IIFL Finance Gets Upgrade From Jefferies After RBI Lifts Gold Loan Ban

Jefferies upgraded IIFL Finance Ltd. to Buy from Hold after the Reserve Bank of India (RBI) lifted its ban on the company’s gold loan business.

The brokerage also raised the non-bank lender’s base case target price to 595 rupees from 470 rupees per share. IIFL was up 7.6% at 533.65 rupees apiece on the National Stock Exchange in Mumbai afternoon trading today.

IIFL yesterday announced the RBI removed the restrictions imposed on the company’s gold loan business with effect from 19 September. The restrictions, imposed on 4 March over certain material supervisory concerns in IIFL’s gold loan portfolio, prohibited the company from carrying out its gold loan business.

The central bank had also asked the company to undergo a special audit, which started on 23 April, and implement the remedial actions.

IIFL said the central bank’s latest decision allows the company to resume the sanctioning, disbursal, assignment, securitization, and sale of gold loans in compliance with all relevant laws and regulations.

“With RBI lifting ban on gold loans at IIFL, disbursement should resume and ramp up steadily,” Jefferies said in a note to investors.

Gold Loan Book & Disbursement

The brokerage said the gold loan book, which was at 122 billion rupees ($1.46 billion) as of August 2024 (down 52% versus March 2024), should be further down at 90 billion rupees as of September 2024 due to unwinding of the gold portfolio.

“Gold loan disbursement should ramp up gradually and normalize in the next one-two quarters,” it added.

Jefferies said the portfolio rebuild to pre-ban levels should take time, given high rundown rates and difficulty in regaining market share/customers, who have switched lenders. However, higher gold prices should be a tailwind and can aid growth in this regard, it noted.

The brokerage expects IIFL's gold loan portfolio to fall 40% to 139.7 billion rupees in FY25 and grow to 220 billion rupees in FY25 (down 6% versus March 2024). IIFL had also pulled back growth in non-gold segments to conserve liquidity, which should also ease, it said.

Jefferies said it expects overall assets under management to decline 7% in FY25 and grow 23% CAGR over FY25-FY27.

Co-Lending Ramp Up

The brokerage gold loans constituted 63% of IIFL's co-lending AUM ban and generated around 800-900 basis points of spreads before the gold loan ban.

“We watch out for resumption of gold loans under co-lending tie-ups with banks, as co-lending has been a key driver of returns at IIFL in the past,” it noted.

Jefferies said it expects co-lending AUM to lag on book growth in the near term. Fall in gold AUM due to the ban weighed on margins during the first quarter, but as IIFL rebuilds its gold loans, margin pressure should ease, it added.

Earnings Visibility

The brokerage said pressure on earnings, uncertainty around timing of removal of ban has dampened IIFL's valuations, but this should ease and improved earnings visibility will support better multiples.

Jefferies reduced its FY25 profit estimate by 3% due to higher operating expenditure but raised FY26-FY27E EPS view by 6% factoring better growth in gold loans.

The brokerage said IIFL's profit is likely to fall 42% in FY25 and grow at 51% CAGR over FY25-FY27, while return on equity should rise to 14%-15% in FY26-FY27 versus 18% in FY24.

Jefferies said improved visibility around gold loan business normalization should lift valuation multiples.

The brokerage has a target price of 645 rupees on IIFL, based on its upside scenario assumptions.

(Send feedback to editor@cornerofficejournal.com)