Ladies and gentlemen, good day and welcome to Five-Star Business Finance Q1 FY 2027 Earnings Conference Call. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance in the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded.
I now hand the conference over to Mr. Sanket Chheda from DAM Capital. Thank you, and over to you, Mr. Chheda.
Hi, a very good morning to all of you. Welcome to Five-Star Q1 earnings call. We have with us the entire management team today. Mr. Lakshmipathy Deenadayalan , who is the Chairman and Managing Director. Then we have Mr. Srikanth Gopalakrishnan, who is the Joint MD and CFO, and Mr. Prashanth Sreenivasan , who is the Chief of Strategy and Investor Relations. Without further ado, I'll hand the call over to Lakshmipathy for his opening remarks, and then we'll follow that up with question and answers.
Over to you, sir.
Yeah. Thank you. First of all, let me welcome you all for this Q1 earnings call, financial year 2027. At the onset of strong momentum, I feel delighted to present the performance of Five-Star Business Finance for the quarter ended June 2026. The quarter panned out in line with our expectations, which vindicated the actions we took to overcome the challenges we faced. The most heartening facet of this quarter is the strong traction in disbursements that we have achieved. We clocked our historical best in disbursement, with quarterly disbursements coming in at INR 1,496 crores, a growth of 23% over the previous quarter and 16% over the previous year. We ended the quarter with an AUM of INR 13,722 crores, which is a sequential growth of 4% for the quarter.
This clearly shows that Five-Star is on the growth trajectory, and at this phase of quarterly growth, we should be able to achieve our full-year growth guidance very comfortably. Collections continues to remain robust despite being the seasonally soft quarter. For the quarter ended June 30, 2026, we clocked a unique customer collection efficiency of 97.9% versus 98.1% last quarter, with our ex-bucket collections coming in at 99.2% versus 99.3% in previous quarter. As a result of this, our current book continues to improve and stood at 83.30% as compared to 82.69% as of previous quarter. We also saw a good improvement in our 30+ book, which reduced to 12.38% as compared to 12.69% in the previous quarter. With our strong collections, we should see asset quality metrics consistently improving in the quarters to come. Our slippages remained flat at 0.70% compared to the previous quarter.
Despite the seasonally soft nature of this quarter, our credit cost dropped sequentially to 1.85% for Q1 financial year 2027, from 1.88% for the Q4 financial year 2026. On the borrowing front, our all-inclusive cost was at 8.33%, despite not so favorable liquidity conditions. This has also helped bring down our cost of fund on the book from 8.95% for Q4 to 8.80% for the Q1 this year. Not only did this ensure our spreads to remain intact despite a drop in our yields in last October 2024, but this also shows the strength of our franchise from the perspective of external stakeholders. On the whole, it has been a great and satisfying quarter for Five-Star and sets the platform for the company to achieve a strong trajectory across the facets of growth, profitability and quality in the quarters to come.
I also want to take this opportunity to state that notwithstanding whatever has been happening over the last year or so, both external and internal, Five-Star has been able to demonstrate very strong numbers across various metrics. This clearly shows the strength of the institution that we have built and re-establishes the fact that we are not an institution that is dependent on few individuals. The individuals may come and go, but the institution will go on forever.
On this positive note, now I would like to hand over to Srikanth.
A very good morning to all of you. Mr. Pathy has outlined a lot of metrics that really gave us tremendous encouragement for us during this quarter. It has been a very encouraging quarter for all of us. During this quarter, one other milestone that we crossed is to achieve 500,000 active loan customers as on 30th June, which is a very significant milestone in the journey of the company. From a branch perspective, we continue to keep adding branches, primarily in the newer states. We added about 12 branches during this quarter, largely coming in from the state of Maharashtra, and ended June with about 856 branches, which is a very strong infrastructure that we can build upon in the quarters to come towards achieving our growth targets.
Our yields continue to remain consistent in line with the drop in yields that we did about a couple of years back. You will see about 10-15 basis points of reduction in yields on a quarterly basis. There was a 12 basis points drop in our yields. However, this was more than compensated by the drop in the average cost of funds, which dropped by about 15 basis points, resulting in a spread of 3 basis points higher compared to the last quarter. The NIM continues to be flat. We had achieved an ROA of about 8.11% for the current quarter, ROE of close to 14.5%. From a collections perspective, two metrics stand out.
Mr. Pathy had already outlined this in his opening remarks, I just want to reiterate the fact that achieving a 60 basis points drop in the one-plus number and achieving a 30 basis points drop in the 30+ number, especially in a softer quarter like Q1, shows that we are completely back on collections, and the collections is on a very strong trajectory. Our provision coverage on the Stage 3 book continues to remain healthy at over 40%, and on the overall AUM, we are close to about 1.8% of provision coverage. On the profitability side, we ended the quarter with about INR 271 crore of PAT, and our net worth as of 30th June stands at about INR 7,653 crore. As we said, it has been a very strong quarter for us.
After four quarters of some challenges that we faced, this quarter has been immensely satisfying, and we are extremely confident in our mind that we will be able to achieve all the guidances that we gave you comfortably in the quarters to come.
On that strong note, we would like to take any questions that any of you may have. Thank you so much.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question comes from the line of Renish from ICICI. Please go ahead.
Yeah. Hi, sir. Congrats on a good set of numbers. Just two things, sir. First, on the OpEx front. I understand we have been doing processes structuring and making investment towards setting up collection infrastructure. Just wanted to understand what will be the new steady- state cost to asset for us. I mean, historically, we used to operate at around 5%, which is now running at almost 6%. When do you see operating leverage kicking in, and ultimately, where does cost to asset settling in over the next five to six quarters?
Renish , this was a point that we had addressed even in the earlier calls as well. This year, given various conditions around us, especially with a few other competitors coming in, we have to be a little more competitive from an employee compensation perspective. To that extent, we are not guiding the market for any strong operating leverage to kick in. Whatever operating leverage kicks in will possibly be taken up by the increased expenses that we'll have to incur. The OpEx for this year will largely stay flat as compared to last year. From next year onwards, certainly you will see operating leverage starting to kick in.
From the perspective of total assets, like you rightly said, we are at about 6%. I think we will stay at around 5.75%-6% for this year. In a steady- state, this number should drop somewhere close to about 5.25%-5.5%.
Okay.
5.25%-5.5% in a steady-state scenario. That will happen more from FY 2028 onwards and not during this financial year.
Got it. No, it's very helpful. Second, on the asset yield part. Do you feel, as of Q1, the large part of asset repricing at lower rate is over, and maybe going ahead, the actual yield contraction will be limited to incremental growth?
That's right, Renish. The large part of the contraction has already happened. In fact, for Q1, if you look at it, we are at less than 22.5%. Today we are onboarding loans at close to 22.5%. Given some adjustments for the NPA interest reversals, this number should largely settle around the 22.25% is our thought. Maybe you will see this contraction of another 10, 15 basis points for the next couple of quarters, should settle somewhere around the 22.25% levels.
Okay. Just last thing, what is the lending rate as of now? It's 21.5%?
No. We are onboarding customers at an average of closer to 22.5%. The range is between 21.5%-23%. Average yield on disbursements will largely come in at around 22.5%.
22.5%.
Yeah.
Why should yield go down if the disbursement yields are at par with your Q1 yields?
Interest reversals on NPAs, Renish .
Okay. That's the only thing. Okay, got it.
That's all.
Okay. Thank you, Srikanth, and best of luck.
Thank you. Next question comes from the line of Viral Shah with IIFL Capital. Please go ahead.
Yeah. Thanks for the opportunity and congrats on good set of numbers. My first question is just a follow-up on the previous question. Srikanth, the yield compression largely being coming from, say, the interest income reversal. What is the extent of further flow-throughs that you expect in the Stage 3 over the next couple of quarters?
The slippages should start trending down, Viral. Given the seasonally soft nature of the quarter, we saw the slippages to be flat. I think you will start seeing slippages coming down in the quarters. Our recoveries are also actually going up. In fact, during this quarter between write-offs and NPA settlements, we clocked a recovery of about INR 35 crore as compared to about INR 26 crore, INR 27 crore of last quarter. You'll also see a pickup in recoveries in the quarters to come. From that perspective, I think you will see slippages coming down and NPAs also starting to trend down in the quarters to come.
Got it. Srikanth, just to clarify, we do not as of now resort to any ARC sale, right?
No. We do not resort to any ARC sale. The second point is our credit cost is also reflected at gross level, which means we are not netting off the recoveries that we are getting on write-off loans on our credit costs. We are actually showing it as other income in the top line. These two aspects need to be kept in mind because there are divergent practices in the market.
Got it. Srikanth, my second question is basically with regards to Sorry?
No, go ahead. Sorry.
My second question is with regards to the asset quality stress. Over the weekend we have comments from some other player. Can you just delve deeper into if at all there are any asset quality stress that you are seeing in your portfolio or in the market? And also whether this is in the early buckets or this is more of a flow-through into the, say, harder buckets or an NPA of the existing overdue accounts. And also whether if you can give some sense of what is the rollback rates in the early delinquent bucket accounts.
From a asset quality perspective, I'll ask Srikanth to check the rollback. I don't know whether he has the data on his hand, but let me take up the first point. On the asset quality front, we see very comfortable collections going forward. I'm not seeing this quarter alone. For last seven months or eight months in Five- Star, our collections trends are going up. That clearly indicates the cash flows of our customers are intact. I want everyone to keep two things in mind. One is on the energy cost, which has gone up, which may even go up. Second is on the liquidity front, what the regulator is going to take a call on the price hike. These two things have to be kept in mind, but at current circumstance, we see no issues from a collections perspective.
As Srikanth said, the slippages, the credit cost, and NPLs will start trending downwards for quarters to come.
Viral, on the rollback, generally, we see at least about 4%-5% of rollbacks happening in the softer buckets. By that, we mean about the 31-60 and the 1-30 bucket, and about 2%-3% happening on the 61-90-day bucket. Ours is more of a stabilization journey rather than too much on the rollback, because these are not customers who can pay multiple installments in a month and roll their account back. Which is why the collection efficiency or the unique customer collection efficiency becomes extremely important, where you're holding them in the same bucket and controlling flows rather than allowing for flows and then rolling back the customers.
Got it. Makes sense. Thanks a lot, and all the best.
Thank you.
Thank you. The next question comes from the line of Abhijit Tibrewal with Motilal Oswal Financial Services Limited. Please go ahead.
Good morning, sirs, and thank you for taking my question. Just to take the discussion forward. Sir, on asset quality, just looking at the net slippage number, largely stable or in percentage terms, just a minor improvement sequentially. The only thing I'm trying to understand here is that in the past we have admitted that large part of the stress that we have seen was at least spillover from microfinance, where we also had overlap with microfinance customers. That in microfinance, we are very clearly seeing an upcycle where asset quality is fast normalized, credit costs are normalized. How many more quarters do you see from here where slippages start coming down?
Maybe what would be a normalized slippage number when a few quarters down the line things are normalized?
As I said in last call, same thing I'll repeat. Definitely our collections are standing by, not in few months, in few quarters, we are able to see our collections trend going up pre-crisis level. That is why when we started our growth engine to come back. We are very clear that collections are more important than growth. We come from that conservative background. Before kick-starting the growth, we wanted to ensure the collections are back and back with a steady- state of numbers for a little longer period of time. Having said this, on the asset quality, I said that coming quarters, especially in September, December and March for this financial year, you see all these three numbers trending down, slippages, credit cost and NPLs.
The guidance, what we have given for the credit cost for this financial year, the credit cost will be in somewhere between 1.7%-1.9%, but already the trend is lower than what we have said in the higher side. You see the trend goes towards 1.7% more likely in the quarters to come.
Abhijit, we have also clearly guided you on the gross NPAs, which will fall to sub 3%. That will be on account of obvious drop in slippages, which should start trending down. We would also like to see one or two quarters of how the slippages trend before giving you a number that we can maintain in the steady- state. Right now, our guidances are on the credit cost and on the NPA side.
Got it. Got it. That is useful. The other is, sir, on the business momentum that you're seeing this quarter, right? I mean, disbursements obviously reached a record level in this quarter, I think from here, from our commentary also, I could make out that the quarterly growth should keep improving from here. I was just trying to understand if you could break down what are the key drivers of this acceleration. Basically, how much is coming from stronger demand versus, let's say, higher approval rates, branch productivity, or any geographic expansion that is planned.
Abhijit, the first point to keep in mind is there is no dearth of demand in this segment, which is something that we have been consistently reiterating. The demand was always there. Given the challenges that the company faced over the last three to four quarters, we had consciously put in certain measures which possibly had a little bit of an impact on the approval rates and consciously slowed down on disbursements. Because as a company, we take a very conservative stand that asset quality comes first, followed by growth. It is extremely important for us to put some of the challenges that we faced in order before resorting to growth. Demand was never a problem. The split of verticals between business and collections has also led to significant increase in productivity because the same person was doing both business and collections in the past.
If there is some level of stressed account that the person is managing, it also shows up negatively on the disbursements that the concerned employee or the branch can do. That is completely addressed because you have a separate team with the requisite expertise who are doing the collections on difficult accounts, which frees up a lot of space for the business people to focus only on bringing incremental logins and incremental business. The lead indicators which we are seeing are very strong traction in logins, very strong traction in business. When we mean business, we talk about sanctions converting into MODs, which will eventually convert into disbursements. These are some actions that we have taken, which has led to significant increase in productivity, and we are very confident that this will continue to sustain or keep going up in the quarters to come.
Got it, Srikanth. Just one last question. While you have already spoken about yields that maybe for the next couple of quarters, there could be anywhere between 10- 15 basis points compression in yields. What's the view on the cost of borrowings? We've seen that keeping improve for the last four, five quarters now. What's the view on cost of borrowings from here?
It will largely stay around the incremental cost, Abhijit, will probably stay somewhere around the 8.5 levels. Because we also have one more tranche that we need to avail from ADB. We'll have to time it right because that's an ECB and there is an impact of hedging cost that hits there. But ADB being ADB, we can't afford not to take that money. My sense is, I think our incremental cost of borrowing should be somewhere around the 8.5 levels, which means we still have another 20, 30 basis points of compression that can come in the borrowings over the period. All this predicated on the fact that there will be no repo rate increases. If there is a repo rate increase, then that will definitely impact the cost of borrowings in a negative manner.
It's a very evolving situation, but at this point of time, we feel confident that the cost of borrowing should at least trend down by another 10, 15 basis points for the year.
Got it. That is very useful. Thank you for answering all my questions. I wish you and your team the very best.
Thank you. Next question comes from the line of Chandrasekhar Sridhar with Fidelity International. Please go ahead.
Hey, good morning. I had a few questions. Have you done a check again on the customer base scrub to see the extent of leveraging maybe any time now versus what we have done in the past since we've done it? Any updates which you could share if you've done on that? The context I'm trying to understand also around this is that What are your thoughts around, obviously gold loans have grown now substantially, largely INR 20 lakh crore. Is there a possibility that given the overlap of our customers with gold loan and MFI, that some of the customers could be using the gold loans to repay us and showing up in the better quality?
Chandra, on the gold loan front, see, generally gold loan is fully secured, so we don't have to worry about gold loans from a repayment perspective, from collections perspective. The point what you said, the gold loans or smaller loans, that gets translated into repayment of other NBFCs or banks. See, this generally happens. It's a seasonal quarter for this. This happens if the cash flow of the customer temporarily goes for a halt, he uses the small loans like around INR 50,000 or sub INR 1 lakh, either from personal loan or microfinance or gold, to take up the cash flows what was being dipped. That's a phenomenon that we have to live with, we'll see across all quarters.
On the scrub part, see, from our underwriting, we always keep this saying that we don't have any control that customers over-leverage can again kick in. We are very conscious. We have taken all measures in last 12 months. It was a bit slow from market perspective, but from our perspective, we have taken all measures to face the next over-leverage crisis that may hit whenever it wants to hit. From that perspective, we are very strong to face the next over-leverage crisis. We can't control the customers as long as the lenders are obedient enough or disciplined enough to have the guardrails what their associations have been put in place.
From our side, we see the leverages what we used to see a year back as trending lower, either through write-offs, what they have done, or either through the strict guardrails, what they follow, we see the leverages coming down. The gold loans keep going up. That's the trend that I can share with you all, saying that loans other than gold as coming down from our customers, but gold loan as a trend is going up, maybe the value would have also added to that. Srikanth?
Yes. I'm just trying to understand whether it helps. I mean, it maybe helps on a quarterly basis, as you say, typically you do find that, but just is that masking maybe the underlying, maybe things have not improved as much but sort of getting masked because of the value of the gold loans going up. Just trying to get some sense around that.
Chandra, not in the last six months or so because all of us know that the gold price corrections have been happening in the last six months. If you had told this last year, we would have probably agreed with you because the growth in gold loans was significantly higher because of the prices. In the last six months, it's more correction while gold loans are still growing, but not at the pace that they were growing maybe prior to six months back. I do tend to agree that to some extent what you're saying is right. That will be a largely a behavioral trend across, not just in the last 12 or 18 months, but any time you will see that temporary cash flows are being addressed through microfinance and gold loans.
I would say in the last couple of quarters, we are definitely seeing that the guardrails that microfinance companies have implemented has brought down the proportion of overlap in microfinance lower. I think the number, while they have not done it for this quarter, but it trended down from about 20%-21% to about 16%-17%. On the gold loans also, given the correction in prices, it is not that people are borrowing big in gold loans to repay us. What we are also seeing is, the other point I think to keep in mind is, we have always maintained that the cash flows of these customers were never a problem, even in the last 12-18 months. It was more the behavior which got a little bit impacted because of write-offs being done by unsecured lenders, and we had to correct the behavior.
Today what we believe is that the cash flows have largely remained flat while they may not have shown too much of improvement, but there is adequate cash flow in the hands of the borrowers to repay the secured lenders.
Understood. Maybe a couple of more questions which I had. One is that just around thoughts around ticket sizes, there has been obviously slight push up, one because of inflation and one sort of consciously, but how do you just think about that on the medium term? That is one. Second thoughts on any diversification sort of broad sense maybe over the next one or two years on what you are thinking of.
Chandra, on the second point on multiple product, I have been talking with all investors for long time. We are very clearly thinking two, three products out of that one product which we wanted to go first. Maybe in next three months or six months, we will definitely get into one of the products because one of the learnings that what we have learnt in this crisis is not to be in a single product. However the depth is there for the growth in this product, a single product is not going to help you during the crisis time. Keeping that in mind, and the boards emphasizes on multi-product, we are also thinking to get into one more product.
At the appropriate time, we will come to the investors and explain what is that product and what is the rationale for that product.
Chandra, on the ticket sizes, like you rightly said, it's a combination of inflation and some bit of conscious movement to move towards slightly higher ticket sizes. As we have been guiding in the past, we definitely want to operate at 25-50-20, which will be 25% at around three lakh ticket size and 50% around the five lakh ticket size and the other 25% closer to the 10 lakh ticket size. That's the kind of mix that we would be comfortable with and we have been taking steps which is getting reflected in the portfolio mix.
Sure. I don't know if could I squeeze in one more question?
Yeah, sure.
Yeah. Just lastly, I think we've had conversation, but around the spreads, it seems aside from the interest reversal on the NPLs and which should sort of start stabilizing, it seems that, in 12 months out, Leave aside policy, but if assuming policy is varied, we should see spreads where they are today because sort of the gap between, you still have about 30 bps left on the incremental cost of funds.
That's right, Chandra. Spread should largely remain flat to current levels for the next few quarters, assuming no policy actions.
Okay. Thank you.
Thank you. A reminder to all the participants that you must press star one to ask a question. Next question comes from the line of Raghav Garg with Ambit Capital. Please go ahead.
Hi. Thanks for the opportunity. I have a few questions. One, your repayment rates have gone up. That's one question. Why have they gone up? A follow-up question to that is that when I look at the duration mix of the book, the share of three to five-year loan is going up. At the same time, your repayment rates have also gone up. I was just trying to reconcile as to how to reconcile these two things. Those are my two questions. I have another question.
Raghav, the repayment rates have gone up primarily due to stronger collections as well. If you're actually comparing against the last 12 months, the repayments were low because obviously the collection efficiencies were more around the 96%, 97% levels. The point is with the collections becoming stronger, that will see slight increases. On the other side, I think the repeat customers who are actually coming, we had a policy where we were any kind of customer, even if it's the best customer in Five-Star with zero DPD for any of the other institutions, we were actually asking the customer to prepay their entire loan before we can sanction a fresh loan, which was becoming very difficult for the customers. They were actually going out to the other NBFCs, which increased the repayments.
We have made some policy changes, stricter policy changes, where at least the best customers, we will not ask them to repay their existing loan, but we'll give the top-up on top of it. That is something which should start helping us from a repayment rate perspective going forward. Having said that, I think while the number currently is at about 30% or closer to 30%, Raghav, this number should largely trend somewhere around 27%, 28% in a normal sense. That's why we say our behavioral loan tenure will be somewhere around 4.5 years.
Understood. That's helpful. The other question is that, like I mentioned, the share of three to five-year loans has been going up for you and at the same time, the share of less than one year is coming down. Theoretically speaking, does this help you in terms of increasing the overall book IRR from an accounting perspective because the share of the longer-term loans is going up?
I just want to understand where you are deriving this data from, Raghav.
You mentioned the age one by loan duration in your presentation, right?
The vintage you're talking about, right?
Correct. Yes.
See, the vintage will obviously go up because as we keep putting more and more new loans and the loans start getting seasoned. This has nothing to do with less than one-year loans. This is more the vintage on the book. This is not the tenure of the disbursements that we do.
Of course, this is the tenure on the outstanding book, correct?
Correct. The higher the disbursements, the momentum in disbursements pick up, you will see increase in less than one-year portfolio because every quarter we are disbursing so much, right? This quarter we disbursed close to INR 1,500 crore, which will come up in the less than one-year book. Most of our loans, I would say almost 85%, 90% of our loans are disbursed for a tenure of seven years.
Understood. Sure. That's all from my side. Thank you.
Thank you. Next question comes from the line of Rajiv Mehta with YES Securities. Please go ahead.
Hi, good morning. Congratulations on good numbers. My first question is how should we look at write-offs trend in the coming quarters and what is the nature of the write-off? Is it driven by policy or is it driven by your discretion on a certain customer profile or collateral profile? See, Stage 3 most likely will keep on going up because there is a rate increase happening. Should we assume that even the write-off will keep increasing in the same proportion or there can be a scenario wherein the write-off will stabilize or will start to normalize a bit?
Rajiv, for this year, we had already provided the guidance. We should be seeing write-offs for the full year at somewhere around INR 225 crores - INR 250 crores, which is largely the run rate that we did in the first quarter. We did about INR 60 crores of write-offs in the first quarter.
Correct.
You should see that number largely remaining flat for the rest of the quarters as well. Don't assume too much of benefit coming in the write-offs for this year, because there is also a good amount of portfolio in the 60- 90 day bucket. There will be slippages. Typically, these write-offs are done purely for two reasons. One is from a tax perspective, it gives us the benefit. The second is in terms of showing the appropriate level of NPAs on the book. These are only technical write-offs. There is no question around the recoverability of these write-offs. Like I said a few minutes back also, we are continuing to show good amount of recoveries in our write-off. For example, this quarter, we recovered about INR 7 crores , INR 8 crores on the write-offs.
We will definitely get back these monies, from a tax and the appropriate level of GNPA positioning perspective, we will continue to keep taking write-offs. What it will be in the steady- state, Rajiv, we'll probably come back to you after two to three quarters. We also want to see how the good collections in the softer buckets are holding up and what is the impact of that on the portfolio. Now, if you start seeing flows decreasing and our softer buckets showing better trends, eventually this write-off should start trending down, at least in the coming years.
Srikanth, your guidance of credit cost, which is 1.7%-1.8% for the whole year, does it build in any building back of coverage on Stage 1 and Stage 2? Because we have drawn down the coverage in the last four, five quarters. When I look at the fresh flow rate, we have completely normalized. We have significantly normalized now. At least the provisioning from a fresh flow rate point of view is coming down. Write-off will stabilize. If you're still guiding for a 1.7%-1.8% credit cost, are you trying to also imply that you will build back coverage in the Stage 1 and Stage 2, which is currently low?
I'll answer it slightly differently. We will endeavor to maintain an overall coverage of 1.75%-1.8% on the book, Rajiv. Whether it's a combination of pushing up the Stage 1, Stage 2 coverage or pushing up the Stage 3 coverage, I think that's a call that the company will take depending on how the portfolio mix looks. Definitely, we will ensure that we maintain our overall coverage on the book at around 1.75%-1.8%.
If the current flow trends were to hold, and once the write-offs stabilize, FY 2028 obviously should be a much better credit cost year for us?
Yes. Whatever guidance we gave you is for the current year. In fact, we spoke last time also. From FY 2028 onwards, it won't be that 1.7%, 1.9% levels. Even the highest range will be 1.7%, possibly around 1.6%-1.7%.
Okay. When you say that the disbursements are now improving and the asset growth is improving, this is without changing any credit filters or credit policies on the ground, right? It is purely driven by the fact that the business people are sourcing much better, with the same level of credit vigilance.
Absolutely. It's improvement in productivity, but no impact on quality.
Understood. Thank you and best wishes.
Yeah.
Thank you. Next question comes from the line of Kunal Shah with Citigroup. Please go ahead.
Yeah. Thanks for taking the question. Firstly, when we look at it overall in terms of the trends in one-plus and 30+, looking at the collection efficiency, wherein we are. As you mentioned, maybe there is no change in the credit filters. How should we see this overall settling? In terms of your credit cost guidance, this is more in terms of controlling the forward flow once it gets into the one- or 30-day bucket, or maybe just preventing the flows itself into this segment.
Kunal, the first point is it's preventing flows into this segment because that is where we are focusing very sharply on the current book. You see our current book collections coming in at upwards of 99% consistently for the last few quarters. The clear thought process of the company is how do we control the flows right from the start rather than allowing the flows to happen and controlling it in the bucket. Controlling a current flow from a current bucket is a lot easier than controlling a flow from a 1- 30 bucket. Very clearly, the thought process is how do we keep our current book more robust, and how do we keep our 30+ more robust. We had sort of given a guidance last time. I think we expect our current book to be about 85% by the end of this year.
It's currently at about 83.3%. You will also start seeing the 30+ come down less than 12%.
Yeah, that I agree maybe from a near-term perspective, maybe as the entire portfolio matures, where do ideally, maybe with this 99.2% standard bucket collection efficiency, where should we see this number settling? Okay, maybe this 15%-odd and 12% -odd , two, three years down the line, where does it settle down with maybe the better underwriting, which we are doing it currently.
Some rule that we're working on, Kunal, is about 90%-91% of Stage 1 assets, which will be somewhere around, let's say, 87%-88% of current and about 3%-4% of 1- 30. Stage 1, somewhere around 91%-92% or so. Stage 2, hovering somewhere around 6%-7%, which will be a combination of maybe 3% or 3.5% in the 31, 60 and 60-90-day bucket. NPA sets are 3%. In a steady- state, if you're talking, we are guiding you for an NPA of around 2.5% or so. I would largely put it as Stage 1, somewhere around 91%-92%. Stage 2, somewhere around 6%-7%. Stage 3, somewhere around 2.5%. That should be the sustainable business model, at least for the short to medium term.
Perfect. That helps. Secondly, on the employee side, is it more like just the retention and the upgrading of the structure which has happened, or there is ESOP component to it and that would be more of a one-off? Because you are now indicating in terms of the operating leverage, not much to come through, and we have seen employee costs going up quite significantly. This is purely the rebase of the existing structure?
That's right, Kunal. See, these are people at the branch level who could be branch managers or supervisors. To them, ESOPs are not the most attractive. I'm not talking about the senior supervisors, but even the mid-level supervisors. ESOPs are not the most attractive form of compensation. This will be more like realigning, revising their salaries, giving them slightly better incentives for the performance, which will push up the cost. Nothing to do with ESOPs.
In terms of the attrition, how it is helping us to bring it down, if you can just give an example, maybe given that now we are rebasing this or maybe providing more incentives, how has the attrition behaved?
Too early to say, Kunal. As of now, it's largely flat to what it was. Our belief is, I think once we start seeing more quarters where people start doing business, the excitement starts coming in. I think the retention will be a lot higher and the attrition should start going down. Possibly we can give you some trends maybe two, three quarters down the line.
Okay, got it. On overhead cost, would there be also an element of investments which will again lead to not much of an operating leverage out there? Maybe the only thing is maybe the overhead benefit is getting offset by the employee cost increase which will be there.
It's primarily employee cost, Kunal. I don't think we are expecting to put too many branches this year. We'll continue our normal run rate of about 50, 60 branches. It's not like the overheads are going to push up the cost. It's primarily on the personal expenses.
Personal expense. Okay, got it. Yeah. Thanks. That answers the question.
Thank you. Next question comes on the line of Aditya Miglani with Burman Capital . Please go ahead.
Hi, team. Congratulations on the good results and momentum. My question was regarding the repayment rates. That has already been asked. Thank you.
We can move to the next one.
Mr. Miglani, please go ahead.
No. His question has already been answered, please move to the next one.
All right. Just give me a moment. The next question comes on the line of Nischint with Kotak. Please go ahead.
Thanks for taking my question. Maybe if you could just reiterate a bit on the expense side. What kind of an expense growth are we looking at this year? Would it kind of track what we saw in the first quarter, or would it kind of accelerate from here on?
On a year-on-year basis, Nischint , I think it'll largely track what you saw in the first quarter. We are expecting somewhere around 20%-21% growth compared to last year's numbers. We are not expecting anything abnormally from here onwards, because some of it has already been built in the first quarter in the form of increments and appraisals and all that. Largely in line with the YoY trend that you have seen in this quarter.
Sure. Just one, the closing line that Mr. Pathy made about employees sort of being volatile or coming in and going. Anything kind of specific happening out there?
Nischint , nothing specific. I just wanted to give confidence to the market and to the shareholders that Five-Star is not an institution depending on few individuals, but it's depending on its 15,000 employees, which will show the strength. That's what we have communicated through results also. Nothing specific.
Got it. That's very clear. Just one last clarification. The write-off of INR 60 crores for the quarter is something that you'll probably expect to continue for the rest of the year. From a coverage point of view, probably ECL coverage can remain at these levels. I think that's what we are saying, right?
Largely, yes, Nischint . At an overall level, ECL coverage will remain at around the 1.75%-1.8% levels, and write-offs also will largely remain stable at around the INR 55 crores-INR 60 crores every quarter.
Got it. Thank you. The 20% loan growth guidance stays, right?
Absolutely.
Okay, perfect. Thank you very much and all the best.
Thank you. Next question comes on the line of Divyansh Gupta with Latent PMS.
Hi, sir. Two questions on the liability side. If I look at the absolute amount of debt. Debt has gone down from March. Two questions. How to read into this? Second is that, while the, let's say, the cost of debt is lower, it's because we are being very choosy and let's optimize even on a PMS. As we want to lever up the balance sheet, what should we expect as a more realistic cost of fund?
Divyansh, I think both the questions are related. We are obviously being choosy currently given our focus on the cost of funds. At the same time, if we want to lever up the balance sheet, we have adequate lines available where we can push and get. That's why we are not even guiding you for an 8.3% incremental cost, we are guiding you for an 8.5% incremental cost. That is something that will come in because of our intention to lever up the balance sheet as and when we need. This quarter, this was sufficient because we also took quite a bit of monies in the last quarter. For example, last quarter, we raised almost close to INR 1,000 crores, and that liquidity was sitting on the balance sheet. Typically, Q1 tends to be a little muted from an additional borrowing perspective.
Banks are also waiting for the results to be announced. It takes a little bit of time for them to get their necessary limits in place, whatever their strategies are. Which is why we took about INR 450 crores. We are still holding close to INR 1,850 crores on the balance sheet. It's still a sizable number. The focus of the company will clearly be to ensure appropriate cost of funds. At the same time, we will not compromise on the growth. We are very confident from a debt perspective, ability to raise whatever quantums we need at the right cost of funds. Please bake in an 8.5% incremental cost of funds going forward, not the current levels.
Understood. The second question was that, let's say when we started reducing the rates, our let's say hypothesis or let's say target was that we will lever up the balance sheet so that ROE does not get hit. While I understand all that happened in the last, let's say, year or so, when can we realistically expect that we will hit a debt-to-equity of 2x, and what timeline are we thinking around for it?
See, debt-to-equity of 2x will take a little bit of time. I would probably think it's in the medium term, maybe another six to eight quarters from here onwards. Because it depends on the growth that we are looking at in the current product and also the newer product diversification we're thinking about how that pans out over the next few quarters. You also need to keep in mind that we add almost INR 1,100 crores , INR 1,200 crores of PAT every year to the network. From that perspective, it's also going to be a little bit of a challenge. I would probably think definitely not before another eight quarters. Six, eight quarters.
Understood. The next question was on the new product that you have mentioned. We had already started something in housing. This is then going to be third product, or the product is just a better variant of housing that we launched?
The housing product what we have launched two quarters down the line, we were not much focusing on that because we want our micro-LAP to bounce back to the pre-crisis level, which you have started to see in the disbursement, and that will show good numbers going forward. Once the existing product is set in tone, then we wanted to get into the housing product what we already launched to our similar profile of customers. What we are talking now is apart from that.
Got it. Understood. The last question is that we used to give our overall collection efficiency, which, let's say, in the last quarter and for this quarter, if you can tell.
I think please connect with our IR team separately on some of these data-related questions, Divyansh.
Sure. Thank you. Thanks a lot.
Thank you. Next question comes from the line of Chirag Fialoke with MS Capital. Please go ahead.
Hi. Thank you for the opportunity. Congratulations, team, on executing what you had laid out a couple of quarters back. Grateful for the opportunity. Srikanth, just one question. On the new customer addition, that quantum has been more in the 6,500, 4,000 kind of range. Then effectively, if one just does back of the envelope math, it seems like the incremental disbursements are more in the average INR 5 lakh-INR 7 lakh kind of range. Is that where it is today? Do you think that this is just a transitory phase and it'll normalize back to more INR 5 lakh kind of range? Is it now more going to be incrementally in the INR 7 lakh average disbursement range?
Chirag, it's not at INR 7 lakh. The average ticket size is somewhere close to around INR 5 lakh, INR 4.5 lakh-INR 5 lakh. It will largely stay there. The intent is not to keep adding smaller and smaller customers, but to keep adding the right kind of customers who will be good from a Nash perspective, who will be good from a repayment perspective, who will be good from a flow perspective. We will continue to keep adding. Our ticket sizes for this year should largely hover around an average ticket size for the quarter of about INR 5 lakh or so.
This is a very important point that everyone should keep in their mind is, we are not vacating any space. Like many players who have done it in last 12 months, we are not vacating any space. We are becoming more and more stronger in the same space where Five-Star has been operating for last 24 years. The only change is the mix. What we guided in last July earnings call was our mix of less than INR 3 lakh ticket size will be close to 25%, and INR 3 lakh to INR 5 lakhs will be close to 50%, and above INR 5 lakhs will be close to 25%. That is the mix in which Five-Star wanted to move from last July to this June. That is what exactly the trend is happening. We are focusing on what we say.
Understood. Very clear, Mr. Pathy. Thank you so much for the work. Just a quick data question. On this 60-90 bucket, could you just highlight what that percentage was for the quarter?
Chirag, please connect with the IR team to take some of these data-related aspects.
Sure. All right. Thank you so much.
Thank you. Next question comes from the line of Kunal Thanvi with Banyan Tree Advisors . Please go ahead.
Hi. Thank you for the opportunity. I had two questions. One was, if you can zoom in into the disbursement growth, what are the areas from which we got the growth? What is your confidence in terms of beating your own guidance of 20% this year? Second question was on the overall organization structural change that you have made. If you can zoom in into the incentive structure from this business side and from a cultural point of view, while I understand the productivity would improve, one of the key things was we were able to run a linear ship with fewer number of employees. How does culturally the organization is now adapting to business guy and a credit guy being separate? If you can zoom into these two aspects. Thanks.
Our request is, can you please keep yourself mute so that the background noise is too much.
Yes.
Thank you. Let me get into the organization structure first, Srikanth will add. Very clearly, we have said in last one year that I'll be in the operation front as MD, and to support me, there's a JMD, who's Srikanth. Underneath Srikanth, you have operational heads across all departments. If you see, every department in Five-Star has one head and one chief. Specifically, in this investor presentation, we have given details of all the 2021 management teams who are in the company. You can please go through them and feel comfortable to come back to our IRR for any doubts.
Kunal, I think on your question in terms of the disbursement trend for the next few quarters, what kind of incentive structure changes we have made, has the culture changed because we have created this business collections vertical? None of that holds good because today, even though the business and collections vertical have been segregated, the business team continues to have the responsibility of collecting at least on the current accounts for a certain vintage. It's not like we are completely removing the DNA of collections from the business people. Their incentives are still dependent on achieving a certain level of collection percentage in the current accounts and also achieving the growth perspective.
It is only that we are moving the arrears to the collection team because you need focus, you need expertise to ensure that the flows are contained, the slippages are largely contained. From this perspective, there has been no cultural shift, there has been no incentive changes, and we are very confident of achieving the traction in disbursements. While we did about INR 1,500 crore in the first quarter, even assuming the same run rate for the next three quarters and adding a 10% on top of it, because the next few quarters, obviously, the numbers will be higher. We'll be somewhere around INR 6,500 crore-INR 6,800 crore, which will enable us to achieve our growth guidance of 20% very comfortably.
Mr. Thanvi, are you done with the question? Mr. Thanvi?
Let's move ahead.
All right. Thank you. Next question comes on the line of Varun Subramanian with Ascent Capital. Please go ahead.
Hi. Thank you. My questions on leverage were answered. I just wanted to understand when you launch the new product, let's say in the medium term, at that point, would you be guiding for a AUM growth of higher than 20% or would that be including the new product launches that you have in mind? Is that a medium-term sort of guidance?
Definitely the guidance at that point of time will be much higher than the guidance what we have given with the micro-LAP product. It's going to be the addition of the guidance what we have given as of now.
Varun, we also want to impress upon on the question on leverage. This is something that we're talking about given the growth on the current product with how the new products pan out. When the growth goes up, obviously, there'll also be a kicker in leverage. Definitely our intent is also to maximize the returns to the shareholders from an ROE perspective, and which is why we are looking at strong growth in the existing product and also the new products coming in and giving better growth, which can help the leverage needle also move up.
Just to clarify, would leverage be linked to the launch of a new product, or would you be able to lever up the book even with the existing product scaling up and with the asset quality improving? Will we be able to maybe get to 1.5x in four quarters, something like that?
Definitely. I think the current product itself will give a kicker in leverage. What we are saying is it will get better with newer products coming in because we have a strong capital, and it is important for us to use the capital in the right way to maximize the returns for all the shareholders, and that's the endeavor of the company that we are working on. Definitely you will see leverage going up in the existing product, but with the new products coming in, it will obviously be a lot higher. From here onwards, the focus is clearly to deliver strong returns to the shareholders.
Understood. Very helpful. Thank you so much. Congratulations.
Thank you. Next question comes on the line of Darshan Deora with Indvest Group. Please go ahead.
Yeah, thank you for the opportunity and happy to see the turnaround in asset quality. Quick question. On a steady-state basis, what sort of ROE would the management be targeting? What sort of ROE would the management be aiming for?
Darshan, today we are operating at somewhere around 8% ROE, right? 8%-8.5% based on the AUM. If you convert it into total assets, this number will be somewhere around 7%-7.25%. Our point is, as leverage keeps going up, you will have a compression in the ROA. In the past, the guidance that we used to give would be a steady-state ROE of somewhere around 6%-6.5%. If we are able to get to the 3x leverage, we are talking somewhere between 18%-20% as the ROE. That's the end goal that we are working on.
Got it. Secondly, in October 2024, we had decided to reduce our lending yields, right? Because it was to some extent the expectation of the regulatory environment. Also, prior to that, we had always experienced relatively good asset quality or able to bounce back relatively fast from any credit crisis. Last 18 months have been sort of a slight change from the previous experiences where we have had to also really bulk up our collection efforts and increase our costs. Now the regulatory environment is also more favorable. Now any thoughts on maybe sort of moving back to a slightly higher yield in order to fasten the process to getting to a higher ROE?
Darshan, first of all, I wanted to correct your first question. You are right. In October 2024, we dropped 200 basis points at one go. That was not from a regulator perspective. I have already reiterated. I am again happy to reiterate that it's because our borrowing cost was 11%+ . It was dropping down to 9%+ . That 200 basis points, we wanted to fix the appropriate time to give it back to our customer. We took October as the right timing to give this 200 basis points reduction to our customers. That point I wanted to emphasize again so that people correct themselves why Five-Star did that 200 basis points in October 2024.
Going forward, our intent is keeping the borrowing cost in mind, our lending rates will get adjusted. It is not that if the borrowing cost trending down, we are not intend to keep our lending rates up. That is not going to happen in Five-Star. That's the call that board has taken in October 2024 itself. That is why that 200 bps reduction was being given for onboarding new customers. As the borrowing rate trends, the lending rates will also trend.
Pathy, point taken, but I think from a cost structure point of view also, cost structure has slightly changed, right? We have invested a lot in sort of increasing our team size because of the collection efforts. Somehow, do we want to price that back into our yields going forward?
I think that will be priced back in our credit cost and slippage ratio and NPLs trending down. We want that to be priced back in provision rather than in increasing the lending rate.
Darshan, like we said, the OpEx will start trending down. It's possibly a phenomenon for one year. It's not like it's going to continue to remain where it is forever. From next year onwards, definitely you will start seeing OpEx to trend down. As a responsible lender, we want to price our products in the right way so that we also see strong traction, the customer service is good, the customer feels happy getting onboarded with Five-Star. At this point of time, given where our borrowing costs, I think we are very comfortable with the yield.
Got it. I think just one suggestion from my side. I think we're doing a great job, but metrics such as AUM per employee, disbursement per employee, we hope as investors to see an uptick in that. I think it's already happening on a Q- on- Q basis, but it would be great, I think maybe with the addition of new products to see that AUM per employee and disbursement per employee are trending upwards with even more speed.
Darshan, you are correct. Not even with new product. I can tell you very confidently with the existing product itself, you will see in the quarters to come that disbursement per employee and AUM per employee will trend up.
All right. Thank you and all the best for the rest of the year.
Thank you. Next question comes on the line of Renish with ICICI. Please go ahead.
Sir, thanks for the follow-up. Just one thing on the disbursement front. If you can share the June disbursement number would be helpful, sir.
June we did about INR 670 crores, Renish.
How much? INR 670 crores ?
INR 670 crores , yeah.
Is there any seasonality in that particular month? Otherwise, the disbursement target which you have in mind for FY 2027, that should actually overshoot by a big margin. Just wanted to get a sense on that.
Renish, there'll always be seasonality in the third month of the quarter. This year, we are very consciously working towards keeping the seasonality between the months and the quarter minimal. You will not see, let's say, the first month of the quarter being at INR 300 crores and the last month of the quarter being at INR 700 crores. There will still be a seasonality. Right now, despite what you have seen in the first quarter, I think which is a very healthy trend, and we are looking at traction building from here onwards to achieve our growth comfortably.
Got it. It is right to assume that, let us say, anywhere between INR 600 crores -INR 650 crores , INR 670 crores should be a new normal monthly disbursement number for rest of the year?
On an average, yes.
Okay. Thank you so much and best of luck, Srikanth.
Thank you.
Thank you. Ladies and gentlemen, that is the last question for today. We have reached the end of question and answer session. I now hand the conference over to the management for closing comments.
Thank you all. As we said, it's been a great quarter for Five-Star. We are extremely confident in the way that the company is moving and the actions that we have taken have vindicated our stance. Like we said in the presentation, from here onwards, we are very confident of moving in the right direction and in our journey to move onwards and upwards to get back to some of the strongest numbers that Five-Star has been used to delivering. On that note, we will all be happy to see you in the next quarter. Thank you so much.
Thank you. On behalf of Five-Star Business Finance, that concludes this conference. Thank you for joining us. You may now disconnect your lines.