IIFL Finance Gets A New 'Buy' Rating From HSBC Citing AUM Growth Resurgent

The four strategic pivots undertaken by the company will lead to more sustainable growth and earnings over FY23-26, HSBC said.

<div class="paragraphs"><p> IIFL  signage. (Photo: Reuters/Shailesh Andrade)</p></div>
IIFL signage. (Photo: Reuters/Shailesh Andrade)

IIFL Finance Ltd. shares rose on Monday after HSBC Global Research initiated coverage with a 'buy', citing four key business pivots for the resurgent in assets under management growth, re-rating, and profitability.

The brokerage has set a price target of Rs 790 per share, implying an upside of 33.8% over the next 12 months.

The four strategic pivots undertaken by the business will lead to more sustainable growth and earnings over FY23–26, which is likely to drive a re-rating of the stock, HSBC said.

Four Strategic And Critical Pivots 

  • IIFL has reduced its dependence on short-term borrowings and maintains a liquid balance sheet.

  • IIFL has run-down loans to commercial real estate, capital markets, and commercial vehicles and built granular, largely secured, retail assets under management.

  • Aggressive investments in distribution, technology, and partnerships will drive growth.

  • IIFL was one of the first NBFCs to use the co-lending model, which sells down a proportion of loans to banks. This frees up capital and is accretive to return on equity; it also reduces risk.

HSBC On IIFL Finance

  • Affordable housing loans, microfinance, digital loans, and co-lending are the key AUM growth drivers. Given adequate pricing power in these segments, margins should remain steady and improve when rates decline, as per the brokerage.

  • Operating leverage, especially in gold loans, should further aid the return on assets. Nearly two-thirds of IIFL's business operates at very low through-the-cycle credit costs.

  • HSBC forecasts strong returns over FY23–26:

    -- A 25% compound annual growth rate in its AUM.

    -- About 3.5% to 3.8% return on assets.

    -- Nearly 21% to 22% return on equity.

    -- Around 28% compound annual growth rate in its earnings per share.

  • Strong retail AUM growth, potentially lower volatility in asset quality in the next cycle, and RoA expansion will lead to potential rerating in the stock, HSBC said.

  • Downside risks include cyclicality in businesses, asset quality, and regulatory changes in co-lending. The risk of adverse selection in new businesses, like digital loans, liquidity tightness, and any increase in repo rate that sours sentiment for NBFCs, can affect the company negatively.

Shares of IIFL Finance rose as much as 2.33%, the most since Sept. 15, before paring gains to trade 1.11% higher as of 10:03 a.m. This compares to a 0.09% decline in the NSE Nifty 50.

The stock has gained 23% on a year-to-date basis. The relative strength index was at 51.7.

All five analysts tracking the company maintain a 'buy' rating on the stock, according to Bloomberg data. The average 12-month consensus price target given by analysts implies an upside of 32.5%.