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IIFL Finance
Our verdict on IIFL Finance isn’t the consensus take — see where we landed, and the one risk the bull case glosses over.
See the verdict — free →Does management do what it says?
Management confirmed the complete exit from these segments and the disposal of the remaining portfolio to an ARC to clean up the balance sheet. (1 met across 1 tracked commitment)
“On a weighted average basis, we may have second half loan losses provision around 2.2%-2.4%”
The company has reached a phygital reach of approximately 4,800 branches, indicating active expansion. (1 in progress, 3 met, 1 exceeded across 5 tracked commitments)
“This is supposed to get over in 60 days' time.”
The aggregate of off-book assets (assigned and co-lending) currently stands at 35% of AUM, slightly below the 40% target but showing growth. (1 in progress, 1 exceeded across 2 tracked commitments)
“Our endeavor will be to take it to 40%, 45%. And within that, co-lending also has been growing relatively, and we think that co-lending should grow even further”
Management intends to maintain leverage around 4-4.5x and target a capital adequacy ratio closer to 20%. — target: Leverage 4-4.5x, CRAR ~20%
“Our leverage, we will keep it around 4-4.5, and capital adequacy, we would like it to be closer to 20.”
Management targets gold loan AUM growth of 20% to 25% for the coming year, assuming gold prices remain stable. — target: 20% to 25% (+1 more commitment)
“So, I think if they remain here, we should see AUM growth of around 20% to 25%.”
See the full cited Management analysis of IIFL Finance
How durable is the business?
The company successfully increased its direct assignment (selling loan pools to banks) transactions, which improved liquidity and supported the bounce-back in gold loan volumes. (3 expanding)
“we could also enhance our direct assignment transactions... to around Rs.4,489 crores this particular quarter compared to Rs.2,400 crores last quarter.”
The company has exited the 'Micro-LAP' and 'Unsecured Digital' sub-segments due to high loan losses, shifting focus entirely to secured MSME lending. (1 exited, 1 shifted, 1 stable, 1 expanding)
“the discontinued businesses of micro-LAP and unsecured digital loans, which are our 2% of portfolio each and have been skewing the loan losses provision”
The microfinance segment is contracting due to macroeconomic pressures and a strategic decision to reduce exposure to over-leveraged borrowers. (1 contracting, 1 shifted, 3 stable across 3 engines)
“Home Loan AUM stood at ₹32,125 Cr. Yield 10.55%”
Asset quality has improved significantly with Gross NPA dropping to 1.5% and Net NPA to 0.7%, both well below the company's long-term guidance. (1 expanding, 4 contracting)
“Our gross NPA stood at around 1.5 and net NPA of 0.7, which is down 77 basis points and 32 basis points, respectively, if you compare to the same period last year.”
IIFL Finance is a large Indian non-banking financial company (NBFC) that provides loans to individuals and small businesses, primarily through gold loans, housing finance, and microfinance, leveraging a massive branch network and AI technology. (+3 more findings)
“Our loan AUM has crossed the INR1 lakh crore milestone and we added INR1,08,000 crores of total loan assets. Our gold loan continues to be the standout performer... our core products, loan AUM comprising home, gold, MSME and microfinance are up 45% on a Y-o-Y”
See the full cited Business Model analysis of IIFL Finance
Where does growth come from?
The housing finance division is pivoting to 'Affordable Housing' and 'Emerging' segments to capture higher interest rates (yields) and better government subsidies.
“We predominantly focus on affordable and emerging... We plan to open about 100 branches this year in a phased manner... pivoting towards higher yield, which will be to start with about 12% plus this year.”
The company has significantly improved its safety net by reducing bad loans (NPAs) and increasing the amount of money set aside to cover potential losses. — Gross NPA: down 77 bps YoY
“GNPA 1.5% (down 77 bps YoY)... Provision Coverage Ratio strengthened to 93%”
Profitability is expected to jump as the cost of bad loans (credit costs) is projected to nearly halve in the coming year. — Credit Cost: -120 to -130 bps (+1 more signal)
“Next year, our credit cost on the whole will be around 1.5% to 1.7%... significant decline will happen with credit cost because we see 120, 130 basis point decline in credit cost.”
The company is working toward a credit rating upgrade to 'AA+', which would significantly lower their borrowing costs and boost profit margins.
“So obviously, our first step will be AA plus. I believe that our cost of funding can go down easily by 100 to 120 basis points once the rating improves.”
The company is intentionally shrinking its unsecured (no-collateral) loan business to focus on safer, asset-backed lending. — Unsecured MSME Loans: 11% QoQ decline
“Shift towards secured MSME lending continues, with disciplined reduction in unsecured exposure, leading to improved risk profile”
See the full cited Future Growth analysis of IIFL Finance
What could break the thesis?
New RBI regulations for gold loans above INR 2.5 lakh require formal credit and cash flow assessments, which could slow down the lending process or increase compliance costs. [REGULATORY]
“basically, loans above INR2.5 lakh, they want the credit assessment to be done and the loans to be monitored.”
The company's capital adequacy ratio for the main NBFC is 17.8%, which is above the 15% regulatory minimum but may limit aggressive growth without further capital infusion. [REGULATORY] (+1 more risk)
“Capital adequacy has stood well with - - standing at around 17.8% for the NBFC.”
This risk is largely resolved as the company executed a one-time cleanup by selling the discontinued Micro LAP and BLC portfolios (totaling ~INR 875-900 crore) to an Asset Reconstruction Company (ARC). (1 resolved)
“Girish took a view which board has agreed with him that we should basically dispose of that portfolio once to ARC... almost INR 875 crore of total portfolio deal has happened. And that cleans the entire thing.”
Off-book AUM (Co-lending and Assignment) has increased to 32% of total AUM. While this aids capital efficiency, the cost of borrowing has crept up to 9.5%. (1 stable)
“Off-book (₹ Cr, as % of AUM) 32%; Cost of borrowing 9.5%.”
The risk is being actively managed by discontinuing the product. While the NPA percentage appears high due to a shrinking denominator (no new loans being added), the segment now only represents 2% of the total loan book. (1 easing)
“So, Ashwin what has happened is that there is only 2% of our total book now and our focus is just on collection here. So, this component may remain little high, but... it is a very small component.”
See the full cited Risk analysis of IIFL Finance
Read the full thesis on IIFL Finance
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