Shares of non-bank lender Five-Star Business Finance surged as much as 9 percent on Monday after brokerage firm Nomura initiated coverage on the stock with a buy rating and a price target of Rs 750 per share. The price target implies a potential upside of 25 percent from Friday's closing levels. Nomura believes that the NBFC is uniquely positioned with "best-in-class" profitability among its peers.

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The brokerage said that Five-Star is highly profitable and ranks among the fastest growing NBFCs in a niche market. It is anticipating the company's Assets Under Management to grow by 30 percent over financial year 2023-2026 led by a large, untapped opportunity in the MSME, particularly in niche, small business loans, coupled with limited competition.

Between financial year 2018-2023, the company had an AUM CAGR of 47 percent with an average ticket size of Rs 3 lakh.

Five-Star's AUM growth will also be led by an expansion of nearly 50-60 branches every year, increase in the fleet on the street, leading to higher customer addition, enhanced productivity and a gradual increase in ticket size back to pre-Covid levels.

Nomura also expects Five-Star to report a Earnings per Share (EPS) CAGR of 25 percent during financial years 2023-2026 with Return on Assets (RoA) and Return on Equity (RoE) seen at 7.7 percent and 16.6 percent respectively over the same period.

Among key risks that Nomura highlights for the stock include inability to scale up in new states, rising competition from other lenders or fintechs, and worse-than-expected deterioration in asset quality.

Shares of Five-Star Business Finance are trading 8.2 percent higher at Rs 649. Today's surge has also meant that the stock has turned positive on a year-to-date basis.