BoB Caps sees 43% upside potential in IIFL Wealth stock; find out why

Brokerage house Bank of Baroda Capital (BoB Cap) has initiated coverage on financial firm IIFL Wealth with a 'buy' call given its rising margins, strong clientele, favourable industry drivers and undervaluation. The brokerage has a target price of ₹2,277 for the stock, implying a potential upside of 43 percent from the current market price of ₹1,585 (as of July 13).

IIFL Wealth has outperformed Indian markets in the last 1 year, rising 27 percent against a 1 percent rise in Nifty. In 2022 so far also, it has advanced 10 percent versus a 7 percent decline in the benchmark. The stock was listed on the exchange in 2019, and since then it has given a positive return of 25 percent.

As per the brokerage, IIFL Wealth has a sustainable business model with diverse product offerings in high- and ultra-high-net-worth individuals (HNI/UHNI) categories. The firm's wealth model of offering wealth solutions to HNI/UHNI is based on driving a larger share of recurring revenue streams (ARR), with its commission structures migrating to trail versus upfront earlier, thus, the recurring revenue is independent of transaction volumes, explained the brokerage.

It noted that at the end-FY22, 55 percent of AUM (assets under management) and 65 percent of revenue were based on ARR, which it expects will grow to 61 percent and 81 percent, respectively by FY25.

The AMC business (PMS, AIF and MFs, albeit AIF-heavy) continues to be one of IIFL Wealth’s strongest segments, where AUM grew at a 44 percent CAGR over FY17-FY22 to ₹55,600 crore, the brokerage highlighted. It believes

aggressive growth plans coupled with senior hires should take AUM past the ₹1 lakh crore-mark by FY25 in the AMC business.

Overall, the company's AUM grew 22 percent over FY17-FY22 to ₹2.6 lakh crore and the brokerage expects net flows of ₹34000 crore by FY23, ₹40500 crore by FY24 and ₹45200 crore by FY25. Similarly, it sees the firm's AUM reaching ₹3.1 lakh crore in FY23, ₹3.8 lakh crore in FY24 and ₹4.5 lakh crore in FY25.

BoB Caps further informed that the firm's ROAE (return on average equity), which declined to 7 percent in FY20, grew to 20 percent at end-FY22 and ROAA (return on average assets), which declined to 1.8 percent in FY20, grew to 6 percent.

The brokerage expects around 28 percent ROAE and 7 percent ROAA by FY25 based on higher total income (14 percent CAGR over FY17-FY22) coupled with a projected decline in cost-to-income ratio to 44 percent in FY25 as compared to 51 percent in FY22.

It also forecasts a net profit CAGR of 18 percent over FY22-FY25 to ₹9.60 crore based on strong AUM growth coupled with operating leverage.

In the March quarter, the company reported a 2 percent YoY rise in consolidated net profit to ₹78.9 crore and a 46 percent YoY increase in revenue to ₹346.8 crore. Meanwhile, the total expenses in Q4FY22 came in at ₹256.6 crore, up 56 percent from Q4 FY21.

On an annual basis, the firm's net profit advanced 39 percent YoY to ₹305.9 crore in FY22 and its revenue rose 56 percent YoY to ₹1,232.3 crore in FY22 over FY21.

Post the earnings, R Venkataraman, managing director of the firm said, "All our business segments have performed exceptionally well during the year. Our investment banking segment has posted an all-time high revenue of ₹150 crore for the full year. We have made significant investments in technology and added manpower during the year. Our customer acquisition has been robust and we expect the same to continue."

IIFL Wealth offers advisory and broking services, financial products distribution, institutional research and investment banking services. The company also provides lending solutions to clients across the spectrum of structured leverage. In addition, it offers estate planning services, such as wealth structuring and succession planning solution; and asset management solutions, including mutual funds, alternative asset funds, and portfolio management services. The company serves high net worth and ultra-high net worth individuals, family offices, and institutional clients.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.