IIFL FINANCE : PLACED IN A PRIME POSITION

IIFL Finance is one of the leading non-banking financial companies (NBFCs) in India. It offers various products such as home loan, gold loan, business loan, microfinance and construction loan. The company focuses on both the frontiers i.e. physical expansion of branches and digital adoption for better customer service and higher market penetration. Their major focus is to provide services to that part of society that is underserved by the financial services’ companies and to achieve this they are expanding their business in Tier II and III cities at an exponential pace. The company’s branch network is equally diversified across the country. As of FY22, 87 per cent of the company’s branches were in Tier II and III cities. 

The company has a customer base of more than 8 million, out of which 2 million were added in FY22. It has a nationwide presence with a thriving network of more than 3,100 branches across more than 500 cities. Apart from this, the company has also signed partnership agreements with various popular financial technology players to support the digital transition movement in the industry. It had 30,000 employees as of FY22, who are well-trained as the company runs a regular programme for training them. As on September 30, 2022, the company had assets under management (AUM) of `55,302 crore of which 36 per cent was of home loan, 32 per cent gold loan, 14 per cent business loan, 12 per cent microfinance, 5 per cent construction and 1 per cent from the capital markets. It has registered 27 per cent CAGR growth in AUM over the last five years.

Sector Overview
As compared to the global average of 54 per cent, India’s urban population is only 35 per cent which is way below and is expected to increase as Indians living in cities would be approximately 525 million by FY25 and 600 million by FY36 and at the same time India’s real estate market is expected to reach USD 1 trillion by FY30. This will increase the demand for more homes, commercial spaces and better infrastructure. As NBFCs hold around 34 per cent share in housing loan, opportunities are aplenty in this segment. In addition, the Pradhan Mantri Awas Yojana (PMAY) is also expected to boost the demand for housing loans. 

Out of India’s total gold, 65 per cent is held by the rural population. This sector is currently dominated by the local lenders and only 23 per cent share remains with the NBFCs. As the gold loan sector is rapidly undergoing changes from unorganised to organised, NBFCs are placed better to grab this opportunity. The gold NPA stood at 1 per cent and the sector is expected to grow at a CAGR of 19.5 per cent till FY25. There are more than 63 million MSMEs which employ more than 110 million people and to achieve India’s target of a USD 5 trillion economy it is necessary that they grow

Given this positive domestic outlook, NBFCs can cater the funding gap in this sector which is currently penetrated by the local players. On the other hand, the microfinance sector plays an important role for the economy’s progress and is expected to grow at a CAGR of 40 per cent through FY25. NBFCs with share of 31 per cent are well-placed to grab the opportunity. In short, rapid urbanisation is expected to boost the demand for home loans, increasing formalisation in the gold sector is a prime opportunity for the NBFCs and to achieve the target of an economy of USD 5 trillion, there will be a boost in demand for loans from the MSME sector. 

Financial Overview
IIFL Finance reported outstanding financials for the quarter ended September 30, 2022. The company is expecting good demand in upcoming years due to a positive domestic outlook. Total income for the company in Q2FY23 stood at ₹1,236 crore, up by 31 per cent YoY, whereas net profit stood at ₹397.1 crore, up by 36 per cent YoY. The company’s core operating segments have delivered phenomenal growth on a sequential basis. Its AUM saw a robust growth of 25 per cent YoY to ₹55,302 crore, supported by growth in various segments. Home loan AUM registered growth of 25 per cent, gold loan by 31 per cent and microfinance by 49 per cent YoY, showing a robust demand in all the segments. 

As of Q2FY23, gross non-performing assets (GNPA) stood at 2.4 per cent and net NPA at 1.2 per cent, placing the company in a better position in the industry. For FY22, the company’s consolidated revenue stood at ₹7,006.27 crore whereas net profit was highest at ₹1,188.25 crore, up by staggering 56 per cent YoY. This growth was registered due to strong AUM and increasing digital presence of the company across India. From a liquidity perspective, the company had ₹9,399 crore, which is sufficient enough to manage the short-term obligations. It has reported healthy return on equity (ROE) of 20 per cent for FY22 and return on assets (ROA) of 2.74 per cent, the highest ever reported in the company’s history. 

The NBFC industry’s average gross NPAs were around 6.5 per cent and net NPAs around 2.3 per cent, whereas for the company the gross NPAs stood at 3.2 per cent and net NPAs at 1.8 per cent, thus placing it in a comfortable position. The company’s net interest margin (NIM) was at 7 per cent as of FY22 whereas the borrowing cost declined by 0.4 per cent to 8.6 per cent during the same period. EBIT margin was at 71 per cent and net profit margin was at 20 per cent. Segment-wise, the company is not dependent too much on a single segment, giving them protection from any cyclical change in that industry. Loan AUM grew by CAGR of 18 per cent for the past five years compared to the industry’s CAGR of just 9.31 per cent. 

This was driven by demand from ‘small ticket’ home loans, microfinance and the gold loan segment. Over the past five years, the company’s home loan segment has registered robust growth at CAGR of 27 per cent while gold loan, microfinance and business loan grew at a CAGR of 41 per cent, 92 per cent and 5 per cent, respectively. The company’s portfolio is now more focused towards retail loans in Tier II, III and IV cities. The company’s shareholding pattern as of September 30, 2022 was as follows: promoters own 24.89 per cent, FIIs own 25.57 per cent, DIIs own 3.41 per cent and others own 46.13 per cent

Outlook
Increasing urbanisation rate, changes in the gold industry, requirement of loans for MSME development and microfinance sector growth are the supporting factors for the NBFC industry. The company is well-positioned to cater to this demand through its vast network of branches and digitalised products. It has a diversified portfolio, making it less prone to impact from any changes in a particular industry. The loan portfolio of the company is well-balanced as 85 per cent of loans are secured and 15 per cent are unsecured. That apart, the major focus of the company is on small ticket size loans and retail loans and the result of this is that 94 per cent of their portfolio comprises retail, which places it on the better side from an NPA perspective. 

The company’s management committee has vast experience in BFSI which can help them to identify opportunities that are untapped by others. The NPAs of the company are lower as compared to the industry average due to more exposure to retail loans. In FY22, the company generated net cash of ₹3,568 crore after all the payments of capital expansion, financing costs, etc., making it more stable and aggressive for rapid expansion, if required. It is rapidly expanding its business to cater to customers who are underserved making it an attractive player to grab opportunities in this flourishing sector. Hence, due to sectoral support, right business expansion, clear management strategy, lower cost of finance and strong fundamentals, we recommend BUY.