IIFL Finance: Up 922% since June 2020 low, HSBC sees another 33% upside in this NBFC stock – here's why

Global brokerage firm HSBC Global Research has initiated coverage on IIFL Finance with a 'buy' rating, valuing IIFL at 2.3x FY25e consolidated BVPS, resulting in a target price of ₹790 apiece, which indicates an upside of 33%. The brokerage's optimistic view stems from the company's four strategic pivots.

IIFL Finance is a non-banking financial company (NBFC) with assets under management (AUM) of $8.3 billion as of 1QFY24. It provides loans against gold (GL), unsecured personal loans, affordable housing loans (AHL), loans against property (LAP), and microfinance (MFI).

Like most other NBFCs, IIFL has gone through cyclical ups and downs during demonetisation (2016), the IL&FS crisis (2018), and COVID-19 (2020–21). However, unlike some NBFCs, it has emerged stronger from each disruption, gradually adopting more best practices, cutting risks, and adopting more from these events to make its business more resilient across cycles, the brokerage underscored.

HSBC has highlighted the following four critical business pivots, which it believes have strengthened IIFL’s lending business:

Stronger liability management: Over FY14–19, IIFL’s borrowings were through short-term papers, making up 16–34% of total borrowings, creating a negative asset-liability gap on the balance sheet.

After the liquidity shock of the IL&FS crisis, the brokerage said IIFL rebalanced its borrowing strategy. It replaced CPs with longer-tenure borrowings like bank loans and debentures. Now, 39% of AUM is in assignment or co-lending, maintaining a positive gap of 40–50% of outflows within a year, it noted. 

According to HSBC, the higher balance sheet liquidity will enable it to withstand unforeseen liquidity events better and provide more confidence to both credit rating agencies and lenders to lend to IIFL.

Stronger risk management: IIFL pivoted its AUM mix to increase granular retail lending and lower concentration risk. It sold its commercial vehicle business to Indostar Capital in February 2019. Further, it reduced its exposure to commercial real estate (CRE) and capital market (CM) products, the brokerage said.

The company has accelerated growth in affordable home loans and gold loans, both of which are secured loans with low credit costs. It built its presence in microfinance through the acquisition of Samasta Microfinance in 2017.

While the MFI business is unsecured and has high event-driven credit costs, it also generates strong through-the-cycle returns. The company has also started to grow digital loans, which are largely originated through partnerships with fintech companies, according to HSBC. 

Investing in distribution, partnerships, and technology: With a focus on building a granular retail loan book, IIFL has been investing in improving its distribution reach. It has added branches, invested in digital processes, and also entered partnerships with fintech companies to leverage its distribution reach.

With this ‘phygital’ approach (part physical and part digital), IIFL is focusing on improving its presence in Tier I suburbs and Tier II and Tier III cities. Through its MFI branches, it is also capturing the credit demand from rural and semi-urban regions.

The company has also invested in technology and partnerships. A digital platform for home loans, which, according to the brokerage, allows IIFL to onboard 99% of the home loan customers digitally. IIFL also made investments in technology to align with new regulatory frameworks and public digital infrastructure, it added.

An active ‘off-book’ strategy: The brokerage stated that the company has developed an active assignment and co-lending strategy, with the off-book AUM (direct assignment and co-lending) increasing from 7% in FY18 to 39% as of 1QFY24. 

According to HSBC, most NBFCs use these tools for up to 8–10% of their AUM, primarily to generate liquidity. However, IIFL is one of the first front-line NBFCs to use them more extensively.

Stock price history: IIFL Finance shares made a remarkable recovery from their June 2020 low of ₹58.15, surging by 922% to reach the current price of ₹594. In CY21, the stock delivered a multi-bagger gain of 146%, followed by a 72% rally in the next year.

In the current year so far, the shares have grown 23.3%, spiking from ₹482 to ₹594.

04 analysts polled by MintGenie on average have a 'strong buy' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.