Gold Loan Ban To Hurt IIFL Finance Profit, Jefferies Says; Downgrades Stock, Cuts TP

Global brokerage Jefferies downgraded IIFL Finance Ltd. to Hold from Buy and slashed its base case target price to 435 rupees from 765 rupees per share following the Reserve Bank of India’s (RBI) action against the company.

Shares of IIFL hit 20% lower limit for the second straight session today after the RBI on 4 March imposed restrictions on the company’s gold loan business. The stock was quoting at a new 52-week low of 382.20 rupees apiece on the NSE.

The RBI's restriction on disbursing gold loans due to material supervisory concerns should dent IIFL’s earnings due to rapid unwinding of profitable gold loan book (32% of assets under management, lower co-lending income and potentially higher cost of funds, Jefferies said in an investor note.

The brokerage said the company’s management indicated that IIFL has already taken corrective measures regarding the RBI's observations and will now request the central bank to conduct a special audit.

Jefferies said timing of lifting of the ban is uncertain and the resolution could take a few quarters.

“Assuming ban stays for nine months (our base case), we forecast AUM to fall 1% YoY in FY25, led by a 51% YoY fall in gold AUM,” it added.

The brokerage said fall in higher yielding gold loan mix (19% yield versus 17.2% book average) to 14% of AUM (30% FY24) could also weigh on margins. Rundown of co-lending gold loan book (63% of co-lending AUM) should also dent co-lending income, it added.

Jefferies noted that spreads on co-lending gold loans are higher at 800-900 basis points versus 200-250bps of co-lending spreads for home loans.

The brokerage reduced its FY25-FY26E EPS by 26%-27% and return on equity (ROE) by 460-480 basis points, assuming ban stays for nine months. It expects profit to fall 6% in FY26.

“We expect subdued earnings and uncertainty around timing of removal of ban on gold loans would weigh on valuation multiples till clarity emerges,” equity analysts Bhaskar Basu, Kaushik Agarwal and Prakhar Sharma said in the note.

Jefferies projected muted EPS CAGR of 5% and ROE of 15%-15.8% during FY24-FY26 versus over 20% earlier.

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