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Strong growth in gold loans; credit cost guidance raised

* Asset quality stress in MFI, unsecured MSME, and micro-LAP

* IIFL Finance (IIFL)’s 1QFY26 NII was down 10% YoY and ~1% QoQ to ~INR12.9b (~10% miss), potentially due to higher interest income reversals. Other income stood at ~INR3.8b (PQ: INR810b). This included assignment income of ~INR2.3b (which was absent for the last six quarters).

* Net total income grew ~17% YoY to ~INR16.7b. Opex grew ~7% YoY to INR8b (~8% higher than MOFSLe), with the cost-to-income ratio declining to ~48% (PQ: 53% and PY: 52%). PPoP stood at INR8.7b and grew ~26% YoY (~7% miss). Consol. PAT (post-NCI) declined ~19% YoY to INR2.3b.

* Credit costs were slightly lower than our estimates and stood at INR5.1b. This translated into annualized credit costs of ~3.65% (PQ: ~2.7%/PY: ~2.1%). Credit costs were elevated in MFI, unsecured lending, and small-ticket LAP..

Consol. AUM rises ~21% YoY; strong 30% QoQ growth in gold loans

* Consol. AUM grew 21% YoY and ~7% QoQ to INR839b. On-book loans grew ~26% YoY. Off-book formed ~32% of the AUM mix, with co-lending forming ~14% of the AUM mix.

* Gold loan AUM stood at ~INR273b and rose ~30% QoQ. Sequential growth in consol. AUM was driven by gold loans (+30%). Home loans grew 1% QoQ, MSME loans declined ~2% QoQ, and Microfinance declined ~10% QoQ.

* Gold loan AUM reached an all-time high, and management guided that the strong growth momentum in Gold Loans will continue over the next three quarters. Yields on gold loans improved sequentially, indicating that growth has been achieved without any trade-off in margins.

* IIFL shared that the robust growth in gold loans was attributed to the limited availability of MFI credit and a steady rise in gold prices over the past year. The company has guided for consolidated AUM growth of 20% in FY26, largely driven by the continued expansion in its gold loan portfolio.

* We estimate gold loans/consolidated AUM to grow ~49%/~21% YoY in FY26, resulting in a consol. AUM CAGR of ~20% over FY25-27E.

NIM dips ~60bp QoQ; calc. yields decline ~55bp QoQ

* Consol. yields/CoB declined ~55bp/5bp QoQ to ~12.7%/~9.7%.

* Calculated NIM dipped ~60bp QoQ. The compression in NIMs was primarily due to interest income reversal from MFI, unsecured MSME, and micro-LAP segments.

Asset quality stress in MFI, unsecured MSME, and micro-LAP segments

* GS3 (consol.) rose ~10bp QoQ to ~2.34%, while NS3 rose ~8bp QoQ to ~1.15%. PCR declined ~130bp QoQ to ~52.3%. NPAs during the quarter were impacted by macro trends in MFI, unsecured lending, and small-ticket LAP.

* Management guided for consolidated credit costs (as a % of avg. loan book) of ~3% (vs. ~2.5-2.7% guided earlier) in FY26.

* IIFL has taken corrective actions for improving the asset quality, such as:

* MSME Loans: IIFL discontinued small-ticket unsecured loans, and it has not been doing new disbursements in 1QFY26. Discontinued AUM (% of total) stood at 2.4%.

* Housing Finance: It discontinued the micro-LAP segment, and it is not doing any new disbursement in 1QFY26. Further, the company deployed a dedicated collection team of 300 for Micro LAP. Discontinued AUM (% of total) is 3.1%.

* Microfinance: Identified high-stress regions and deployed focused recovery teams. Reducing exposure to borrowers with more than three active lenders.

Highlights from the management commentary

* The company has recalibrated its exposure, gradually exiting riskier segments within MSME and micro LAP to prioritize portfolio stability.

* Within micro-LAP, the company witnessed higher stress in the states of Andhra Pradesh and smaller cities in Maharashtra. Since the exposure of the company is higher in AP, the impact was more pronounced in AP.

* The company received RBI approval to open 10 new branches in Jammu & Kashmir on 23rd May’25 and 500 in locations across India on 28th Jul’25.

Valuation and view

*  IIFL reported an operationally weak quarter. Very strong growth in gold loans is the only positive. Loan growth remained tepid across all other segments. The company faced asset quality pressures in its MFI, unsecured business loans, and micro-LAP portfolios, which resulted in elevated credit costs. Additionally, NIMs declined further, potentially impacted by interest income reversals on fresh slippages in the quarter.

* We cut our FY26 EPS estimates by ~5% to factor in higher credit costs during the year. The stock trades at 1.3x FY27E P/BV and ~9x P/E for an estimated RoA/RoE of 3%/16% in FY27. We have a BUY rating on the stock with a TP of INR550 (based on SoTP valuation; refer to the table below).

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