IIFL Finance - Acing The Asset-Light Model: Motilal Oswal Initiates Coverage With A 'Buy' Rating

Motilal Oswal Report

The two biggest strengths that will help IIFL Finance Ltd. sustain its strong assets under management growth trajectory over the medium term are:

1. aggressive expansion of the physical distribution network and investments in partnerships, technology, and digital capabilities; and

2. establishing a first-mover advantage in co-lending with banks and completing it with an effective direct assignment strategy.

Co-lending is capital efficient and return on equity-accretive, and mitigates risk.

IIFL Finance has morphed into a franchise that has the distribution strength, strong presence in co-lending, superior digital loan origination and underwriting capabilities and can effectively leverage fintech partnerships to deliver a ~25% AUM compound annual growth rate over FY23-FY26E.

IIFL Finance’s dominance in lower-risk secured product segments, such as gold loans and home loans, and higher-growth segments such as micro finance (aided by cyclical tailwinds), will enable the company to deliver healthy AUM growth with robust asset quality and healthy return ratios. 

IIFL Finance's track record of successful execution is evident in its ability to pre-empt business cycles and prioritize sustainable and scalable asset portfolios. It has embraced technology and expanded digital capabilities in home loans, gold loans, and digital loans. Despite cyclical disruptions, IIFL has emerged resilient, demonstrating adaptability, strategic foresight, and a commitment to value creation.

The company trades at 1.5 times FY26E price/book value and can sustainably deliver RoE of 20%+ in the medium term. We believe IIFL can see further re-rating as investors gain more confidence in its execution prowess through strengths in its core retail businesses. We initiate coverage on the stock with a 'Buy' rating and a target price of Rs 800 based on SOTP valuation.

We believe there will be value-unlocking events in this franchise in the next two to three years. The company plans to demerge housing finance company and MFI subsidiaries and list them separately to unlock value.

IIFL trades at 1.9 times/1.5 times FY25E/FY26E P/BV. We initiate coverage on the stock with a 'Buy' rating and a target price of Rs 800 (based on SOTP valuation).

Key downside risks:

• Regulatory uncertainty: Any adverse regulation leading to lower demand for colending and/or assignments can impact the asset-light business model of IIFL.

• Sharp decline in gold prices: Gold loans form ~33% of the AUM mix and any sharp decline in gold prices can impact gold loan growth.

• Potential caps on pricing in microfinance: Spread caps (in any form) will not be positive for the MFI sector and can potentially impact NIM for IIFL Samasta.

• Cyclicality in MFI and gold loan growth: Gold loan growth has a strong correlation with gold prices, while MFI credit cycles are punctuated by natural or man-made disturbances.

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