Jefferies: Analysts predict that IIFL Finance, a diversified non-banking financial company (NBFC), will see healthy net interest income (NII) growth, stable asset quality, and strong earnings growth.
According to foreign brokerage Jefferies, the company has strengthened its retail franchise by expanding branches twice in three years, which is expected to drive a 23% asset under management (AUM) CAGR and a 26% NII CAGR over FY23-26.
Furthermore, a higher mix of gold and housing loans should keep credit costs in check, while the company’s emphasis on an off-balance-sheet strategy will boost ROA and optimize capital consumption, according to Jefferies.
The global brokerage began coverage of IIFL Finance with a ‘Buy’ rating and a target price of 760 per share, implying a 25% increase from Friday’s closing price.
IIFL Finance’s margins have increased in recent quarters and are expected to fall from Q2 highs due to a potential 30-40 basis point increase in cost of funds (CoF). According to Jefferies, interest rate increases in gold and MFI loans should help to mitigate the impact.
It projects a healthy net interest margin (NIM) (% of AUM) to remain at 7.5-7.8% and a 26% compound annual growth rate (CAGR) for NII between FY23 and FY26.
Additionally, the company’s asset quality improved as of Q2FY24, when gross non-performing assets (GNPA) dropped to 1.8% from a peak of 3.2% and wholesale GNPA to 0.4%.
“We think a manageable mix of digital/unsecured business loans (6-7% of loans) and a balanced mix of lower-risk housing/gold loans (53% of loans), along with a lower mix of wholesale/capital market loans (5% of AUM versus 20% in FY18), will keep credit costs in check at 2-2.2% of loans over FY23-26E,” according to Jefferies.
Strong topline growth, improved operating efficiencies, and IIFL Finance’s off-balance-sheet strategy, according to the global brokerage, should support a 24% EPS CAGR and higher ROA and ROE of 3.4% and 20%+ over FY24-26E.
Risks include a slowing of growth, lower co-lending, regulatory changes, and asset quality deterioration.
IIFL Finance reported a consolidated net profit of 525.52 crore for the second quarter of FY24, up 32.35% from 397.06 crore the previous year. In Q2FY24, consolidated revenue from operations increased 22.17% year on year to 2,475.7 crore.
Over the last three months, IIFL Finance’s share price has increased by over 7%, and the company has gained more than 27% year to date (YTD). IIFL Finance’s stock has increased by more than 49% during the past year.
