IIFL Finance may rally 34% on robust assets growth, higher returns, says HSBC

HSBC forecasts robust returns for IIFL Finance over FY23-26, including a 25 percent AUM CAGR, 3.5-3.8 percent RoA

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Strong growth in retail assets under management (AUM), potentially lower volatility in asset quality in the next cycle, and expansion of return on assets (RoA) can drive re-rating in IIFL Finance, according to HSBC Global Research.

The company has recently initiated a coverage on the stock with the ‘buy’ rating and a target price of Rs 790, indicating a 33.5 percent upside from the current market price.

With assets worth $8.3 billion as of Q1 FY24, the non-bank financial company has diversified its portfolio to include loans against gold, unsecured personal loans, affordable housing loans, loans against property, and microfinance.

“Improved liability management, stronger risk management, aggressive
investments in distribution and technology, and a first-mover in the co-lending model – are the four strategic pivots that have helped the company,” Abhishek Murarka, senior analyst at HSBC, said in his report.

Over FY14-19, around 16-34 percent of IIFL’s borrowings were through short-term papers, leading to a negative gap between assets and liabilities. “IIFL has reduced its dependence on short-term borrowings and now maintains a liquid balance sheet,” HSBC said.

The company has embraced the co-lending model, collaborating with banks to free up capital, and thus enhancing return on equity, and mitigating risk, it pointed out.

HSBC forecasts robust returns for IIFL Finance over FY23-26, including a 25 percent CAGR in AUM, 3.5-3.8 percent RoA, 21-22 percent RoE, and 28 percent CAGR in EPS. CAGR stands for compounded annual growth rate.

However, risks loom on the horizon, noted the firm. This includes cyclicality in businesses, regulatory changes in co-lending, adverse selection in new ventures like digital loans, liquidity constraints, and shifts in repo rates affecting the sentiment for NBFCs.

At 12pm, IIFL Finance was quoting at Rs 588.65 on the NSE, up 0.35 percent from previous close.

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