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Diversified product suite strengthens execution

Risk-reward favorable for a ~25% AUM CAGR and RoE of ~20-21%

* IIFL Finance (IIFL) has a presence across home loans, loans against property (LAP), 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 NIM (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 (CoB). 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 P/BV, we believe risk-reward is favorable for a franchise that can deliver a PAT CAGR of ~27% over FY23-26E and RoA/RoE of ~4.1%/22% by FY26E. We reiterate our BUY rating with a TP of INR800 (based on SOTP valuation).

Home loans and LAP: Using technology advantage for scale-up

* IIFL Home Finance Co.’s (HFC) operational model is its differentiator, including the way it leverages its technology and digital capabilities to deliver a lower turnaround time (TAT) and a superior experience to customers. It operates under a hub-and-spoke model and has a centralized credit, legal and technical team.

* The company has also pivoted to a more granular LAP product, in which the competition from banks is much lower and there is no irrational pressure on pricing. This allows IIFL to maintain healthy yields on its LAP product.

Gold loans: Distribution and co-lending boosting AUM growth

* IIFL is now the second-largest gold loan NBFC in India in terms of AUM and the third-largest in terms of on-book loans. It has 2,700+ gold loan branches in 25 states/UTs. The northern and western regions account for ~34% and 26% (cumulatively ~60%) of its gold AUM, respectively.

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