Advertisement

Updated January 5th, 2024 at 13:20 IST

IIFL Finance initiates asset-light model to propel sustained profitability

The company's asset-light model involves co-lending and assignments, contributing around 15% and 25%, respectively, to the AUM mix.

Tanmay Tiwary
IIFL Finance
IIFL Finance | Image:Pexels
Advertisement

IIFL Finance in focus: IIFL Finance, a diversified Non-Banking Financial Company (NBFC), is strategically adopting an asset-light business model to enhance profitability and scalability in various retail segments.

The company, with a consolidated Assets Under Management (AUM) of approximately Rs 73,100 crore as of September 2023, has displayed a commendable AUM Compound Annual Growth Rate (CAGR) of 22 per cent from FY21 to 1HFY24.

Advertisement

Image Credits: Pexels

IIFL Finance operates in diverse segments such as gold loans, home loans, microfinance, Loan Against Property (LAP), and unsecured business loans. With a robust presence in around 26 states/Union Territories and an extensive distribution network of approximately 4,600 branches, the company has strategically positioned itself for growth.

Advertisement

Asset-light approach

The company's asset-light model involves co-lending and assignments, contributing around 15 per cent and 25 per cent, respectively, to the AUM mix. This strategic shift enables capital efficiency, risk mitigation, and positive Return on Equity (RoE), according to brokerage firm Motilal Oswal. 

Advertisement

IIFL's focus on co-lending, recognised for its capital efficiency, positions the company for a robust AUM CAGR of approximately 25 per cent from FY23 to FY26E, the brokerage firm noted.

Strengthened franchise 

Advertisement

IIFL has fortified its retail product segments through an expansive branch distribution network and investments in technology. Notably, strategic decisions such as exiting Commercial Vehicle (CV) finance, downsizing wholesale construction finance (CRE), and transitioning towards lower-ticket LAP and business loans have contributed to the company's resilience in granular retail businesses.

Credit quality and profitability

Advertisement

The company has effectively managed credit quality, with Gross Stage 3 (GS3) at 1.8 per cent as of September 2023, a notable improvement from the peak of 3.2 per cent in March 2022. IIFL's focus on secured product segments, including Gold, Housing, and LAP loans, comprising approximately 75 per cent of the AUM mix, contributes to the anticipation of benign credit costs at around 2.2 per cent-2.3 per cent over FY25-FY26.

Image Credits: Pexels 

Advertisement

With multiple growth levers in play, including a robust co-lending strategy and a favourable risk profile, analysts initiate coverage on IIFL Finance with a ‘Buy’ rating. The company's commitment to sustainable growth, effective risk management practices, and technological innovation positions it for a Projected Annual Total (PAT) CAGR of 28 per cent over FY23-FY26E and an RoE of approximately 22 per cent by FY26E, Motilal Oswal highlighted in a note.

While IIFL Finance faces potential risks such as adverse regulations impacting co-lending and assignments, a decline in gold prices, regulatory constraints on Microfinance sector pricing, and cyclicality in Microfinance Institution (MFI) and gold loan growth, its off-book strategy and evolving digital distribution channels remain pivotal for future success.

Advertisement

IIFL Finance's evolution and strategic adaptability position it as a strong contender in the NBFC sector, making it an attractive investment with a target price of Rs 800, indicating a potential upside of 26 per cent.

Advertisement

Published January 5th, 2024 at 09:30 IST

Your Voice. Now Direct.

Send us your views, we’ll publish them. This section is moderated.

Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Whatsapp logo