Microfinance Stabilization And Gold Loan Recovery Will Strengthen Future Outlook

Key Takeaways

• Supportive regulatory changes and easing liquidity could enhance revenue growth, reduce borrowing costs, and improve net margins through strategic expansions.
  
• Recovery in gold loans and improved microfinance collections can boost asset quality and stabilize earnings, reinforcing financial strength and market position.
  
• Economic slowdown, liquidity issues, declining profits, worsening asset quality, and lower yields challenge IIFL Finance's revenue growth and profitability.

Catalysts

A non-banking financial company, engages in financing activities in India and internationally.

• The regulatory environment is expected to improve, with the government and regulators shifting towards a more supportive and accommodative monetary and fiscal policy stance. This could halt and reverse the current cyclical slowdown, potentially boosting revenue and earnings growth.
  
• The gold loan business is projected to recover, with volume growth expected and efforts to regain customer base despite a temporary compromise on yields. This should enhance future revenue as the business approaches pre-ban levels.
  
• Improved collection efficiency in the microfinance segment, particularly following regulatory disruptions like Karnataka's ordinance, indicates potential stabilization. This could improve asset quality and reduce credit costs, positively impacting net margins.
  
• The company expects to recover assignment volumes as disbursements pick up and the RBI's seasonality embargo constraint is overcome, potentially improving liquidity and capital efficiency, which could support earnings growth.
  
• Tight liquidity conditions are expected to ease as IIFL Finance raises significant funds through various channels, including international markets. This can lower borrowing costs over time and enable expansion, leading to better net margins and increased earnings.

IIFL Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IIFL Finance's revenue will grow by 18.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.1% today to 34.6% in 3 years time.
• Analysts expect earnings to reach ₹34.4 billion (and earnings per share of ₹83.52) by about March 2028, up from ₹5.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, down from 25.8x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 24.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.24%, as per the Simply Wall St company report.

IIFL Finance Future Earnings Per Share Growth

Risks

• The cyclical slowdown in the economy, coupled with stress in unsecured and microfinance segments, is impacting earnings and market sentiment, which can potentially suppress revenue and profits.
  
• Tight liquidity for NBFCs, due to banks restricting funding access, could limit IIFL Finance’s ability to grow its loan book, thus affecting future earnings.
  
• The decline in pre-provision operating profit and a significant year-on-year drop in profit after tax indicate current financial performance challenges, negatively impacting net margins.
  
• The increase in gross and net NPAs, particularly in microfinance and small ticket LAP, reflects worsening asset quality, which could deteriorate future earnings and capital strength.
  
• Lower yields in the competitive gold loan segment could pressure net interest margins, impacting profitability while aiming for volume growth.

Valuation

• The analysts have a consensus price target of ₹462.5 for IIFL Finance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹560.0, and the most bearish reporting a price target of just ₹415.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹99.6 billion, earnings will come to ₹34.4 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 21.2%.
• Given the current share price of ₹330.55, the analyst price target of ₹462.5 is 28.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.