Rebuilding Gold Loans And Expanding Secured Lending Will Strengthen Future Earnings

Key Takeaways

• Lifting of RBI embargo on gold loans and risk-based SME loan pricing improve revenue potential and net margins through diversification.
  
• Focus on secured lending and strengthened compliance enhances sustainable growth and risk management.
  
• Financial instability is exacerbated by RBI embargoes, microfinance challenges, competitive pressures, and exceptional losses from AIF provisions, affecting revenue and profit stability.

Catalysts

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

• The lifting of the RBI embargo on their gold loan business has provided IIFL Finance with an opportunity to rebuild their gold loan book, which had fallen significantly during the ban. This should boost future revenue as the business scales back to its pre-embargo size.
  
• The strengthening of compliance and assurance functions post-embargo will not only prevent future regulatory issues but also potentially improve net margins through better risk management.
  
• With the recent reintroduction of affordable housing incentives and a favorable interest rate environment, IIFL’s home loan segment is poised for growth, impacting overall earnings positively.
  
• The introduction of risk-based pricing and government insurance schemes for unsecured SME loans may allow IIFL to diversify and expand their digital loan portfolio, potentially increasing net margins and revenue with controlled risk.
  
• The company’s reduction in co-lending and focus on growing their secured lending book, like loan against property and MSME loans, will likely lead to a more stable and sustainable growth in earnings.

IIFL Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming IIFL Finance's revenue will grow by 13.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.3% today to 24.0% in 3 years time.
• Analysts expect earnings to reach ₹22.7 billion (and earnings per share of ₹51.73) by about February 2028, up from ₹15.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹18.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.1x on those 2028 earnings, up from 9.8x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 26.5x.
• 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 20.31%, as per the Simply Wall St company report.

IIFL Finance Future Earnings Per Share Growth

Risks

• The embargo on the gold loan business by RBI led to a significant drop in the gold loan book and may cause disruptions in revenue and profits until the business fully recovers.
  
• The microfinance segment is experiencing challenging times due to concerns about over-borrowing, possibly increasing credit costs and impacting the company's net margins.
  
• The company reported a net loss and a decline in pre-provision operating profit, indicating challenges in maintaining stable earnings.
  
• The necessity to provision for AIF investments resulted in an exceptional loss, which may not recur but highlights potential management and investment risks affecting financial stability.
  
• Increased competition and customer attrition in the gold loan market could pressure sales volumes and profit margins, impacting future revenue growth.

Valuation

• The analysts have a consensus price target of ₹528.75 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 ₹595.0, and the most bearish reporting a price target of just ₹450.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹94.4 billion, earnings will come to ₹22.7 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 20.3%.
  
• Given the current share price of ₹364.6, the analyst price target of ₹528.75 is 31.0% 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.