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Brokerage firm Jefferies has downgraded its rating on IIFL Finance following RBI’s directive to the company to stop incremental gold loan sanctions, citing hit on earnings due to rapid unwinding of the profitable gold loan book (32 per cent of AUM), lower co-lending income and potentially higher cost of funds.
“Timing of lifting of the ban is uncertain, but assuming ban stays for 9 months, we cut FY25-26E EPS (earnings per share) by 26-27 per cent and ROE (return on equity) by 460-480 bps. We expect profit to fall 6 per cent in FY26E,” Jefferies said while cutting the stock rating to ‘hold’ with a price target of Rs 435.
The Reserve Bank of India, on March 4, 2024, took the action against the company citing deviation in certifying gold purity at the time of sanction and at time of auction, breaches in loan-to-value (LTV) ratio, cash collection and disbursements over statutory limit, and non-compliance to standard auction process.
In return, IIFL Finance has said that deviation in certifying purity/ net weight of gold is due to divergence in assessment of gold at branch and by IIFL’s internal audit team before auction. LTV norms (75 per cent) were met at the time of disbursement, but differences in gold purity assessment led to LTV breach at the time of auction. The company plans to take corrective action and comply with cash collection and disbursement norms.
“We think resolution of the ban could take a few quarters. Assuming ban stays for 9 months (our base case), we forecast AUM to fall 1 per cent yoy in FY25 led by 51 per cent yoy fall in gold AUM,” the report said, adding that the fall in the share of higher yielding gold loans (19 per cent yield vs 17.2 per cent average) to 14 per cent of AUM from 30 per cent in FY24 could also weigh on margins.
gold loan book
Rundown of co-lending gold loan book (63 per cent of co-lending AUM) should also dent co-lending income. Spreads on co-lending gold loans are higher at 800-900 bps compared with 200-250 bps of co-lending spreads for home loans.
“We forecast muted EPS CAGR of 5 per cent and ROE of 15-15.8 per cent over FY24-26E (20 per cent plus earlier),” it added.
Separately, Motilal Oswal Securities too said that the gold loan ban is likely to dampen growth and profitability, especially given the uncertainty on correction timeline.
“Our base case assumes that it could take around six months to get the RBI to conduct a special audit and subsequently rectify the observations to the satisfaction of the RBI. After incorporating the impact of this ban, we cut our FY24 EPS estimate by 2 per cent, FY25 by 14 per cent and FY26 by 15 per cent,” the brokerage firm said.
However, it continued to maintain a ‘buy’ rating on the stock with a price target of ₹560, even as it flagged risks such a sharp run-down in the gold loan portfolio and employee attrition if the ban remains in force for longer, and reputational damage to the brand.
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