Behavioral Credit Risk | Management noted a shift from “capacity-to-pay” issues to “willingness-to-pay” issues as borrowers see other unsecured lenders writing off loans. |
| Operating Expenses | Opex likely to rise as the company invests in a dedicated collection vertical and increases salaries to counter rising industry attrition. |
| MFI Overlap | While ticket sizes differ, MFI lenders are increasingly targeting the same small-business segment, leading to borrower over-leverage. |
Q&A Highlights
Asset Quality & Collection Efficiency
- Question: Can you share unique customer collection efficiency excluding NPAs? (Viral Shah)
- Answer: Unique customer collection efficiency (excl. NPAs) rose from 96.5% in Q2 to 97.26% in Q3. Most importantly, collections on the current book rose from 98.5% to 99.01% (Srikanth G.).
- Question: Why is stress protracted compared to history? (Sanjay Ladha)
- Answer: This is a “lender-made” crisis. While we could write off ₹1,000 crores to clean the book, we refuse to do so to preserve credit culture. We are in the last leg of fixing these behavioral issues (Lakshmipathy D.).
Growth & Strategy
- Question: What is the roadmap for AUM growth in FY27? (Viral Shah)
- Answer: Disbursement is the easy part; collection is hard. We will withhold specific FY27 guidance until after Q4 results once the collection vertical is fully operational (Srikanth G.).
- Question: What are you doing differently in underwriting? (Abhijit Tibrewal)
- Answer: We have significantly reduced MFI overlap where possible, though overlap is inevitable as MFIs move up-market. We now require a 2-year track record for repeat loans (Lakshmipathy D.).
Provisions & Write-offs
- Question: What was the write-off amount this quarter? (Chirag Fialoke)
- Answer: ₹63 crores (Srikanth G.).
- Question: Why not maintain higher PCR on Stage-3? (Kunal Shah)
- Answer: As we write off loans (typically those >450 days delinquent), the PCR naturally moves. We believe 1.83% total AUM coverage is very healthy for a secured book (Srikanth G.).
Key Takeaway
Five-Star Business Finance delivered a quarter of consolidation, prioritizing the “fixing” of asset quality over aggressive growth. PAT stood at ₹277 crores with a healthy 7% ROA, even as disbursements were moderated to ₹976 crores (-18% QoQ). The company is combatting what it terms a “lender-made” behavioral crisis among small borrowers by aggressively scaling its collection vertical to 2,452 officers and maintaining a strict stance against large technical write-offs. While Stage-3 remains slightly elevated, a 10 bps improvement in the “Current” portion of the book and the lowest fresh Stage-2 additions in a year suggest early signs of revival. Management remains focused on stabilizing credit culture through physical collection and borrower education, expecting to return to business acceleration in FY2027 once these structural fixes are solidified.
Want more insights like this?
Subscribe to get deep dives delivered to your inbox.
More Earnings Summaries
Explore more Q3 FY26 earnings call analyses: