IIFL Finance - Diversified Product Suite Strengthens Execution: Motilal Oswal

Motilal Oswal Report

IIFL Finance Ltd. has a presence across home loans, loans against property, gold loans, microfinance loans, and unsecured business and personal loans. The two factors that will help IIFL sustain its strong AUM growth over the medium term are:

1. the aggressive expansion of its physical distribution and digital capabilities, and

2. its first-mover advantage in co-lending with banks, complemented by an effective direct assignment strategy.

The company’s net interest margin (as % of total AUM) is likely to improve to ~8.0% in FY24E from 6.2% in FY19, aided by an improvement in the product mix and a decline in the cost of borrowings. We expect IIFL to sustain NIM at the current level in FY25/FY26, with a potential upside from any credit rating upgrade.

The opex-to-average AUM ratio was high at ~3.9% in FY23, as IIFL invested aggressively in branch expansion for its home loan, gold loan, and MFI businesses, which gave it a strong distribution edge. We expect IIFL to slow the branch expansion and expect higher branch productivity to result in an improved opex-to-average AUM ratio of ~3.5% by FY26.

Gold loans and home loans, which contribute ~65% to the AUM mix, exhibit robust asset quality and low credit costs. They help IIFL mitigate the relatively higher vulnerability of MFI and digital loans. We estimate credit costs to remain range-bound at 2.2%-2.3% over FY25-26.

The asset-light model leveraging co-lending/direct assignments, and a diversified product suite will enable a strong AUM CAGR of ~25% over FY23-FY26E. With current valuations at 1.8x/1.5x FY25E/FY26E price/book value, we believe risk-reward is favorable for a franchise that can deliver a PAT CAGR of ~27% over FY23-26E and return on asset/return on equity of ~4.1%/22% by FY26E. We reiterate our 'Buy' rating with a target price of Rs 800 (based on SOTP valuation).

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