IIFL Finance Ltd. has solidified its position in the market with its diverse range of offerings, including home loans, loans against property, gold loans, microfinance loans, and unsecured business and personal loans. The company's strong asset under management (AUM) growth is expected to continue in the medium term, thanks to two key factors.
Firstly, IIFL has been aggressively expanding its physical distribution and digital capabilities, giving it a competitive edge. Additionally, the company has a first-mover advantage in co-lending with banks, which is further complemented by an effective direct assignment strategy.
One area where IIFL is set to benefit is its net interest margin (NIM), which is projected to improve from 6.2% in FY19 to around 8.0% in FY24E. This improvement can be attributed to a better product mix and a decrease in the cost of borrowing. Looking ahead to FY25 and FY26, the company is expected to sustain its NIM at the current level, with the possibility of an upside from any credit rating upgrade.
While IIFL invested heavily in branch expansion for its home loan, gold loan, and microfinance businesses in FY23, resulting in a high opex-to-average AUM ratio of approximately 3.9%, the company is now looking to slow down its branch expansion. It is anticipated that higher branch productivity will lead to an improved opex-to-average AUM ratio of around 3.5% by FY26.
Gold loans and home loans make up approximately 65% of IIFL's AUM mix and are characterized by robust asset quality and low credit costs. These loans help mitigate the relatively higher vulnerability of microfinance and digital loans. It is estimated that credit costs will remain range-bound at 2.2%-2.3% over FY25-26.
IIFL's asset-light business model, utilizing co-lending and direct assignments, coupled with a diverse product suite, is expected to drive a strong AUM compound annual growth rate (CAGR) of around 25% from FY23 to FY26E. The company's current valuations, at 1.8x/1.5x FY25E/FY26E price/book value, indicate a favorable risk-reward for investors. With a projected profit after tax (PAT) CAGR of around 27% from FY23 to FY26E and a return on asset (ROA) and return on equity (ROE) of approximately 4.1% and 22% respectively by FY26E, IIFL is positioned to generate attractive returns.
In light of these factors, we reiterate our 'Buy' rating for IIFL Finance Ltd. with a target price of Rs 800, based on a sum-of-the-parts (SOTP) valuation. The company's growth potential and strong financial performance make it an attractive investment opportunity.
Analyst comment
Positive news: The presence of IIFL Finance Ltd. in various loan segments and its aggressive expansion of physical and digital capabilities, as well as its first-mover advantage in co-lending, are expected to contribute to strong AUM growth. The company’s net interest margin is likely to improve, and credit rating upgrades may provide further upside. The opex-to-average AUM ratio is expected to improve, and the robust asset quality of gold and home loans will help mitigate vulnerabilities. With a strong AUM CAGR and favorable risk-reward, analysts reiterate a ‘Buy’ rating with a target price of Rs 800.
