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NIM expansion and credit cost decline drive earnings beat Poised well for healthy growth in AUM and profitability in FY27

* IIFL Finance’s 1QFY27 NII grew 55% YoY and ~16% QoQ to ~INR20b (~9% beat). Other income stood at ~INR2b (~52% miss) compared to INR3.7b in 4QFY26. This included assignment income of ~INR749m (PQ: INR2.1b).

* Net total income grew ~32% YoY to ~INR22b (in line). Opex rose ~22% YoY to INR9.8b (in line), with the cost-income ratio remaining broadly stable QoQ at ~44.5% (PQ: 44.6% and PY: ~48%).

* PPoP stood at INR12.2b, up ~41% YoY (in line). PAT (post-NCI) stood at INR6.7b (~14% beat).

* Calculated NIMs expanded ~50bp QoQ to 7.2%. Credit costs stood at INR2.9b (~16% lower than MOFSLe). This translated into annualized credit costs of ~1.6% (PQ: ~1.9% and PY: ~3.7%).

* IIFL has set out targets for FY27 and the FY27-29 period. Management guides for 25% YoY consolidated AUM growth in FY27, credit costs of 1.5- 1.7%, RoA of 3.1-3.3% and RoE of 16-20% (a potential equity raise might impact leverage and RoE). Off-book loan assets are expected to account for 35-40% of the portfolio. Over FY27-29, management targets 20% AUM CAGR, credit costs of 1.0-1.2%, RoA of 3.6-3.8% and RoE of 18-20%, with off-book loan assets expected to increase to ~40%.

* Management acknowledged that capital adequacy at the parent level remains relatively tight and is evaluating multiple options to strengthen capital, including a QIP, strategic/secondary stake sale and/or additional Tier 2 perpetual debt issuance, and improving momentum in co-lending.

* We raise our FY27E EPS by ~9% to factor in slightly higher AUM growth, expansion in NIM and lower credit costs. Reiterate our BUY rating on the stock with a TP of INR700 (based on Mar’28E SoTP).

GS3 up ~10bp QoQ; sequential moderation in credit costs

* GS3/NS3 rose 10bp QoQ each to 1.55%/0.8%. PCR declined 3pp QoQ to 47.3%.

* Management shared that gold loan asset quality remains comfortable, supported by strong collateral coverage and low LTV. It expects GNPA to remain manageable despite potential gold price volatility, given the portfolio's historically low LGD. We model credit costs of 1.7%/1.6% for FY27/FY28 (vs. 2.8% in FY26).

Valuation and view

* IIFL reported a healthy quarter, driven by strong momentum in the gold loan segment, supported by healthy tonnage growth and elevated gold prices. The MFI business also continued to recover, with improving growth momentum and asset quality. While asset quality witnessed a marginal seasonal deterioration, credit costs continued to decline as the company winds down its unsecured portfolio and increases the share of secured lending.

* IIFL is undergoing a meaningful structural improvement as a franchise, with a clear shift towards secured lending and a gradual run-down of unsecured businesses (apart from MFI). The improving portfolio mix, normalizing credit costs and operating leverage are expected to drive a meaningful improvement in return metrics over the coming quarters. We believe sustained execution on its growth and profitability targets, alongside improving asset quality, will support a re-rating of the stock over the medium term.

* We raise our FY27E EPS by ~9% to factor in slightly higher AUM growth, margin expansion and lower credit costs. The stock trades at 1.5x FY27E P/BV and ~9x P/E for estimated RoA/RoE of 3.1%/19% in FY28. Reiterate our BUY rating on the stock with a TP of INR700 (based on SoTP valuation; refer to the table below).

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