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Mastering the asset-light model for sustained profitability

Off-book strategy: Helping build granular and scalable retail businesses

IIFL Finance (IIFL) is a diversified NBFC with a strong presence in various retail business segments. Its core products include gold loans, home loans, microfinance, LAP and unsecured business loans. IIFL’s consolidated AUM stood at ~INR731b as on Sep’23 and it delivered an AUM CAGR of 22% over FY21-1HFY24. IIFL is present in ~26 states/UTs and has a distribution network of ~4,600 branches. The company has an asset-light business model with co-lending and assignments contributing ~15% and ~25% to the AUM mix, respectively.

* Strengthened franchise: IIFL has strengthened its retail product segments through aggressive expansion in its branch distribution network (37% of branches have <2- year vintage), investments in technology and digital processes/partnerships.

* Firm positioning: The company has gained a first-mover advantage in co-lending, a strategy known for its capital efficiency, risk mitigation, and positive impact on RoE. This has positioned IIFL for a strong AUM CAGR of ~25% over FY23-FY26E.

* Effective decision making: IIFL’s strategic decisions of: 1) exiting the CV finance business, 2) downsizing the wholesale construction finance (CRE) and capital markets segment, and c) transitioning towards lower-ticket LAP and business loans have helped it find its niche in the granular retail businesses.

* Credit costs to stay in the comfort zone: Asset quality has recovered after the Covid stress with GS3 at 1.8% as of Sep’23 (peak of 3.2% in Mar’22), led by the sale of stressed portfolio to AIFs and ARCs. With wholesale CRE and capital market loans now at <5% of AUM (vs. ~16% in FY19), secured product segments such as Gold/Housing/LAP loans contributing ~75%, and unsecured digital loans at only ~5% of the AUM mix, we project credit costs to remain benign at ~2.2%-2.3% over FY25-FY26.

* Multiple growth levers at play; initiate with a BUY: IIFL’s evolution from inception to the current state depicts a thoughtful adaptation to the changing landscape for NBFCs. The company's commitment to sustainable growth, robust risk management practices, and technological innovation position it favorably for a PAT CAGR of 28% over FY23-FY26E and an RoA/RoE of ~4.1%/22% by FY26E. IIFL trades at 1.9x/1.5x FY25E/FY26E P/BV. We initiate coverage on the stock with a BUY rating and a TP of INR800 (based on SOTP valuation).

* Key risks: 1) potential adverse regulations reducing the demand for co-lending/ assignments; 2) a sharp decline in gold prices, 3) regulatory limitations on pricing within the Microfinance sector, and d) cyclicality in MFI and gold loan growth.

Thrust on off-book strategy and phygital distribution a big enabler

* Over the last 2-3 years, IIFL has expanded its branch network across gold, MFI, and home loans to ~4,600 branches (vs. ~2,600 as of Mar’21). The improvement in productivity across ~37% of its branches (each with <2-year vintage) and the expansion of partnerships for loan originations, are poised as key growth drivers.

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