IIFL Finance diversifies portfolio, HSBC initiates coverage with 'Buy' rating

IIFL Finance, a non-banking financial company, has broadened its portfolio to feature a variety of loans including gold-backed, unsecured personal, affordable housing, property, and microfinance. The company's assets were valued at $8.3 billion as of the first quarter of fiscal year 2024 according to information released on Wednesday.

HSBC Global Research has recently started covering IIFL Finance and has given it a 'Buy' rating with a target price of Rs 790 ($1 = INR83.167). This suggests a potential upside of 33.5% from the current market price. HSBC believes several factors could contribute to IIFL's re-rating such as robust growth in retail assets under management (AUM), lower volatility in asset quality in the upcoming cycle, and an improved return on assets (RoA).

Four strategic shifts have been highlighted by HSBC that have contributed to IIFL's progress: better liability management, stronger risk management, aggressive investments in distribution and technology, and pioneering the co-lending model. The co-lending model involves partnering with banks to free up capital, which enhances return on equity and reduces risk.

Between fiscal years 2014 and 2019, IIFL sourced between 16% and 34% of its borrowings through short-term papers. This practice created a negative gap between assets and liabilities. However, the company has since reduced its dependence on short-term borrowings and now maintains a liquid balance sheet.

HSBC forecasts strong returns for IIFL Finance from FY23 to FY26. This includes a compounded annual growth rate (CAGR) of 25% in AUM, RoA of 3.5-3.8%, return on equity (RoE) of 21-22%, and a CAGR of 28% in earnings per share (EPS).

However, HSBC also notes potential risks for IIFL Finance. These include business cyclicality, regulatory changes in co-lending, adverse selection in new ventures such as digital loans, liquidity constraints, and shifts in repo rates that may affect sentiment for non-bank financial companies.

On Wednesday, IIFL Finance's stock was quoted at Rs 588.65 on the NSE at midday, marking a 0.35% increase from the previous close.

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