IIFL Finance share price rises over a per cent in a weak market; HSBC sees 35% upside in stock

The stock opened at ₹589.45 against the previous close of ₹586.35 and soon rose over a per cent to the level of ₹592.75. The stock hit its 52-week high of ₹648 on September 11 this year. It has clocked a whopping gain of nearly 65 per cent in the last one year while the equity benchmark Sensex has gained about 12 per cent in the same period.

In a report on September 18, HSBC pointed out that IIFL has strengthened its business by making the following four strategic pivots:

(1) Improved liability management: Over FY14-19, 16-34 per cent of IIFL’s borrowings were through short-term papers, leading to a negative gap between assets and liabilities (maturity less than 12 months) in FY18. IIFL has reduced its dependence on short-term borrowings and maintains a liquid balance sheet, HSBC said.

(2) Stronger risk management: The global financial firm observed that IIFL has run-down loans to commercial real estate, capital markets and commercial vehicles and built granular, largely secured, retail AUM (assets under management).

(3) Aggressive investments in distribution, technology, and partnerships to drive growth.

(4) IIFL was one of the first NBFCs to use the co-lending model, which sells down a proportion of loans to banks. This frees up capital, is RoE (return on equity) accretive, and reduces risk, HSBC said.

“IIFL has strengthened its business by making four strategic pivots. We think these steps will lead to more sustainable growth and earnings over FY23-26e, which is likely to drive a re-rating of the stock,” said HSBC.

“We see AHL (affordable housing loan), MFI (microfinance), digital loans, and co-lending as the key AUM (assets under management) growth drivers. Given adequate pricing power in these segments, margins should remain steady and improve when rates decline – nearly 50 per cent of the loan book (gold loan, MFI) has fixed rates,” HSBC said.

“Operating leverage, especially in gold loans (GL), should further aid RoA (return on assets). Nearly two-thirds of its business (GL, AHL) operates at very low through-the-cycle credit costs. We forecast strong returns over FY23-26e – 25 per cent AUM CAGR, 3.5-3.8 per cent RoA, 21-22 per cent RoE (return on equity), and about 28 per cent EPS (earnings per share) CAGR (compound annual growth rate),” said HSBC.

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HSBC thinks IIFL’s potential re-rating will be driven by strong retail AUM growth, potentially lower volatility in asset quality in the next cycle, and RoA expansion.

HSBC said the downside risks to its assessments of IIFL Finance stock include cyclicality in businesses and asset quality, regulatory changes in co-lending, risk of adverse selection in new businesses like digital loans, liquidity tightness, and any increase in repo rate souring sentiment for NBFCs.

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Updated: 20 Sep 2023, 10:40 AM IST