IIFL Finance share price up 4% in last three months; Motilal Oswal says buy. Here are 5 important reasons why
IIFL Finance shares have lagged behind the benchmark Sensex in the past three months. While the stock increased by only about 4 per cent, the Sensex surged by 10 per cent during the same period.
However, brokerage firm Motilal Oswal Financial Services is positive about the stock for the long term as it sees several growth levers at play for the company.
The brokerage firm has initiated coverage on IIFL Finance stock with a buy recommendation and target price of ₹800, implying a 26 per cent upside potential.
“IIFL has morphed into a franchise, which enjoys distribution strength, strong presence in co-lending, and superior digital loan origination and underwriting capabilities, and can effectively leverage fintech partnerships to deliver a nearly 25 per cent AUM CAGR over FY23-FY26E,” said Motilal Oswal.
“The company trades at 1.5 times FY26E P/BV (price-to-book-value ratio) and can sustainably deliver a RoE (return on equity) of more than 20 per cent in the medium term. We believe IIFL can see further re-rating as investors get more confidence in its sustained execution prowess through strengths that it has built-in its core retail businesses,” said the brokerage firm.
Here are five important reasons, according to Motilal Oswal, that make it positive about the stock:
1. Strengthened franchise
Motilal Oswal pointed out that over the last two to three years, IIFL has expanded its branch network across gold, MFI (microfinance institutions), and home loans to nearly 4,600 branches versus nearly 2,600 as of March 2021.
“The improvement in productivity across nearly 37 per cent of its branches (each with less than two-year vintage) and the expansion of partnerships for loan originations, are poised as key growth drivers,” Motilal Oswal said.
“To optimize capital utilisation, IIFL has strategically intensified its attention on assignments and co-lending, which will also contribute to higher profitability. This shift is evident in the higher share of off-book loans, constituting nearly 40 per cent of
AUM (including nearly 14 per cent co-lending). This approach has granted leadership to IIFL in co-lending and will enable a strong AUM CAGR of nearly 25 per cent over FY23-FY26E,” said the brokerage firm.
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2. Efficient liability management
Motilal Oswal underscored that IIFL significantly enhanced its liability management by reducing its short-term
borrowings (post-IL&FS default), which declined sharply to nearly 2 per cent of the borrowing mix as of the first half of FY24 versus nearly 34 per cent in FY19.
“A combination of all the strategic initiatives has made IIFL’s balance sheet more robust and these will render confidence to the rating agencies to consider a credit rating upgrade for IIFL. The company has a credit rating of AA (Positive) and an upgrade to AA+ will give it better access to debt markets. This upgrade can also potentially reduce its cost of borrowings by 20-25bp,” said the brokerage firm.
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3. NIM outlook stable
Motilal Oswal underscored that shifting the mix toward higher-yielding MFI can help mitigate the impact of an increase
in the cost of borrowing on NIM (net interest margin). Further, IIFL will benefit from any decline in repo rates, since nearly 53 per cent of the AUM (gold loans, MFI, and digital loans) are on fixed rate.
“NIM (as a percentage of total AUM) for IIFL is likely to improve to nearly 7.5 per cent in FY24E from 6.2 per cent in FY19, driven by an improvement in product mix and a decline in the borrowing costs. We expect IIFL to be able to maintain its NIM at similar levels in FY25/FY26 with a potential upside from any credit rating upgrade,” said the brokerage firm.
4. Co-lending RoA accretive
IIFL has forged partnerships with multiple digital platforms and fintech firms to facilitate loan originations, particularly in the digital loans (personal loans and business loans) segment. Additionally, the company has developed strong digital capabilities, enabling quicker TAT, enhanced productivity/efficiencies, and offers customers a seamless and paperless journey, Motilal Oswal observed.
“While co-lending is capital efficient and RoA (return on assets) accretive, it also reduces the volatility and brings more predictability to the earnings profile,” Motilal Oswal said.
5. Operating leverage to play out; credit costs to remain benign
Motilal Oswal expects IIFl’s branch expansion strategy to take a back seat and higher productivity across branches to result in an improved opex-to-average AUM ratio of nearly 3.5 per cent by FY26.
“Gold loans and home loans (which contribute nearly 65 per cent to the AUM mix) exhibit through-cycle robust asset quality and low credit costs. They help to mitigate the relatively higher vulnerability of the MFI and digital loan businesses,” said Motilal Oswal.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 05 Jan 2024, 11:50 AM IST
