The NBFC sector has been considered one of the highest sustainable growth segments in the private sector over the past couple of years. As the Indian economy continues to grow, the demand for credit is also increasing. Several companies are making strong efforts to capture a larger market share in order to expand their AUM.
If we take a closer look, regional companies are adopting different strategies compared to others. Companies like Bajaj Finance and Sriram Finance are among the top high-growth players in the sector. These companies operate with diverse business models and focus on key pillars, particularly in the South India region. Over time, they have built a strong presence there and continue to expand their business operations.
Five-Star has a strong business presence in the southern region of India. Tamil Nadu is the second-largest state for the company in terms of operations, while Andhra Pradesh ranks first. In financial year 2026, around 36% of the total revenue came from Andhra Pradesh, while Tamil Nadu contributed 28% and Telangana nearly 19%.
Key Financial Metrics
One of the key developments in the company’s business has been seen in the recent quarter. In Q4 FY2026, the company’s total income stood at ₹826 crore, compared to ₹822 crore in Q3 FY2026.
On a quarter-on-quarter basis, the company reported revenue of ₹759 crore in Q4 FY2026, reflecting healthy growth. Additionally, net interest income (NII), which is a key indicator of business stability, stood at ₹644 crore in Q4 FY2026, compared to ₹633 crore in Q3 FY2026.
This indicates that the company is maintaining a stable and sustainable business model. Importantly, this kind of consistent growth is also seen in other leading NBFCs like Bajaj Finance and similar players in the sector.
The company’s management has expressed confidence in the current business performance. According to management, the slippage ratio declined from 1.09% in Q3 FY2026 to 0.70% in Q4 FY2026, which is a positive development.
This improvement in the slippage ratio has also helped keep NPAs largely stable, with the figure standing at around 3.37%.
Cost of Funds
Across the NBFC sector, one of the most critical factors is the cost of funds, as it directly influences how these companies generate returns. A lower cost of funds is always favorable, as it supports better margins and profitability.
The company has made consistent progress in reducing its cost of funds. It declined from 10.51% in FY2022 to around 9.21% in FY2026, indicating a steady improvement.
If we look at more recent data, the trend becomes even clearer. In Q4 FY2025, the cost of funds stood at 9.63%, which has further reduced to around 8.95% in the latest period. This reflects a positive development for the company.
One of the key observations from the recent quarters is the trend in loan disbursements. The disbursement levels had been declining consistently over the past few quarters. For instance, in Q4 FY2025, disbursements stood at ₹1,459 crore, which declined to around ₹976 crore in Q3 FY2026.
However, in the latest quarter, disbursements have recovered to approximately ₹1,213 crore, indicating a strong rebound. This improvement suggests a positive shift in business momentum.
Going forward, this increase in loan disbursements is likely to support growth in total income and net interest income, as higher disbursements typically translate into a stronger earning asset base.
Key Concerns
There are certain concerns that explain why the company is not commanding higher valuations compared to other leading NBFC players. One of the primary issues is the rising trend in asset quality stress.
The company’s gross NPA has increased to around 3.37% in Q4 FY2026, compared to 3.18% in Q3 FY2026 and 2.64% in Q2 FY2026. This indicates a continuous rise in NPAs, which is a key concern for investors.
As a result, the stock has not shown strong upside stability. Additionally, the company’s net NPA has also deteriorated. It stood at around 2% in Q4 FY2026, compared to 0.88% in Q4 FY2025, reflecting a sharp increase of approximately 1.2 percentage points.
This rise in net NPA is negative for the company, as it impacts asset quality and overall profitability.
1. What is driving the growth of Five-Star in the NBFC sector?
Answer:
Five-Star’s growth is primarily driven by strong demand for credit in semi-urban and rural areas, along with its focused business model in South India. The company is expanding its AUM and maintaining stable Net Interest Income (NII), which supports consistent growth.
2. How strong is Five-Star’s geographical presence?
Answer:
The company has a strong concentration in South India. Andhra Pradesh contributes around 36% of revenue, Tamil Nadu 28%, and Telangana nearly 19%. These three states form the core revenue base, providing stability but also creating geographical concentration risk.
3. How has the company performed financially in recent quarters?
Answer:
The company has shown stable performance. Total income increased slightly from ₹822 crore in Q3 FY2026 to ₹826 crore in Q4 FY2026. Net Interest Income (NII) also improved from ₹633 crore to ₹644 crore, indicating steady operational growth.
4. Why is cost of funds important for NBFCs?
Answer:
Cost of funds is critical because it directly impacts margins and profitability. A lower cost of funds allows NBFCs to maintain higher spreads. Five-Star has improved its cost of funds from 10.51% in FY2022 to around 9.21% in FY2026, which is a positive sign.
5. What does the loan disbursement trend indicate?
Answer:
Loan disbursements declined from ₹1,459 crore in Q4 FY2025 to ₹976 crore in Q3 FY2026 but recovered to ₹1,213 crore in the latest quarter. This rebound indicates improving business momentum and potential future growth in income and NII.
6. Why are rising NPAs a concern for the company?
Answer:
The company’s Gross NPA has increased from 2.64% in Q2 FY2026 to 3.37% in Q4 FY2026. Net NPA has also risen to around 2%. This trend indicates weakening asset quality, which can negatively impact profitability and investor confidence.
7. Why is the company trading at a lower valuation compared to peers like Bajaj Finance?
Answer:
The lower valuation is mainly due to rising NPAs and asset quality concerns. While the company shows stable growth and improving cost efficiency, the increasing credit risk leads to a valuation discount compared to stronger NBFC peers.