Event Participants
Executives
3 Lakshmipathy Deenadayalan, Srikanth Gopalakrishnan, Prashanth Sreenivasan
Analysts
14 Abhijit Tibrewal (Motilal Oswal), Aditya Miglani (Burman Capital), Chandrasekhar Sridhar (Fidelity International), Chirag Fialoke (MS Capital), Darshan Deora (Indvest Group), Divyansh Gupta (Latent PMS), Kunal Shah (Citigroup), Kunal Thanvi (Banyan Tree Advisors), Nischint (Kotak), Raghav Garg (Ambit Capital), Rajiv Mehta (YES Securities), Renish (ICICI), Varun Subramanian (Ascent Capital), Viral Shah (IIFL Capital)
Financials & KPIs
| Metric | Reported | Commentary |
|---|---|---|
| AUM | ₹13,722 crores | +4% QoQ; on track to achieve FY27 growth guidance "very comfortably" |
| Disbursements | ₹1,496 crores | Historical best; +23% QoQ, +16% YoY; June run-rate ₹670 crores |
| Active loan customers | 500,000 | Milestone crossed as of June 30, 2026 |
| Branch network | 856 | +12 branches in the quarter, largely Maharashtra |
| Unique customer collection efficiency | 97.9% | vs 98.1% QoQ; resilient despite seasonally soft Q1 |
| Ex-bucket collections | 99.2% | vs 99.3% QoQ |
| Current book | 83.30% | vs 82.69% QoQ; guided to ~85% by FY27-end |
| 30+ DPD book | 12.38% | vs 12.69% QoQ; guided to below 12% |
| Slippages | 0.70% | Flat QoQ; expected to trend down in coming quarters |
| Credit cost | 1.85% | vs 1.88% Q4 FY26; FY27 guidance 1.7%-1.9%, trending toward 1.7% |
| Stage 3 PCR | >40% | Overall provision coverage ~1.8% of AUM, maintained |
| PAT | ₹271 crores | Q1 FY27 profit after tax |
| ROA | 8.11% | Q1 FY27 |
| ROE | ~14.5% | Q1 FY27 |
| Yield on portfolio | <22.5% | -12 bps QoQ; new disbursements at ~22.5% (range 21.5%-23%) |
| Cost of funds (book) | 8.80% | vs 8.95% Q4 FY26, -15 bps QoQ; all-inclusive incremental cost 8.33% |
| Spread / NIM | +3 bps QoQ spread | NIM flat; yield compression fully offset by cost-of-funds decline |
| Net worth | ₹7,653 crores | As of June 30, 2026 |
| Write-offs / Recoveries | ₹60 crores / ₹35 crores (Q1) | FY27 write-offs guided ₹225-250 crores; recoveries up from ₹26-27 crores last quarter |
Geographic & Segment Commentary
Micro-LAP (Core Secured Lending): Record disbursements of ₹1,496 crores with average ticket size of ~₹4.5-5 lakh; mix steadily shifting toward the guided 25-50-25 profile (≤₹3 lakh / ₹3-5 lakh / >₹5 lakh). Management emphasized the company is strengthening its position in the core segment, not vacating space. Current book at 83.30% and 30+ at 12.38% reflect improving collection quality.
Housing Product: Launched two quarters ago but deliberately not scaled while micro-LAP normalizes to pre-crisis disbursement levels; a housing variant for the same customer profile will be activated once core momentum is firmly established.
Branch Expansion: 12 branches added, largely in Maharashtra, taking the network to 856; infrastructure investments continue to support growth targets, though branch addition run-rate remains normal (~50-60 branches expected for the year).
Company-Specific & Strategic Commentary
Business-Collection Vertical Segregation: Splitting business and collections teams boosted productivity significantly — business staff now focus purely on logins and sanctions while specialist teams handle arrears. Credit filters and customer profile remain unchanged; the business team retains responsibility for current-account collections on newer vintages, preserving the collection DNA.
Product Diversification: Board-endorsed multi-product strategy driven by the single-product concentration lesson from the recent crisis; one new product to be launched within the next 3-6 months, with detailed rationale shared with investors at the appropriate time.
Pricing Philosophy: The October 2024 200 bps yield cut was a proactive customer repricing driven by declining borrowing costs (from 11%+ to 9%+), not regulatory pressure; lending rates moving forward will continue to track cost of funds, with pricing benefits expected to flow through provisions via lower credit costs rather than higher yields.
Institutional Strength: Management emphasized that results across growth, profitability, and quality metrics demonstrate an institution built on 15,000 employees, not dependent on a few individuals; the 500,000 active customer milestone and 856-branch infrastructure underpin this positioning.
Guidance & Outlook
| Metric | Guidance / Outlook | Commentary |
|---|---|---|
| Loan/AUM growth | 20% for FY27 | Achievable "very comfortably"; implied disbursement run-rate ₹6,500-6,800 crores for the year |
| Credit cost | 1.7%-1.9% FY27; ~1.6%-1.7% FY28 | Current trend toward the lower end; FY28 highest range 1.7% |
| GNPA | Sub 3% by FY27-end | Driven by declining slippages; recovery momentum picking up (₹35 crores in Q1) |
| Current book / 30+ DPD | ~85% / <12% by FY27-end | Collections trajectory from current book (>99%) expected to sustain |
| Yield | Settle ~22.25% | Further 10-15 bps contraction over next 2 quarters, driven by NPA interest reversals |
| Cost of funds | Incremental ~8.5%; another 10-15 bps compression for the year | Predicated on no repo rate increase; ADB ECB tranche pending with hedging cost impact |
| OpEx / cost-to-assets | ~5.75%-6% FY27; 5.25%-5.5% steady state from FY28 | OpEx growth ~20-21% YoY, flat as a ratio; operating leverage deferred to FY28 |
| Write-offs | ₹225-250 crores for FY27 | ~₹55-60 crores per quarter; technical write-offs for tax and GNPA positioning |
| Leverage | 2x D/E in 6-8 quarters; ROE 18%-20% at 3x leverage | PAT accretion of ₹1,100-1,200 crores annually partially offsets leverage build |
| New product launch | Within 3-6 months | Additional to housing; will supplement existing-product growth and leverage |
Risks & Constraints
| Risk | Context |
|---|---|
| Macro / customer cash flows | Rising energy costs and the regulator's potential decision on price hikes could pressure borrower cash flows. Management sees no collections stress currently (7-8 months of improving trends) but flags both factors as watch items. |
| Rate environment | Any repo rate increase would reverse the expected 10-15 bps cost-of-funds compression; all-inclusive borrowing cost guidance of ~8.5% assumes rates stay on hold. |
| Competitive / people costs | New entrants are pushing up employee compensation, keeping FY27 OpEx elevated at ~6% cost-to-assets and delaying operating leverage to FY28; attrition currently flat but expected to improve as productivity picks up. |
| Sector over-leverage | Customers use small gold loans / microfinance to bridge temporary cash-flow gaps, a phenomenon management calls permanent. MFI overlap has declined from 20-21% to 16-17%, but prevention of the next over-leverage cycle depends on lender discipline across the industry. |
| Asset quality normalization | Slippages need 1-2 more quarters of confirmed downward trend before a steady-state slippage number can be guided; elevated write-offs (₹225-250 crores FY27) will persist through the year. |
Q&A Highlights
Operating Leverage & OpEx Trajectory
- Question: Historically cost-to-assets was ~5%; it's now ~6%. When does operating leverage kick in and where does cost settle? (Renish, ICICI)
- Answer: FY27 OpEx will stay flat YoY as a ratio; cost-to-assets to remain at 5.75%-6% this year (total expense growth ~20-21% YoY). Steady-state of 5.25%-5.5% only from FY28 onwards. Elevation is driven by competitive employee compensation realignment, not ESOPs or branch expansion. (Srikanth Gopalakrishnan)
Yield Contraction & Cost of Funds
- Question: Is the large part of asset repricing at lower rates over? (Renish, ICICI)
- Answer: Yes — new disbursements are being onboarded at ~22.5% (range 21.5%-23%), with another 10-15 bps of quarterly contraction possible for the next couple of quarters before settling ~22.25%. The residual compression is largely from NPA interest reversals, not pricing. (Srikanth Gopalakrishnan)
Slippages, Recoveries & ARC Sales
- Question: What is the extent of further stop-3 flow-throughs? Do you resort to ARC sales? (Viral Shah, IIFL Capital)
- Answer: No ARC sales. Slippages should start trending down; Q1 recoveries were ₹35 crores vs ₹26-27 crores last quarter. Credit cost is shown at gross (recoveries booked as other income, not netted). NPA levels and credit cost will trend down through Sep-Dec-Mar quarters. (Srikanth Gopalakrishnan; Lakshmipathy Deenadayalan)
Early-Bucket Stress & Rollbacks
- Question: Is stress in early buckets or flow-through into harder buckets? What are rollback rates? (Viral Shah, IIFL Capital)
- Answer: Rollbacks of 4-5% in the 1-30 and 31-60 buckets, and 2-3% in 61-90. Strategy focuses on preventing flows at the current bucket (99%+ current collection efficiency) rather than allowing flows and relying on rollbacks, since these customers cannot typically pay multiple installments to roll back. (Srikanth Gopalakrishnan)
Slippage Normalization Timeline
- Question: How many more quarters before slippages normalize post the MFI spillover, and what is a normalized level? (Abhijit Tibrewal, Motilal Oswal)
- Answer: Collections have been trending up for 7-8 months; slippages, credit cost, and NPAs to trend down across Sep/Dec/Mar quarters. GNPA guided below 3%; a steady-state slippage number will be given only after 1-2 quarters of confirmed trend. Credit cost likely settles toward the 1.7% lower end of guidance. (Lakshmipathy Deenadayalan; Srikanth Gopalakrishnan)
Customer Leverage & Gold Loan Overlap
- Question: Are customers using gold loans to repay us, masking underlying asset quality? (Chandrasekhar Sridhar, Fidelity International)
- Answer: Small gold/MFI loans bridging temporary cash-flow gaps is a permanent behavioral trend. MFI overlap has declined from 20-21% to 16-17%; gold price corrections over the past 6 months have reduced the gold-loan repayment dynamic. Customer cash flows are adequate for secured lenders. (Lakshmipathy Deenadayalan; Srikanth Gopalakrishnan)
Repayment Rates & Top-Up Policy
- Question: Why have repayment rates gone up, and how does this reconcile with the increasing 3-5 year duration mix? (Raghav Garg, Ambit Capital)
- Answer: Repayments rose due to stronger collections and a prior policy that asked even zero-DPD customers to fully prepay before a fresh loan, pushing them to competitors. Policy changed to allow top-ups for the best customers. Repayment rate of ~30% should normalize to 27-28%, implying a behavioral tenure of ~4.5 years; 85-90% of loans are disbursed at 7-year tenure. (Srikanth Gopalakrishnan)
Write-offs & ECL Coverage
- Question: Will write-offs keep increasing proportionally with Stage 3? Does 1.7%-1.8% credit cost guidance build back Stage 1/2 coverage? (Rajiv Mehta, YES Securities)
- Answer: Write-offs are technical (tax and GNPA positioning), at ~₹60 crores per quarter, ~₹225-250 crores for FY27; ₹7-8 crores already recovered from written-off accounts in Q1. Overall ECL coverage to be maintained at 1.75-1.8% of book — mix between Stage 1/2/3 coverage depends on portfolio. FY28 credit cost should improve to 1.6%-1.7%. (Srikanth Gopalakrishnan)
Steady-State Asset Quality Model
- Question: With 99.2% standard-bucket collection efficiency, where does the portfolio settle long term? (Kunal Shah, Citigroup)
- Answer: Steady-state target: Stage 1 at 91-92% (~87-88% current + 3-4% in 1-30), Stage 2 at 6-7% (3-3.5% each in 31-60 and 61-90), and Stage 3 at ~2.5%. Near-term: current book to ~85% and 30+ below 12% by year-end. (Srikanth Gopalakrishnan)
Disbursement Acceleration & Monthly Run-Rate
- Question: What is driving the disbursement acceleration, and is ₹600-670 crores per month the new normal? (Abhijit Tibrewal, Motilal Oswal; Renish, ICICI)
- Answer: Demand never was a problem — the slowdown was conscious during the challenge period. The business/collections vertical split lifted productivity, and logins/sanctions conversion shows strong traction. June disbursements were ₹670 crores; FY27 run-rate of ~₹6,500-6,800 crores implies average monthly ₹600-670 crores. (Lakshmipathy Deenadayalan; Srikanth Gopalakrishnan)
Product Diversification & Ticket Sizes
- Question: What about diversification beyond housing, and is the average disbursement ticket now ₹5-7 lakh? (Chandrasekhar Sridhar, Fidelity International; Chirag Fialoke, MS Capital)
- Answer: Average ticket is ~₹4.5-5 lakh, not ₹7 lakh. Mix guidance is 25-50-25 (≤₹3 lakh / ₹3-5 lakh / >₹5 lakh). A new product beyond housing will launch in 3-6 months; housing will be re-activated once micro-LAP stabilizes. No space is being vacated in core segments. (Lakshmipathy Deenadayalan; Srikanth Gopalakrishnan)
Leverage, ROE & Product-Linked Growth
- Question: When will D/E reach 2x, and what is the ROE target? Is higher growth guidance linked to new products? (Divyansh Gupta, Latent PMS; Darshan Deora, Indvest Group; Varun Subramanian, Ascent Capital)
- Answer: 2x D/E in 6-8 quarters; PAT adds ~₹1,100-1,200 crores annually to net worth, which offsets leverage build. Current product alone will lift leverage; new products will add a further kicker. ROE target is 18-20% at 3x leverage. Growth guidance at new-product launch will be set above the current 20% micro-LAP guidance. (Srikanth Gopalakrishnan; Lakshmipathy Deenadayalan)
Key Takeaway
Five-Star Business Finance delivered a record Q1 FY27, with disbursements of ₹1,496 crores (+23% QoQ, +16% YoY), AUM of ₹13,722 crores (+4% QoQ), and the milestone of 500,000 active customers, ending the quarter with 856 branches. Asset quality metrics improved decisively — current book at 83.30%, 30+ down to 12.38%, slippages flat at 0.70%, and credit cost easing to 1.85% — with management confident that slippages, NPAs, and credit cost will all trend down through the year toward guided levels of sub-3% GNPA, 1.7%-1.9% credit cost, and 20% loan growth. PAT stood at ₹271 crores with ROA of 8.11% and ROE of ~14.5%; spreads held despite yield compression as cost of funds declined 15 bps QoQ. Strategic priorities include collection-led underwriting discipline (no credit filter changes), product diversification with a new launch within 3-6 months, and a controlled OpEx trajectory with operating leverage deferred to FY28, when cost-to-assets should fall toward 5.25%-5.5%. Key watch items are energy-cost inflation, potential repo rate hikes, competitive pressure on employee costs, and sustained moderation in MFI/gold-loan overlap.