Key Rating Drivers & Detailed Description
Strengths:
Comfortable capitalisation, supported by demonstrated ability to raise capital and an asset-light business model
The group has demonstrated its ability to raise capital from long-term marquee investors, such as Fairfax and the CDC group in the past. IIFL Home has also raised Rs 2,200 crore as primary equity from ADIA in the second quarter of fiscal 2023. Consequently, consolidated networth improved to Rs 12,056 crore as on March 31, 2024 (Rs 10,202 crore as on March 31, 2023, and Rs 6,470 crore as on March 31, 2022), and adjusted gearing to 3.9 times (as against 3.9 times and 5.5 times, respectively). Further, IIFL Finance raised Rs 1,272 crore via rights issue in May 2024. Networth coverage for net non-performing assets (NPAs) was comfortable at 20 times as on March 31, 2024. Given the capital infusion and the asset-light business model, capitalisation should remain comfortable for the projected scale of operations over the medium term.
IIFL Finance reported a standalone networth and gearing of Rs 5,595 crore and 3.6 times, respectively as on March 31, 2024, Tier I capital adequacy ratio (CAR) and overall CAR stood at 13.1% and 19.7%, respectively, as on the same date. Networth coverage for net NPAs was around 16 times. IIFL Home had networth and gearing of Rs 6,447 crore and 2.7 times, and Tier I and overall CAR of 37.6% and 42.8%, respectively, and networth coverage for net NPAs of around 27 times. As on March 31, 2024, IIFL Samasta reported networth and gearing of Rs 2,010 crore and 4.6 times, respectively. Tier I and overall CAR on the same date were 17.7% and 24.0%, respectively.
Established track record of operations and extensive branch network; implications of current restrictions on the market position is monitorable
Consolidated AUM stood at Rs 78,960 crore as on March 31, 2024 (Rs 64,638 crore as on March 31, 2023, and Rs 51,210 crore, a year earlier) majority of which were deployed in retail asset classes. Two lending subsidiaries, IIFL Home and IIFL Samasta, are engaged in mortgage finance and microfinance, respectively. The group is among the top three players in the microfinance segment, whereas it had the second highest market share, among standalone gold financiers. In the affordable housing space, the group extends loans of average ticket size of Rs 20 lakhs and within this sub-segment, it is a prominent player. Retail loans (ticket size less than Rs 1 crore) accounted for 98% of the consolidated AUM as on March 31, 2024, making the portfolio highly granular. Also, 67% of the portfolio, excluding gold loans, qualified under priority sector lending. As on March 31, 2024, the group was present across five key segments: home loans (35% of AUM), gold loans (30%), LAP (11%), digital loans (5%) and microfinance (17%), which together accounted for 98% of the AUM, up from 67% as on March 31, 2017.
Till the restrictions are lifted, the gold loan portfolio will continue to run down organically. Any developments stemming from this restriction, hindering the group’s ability to grow its non-gold portfolio, will be a key sensitivity factor. Apart from these, there are two non-core, but synergistic segments: construction and real estate (CRE) funding and capital market lending. The group has been consciously scaling down its book under these segments, which together formed only 2% of the AUM. Under CRE, the group finances completion of projects already funded by it and is also looking at providing smaller ticket construction finance through IIFL Home, as it will be synergistic to its core business. In the capital market segment, the group finances retail clients of IIFL Securities Ltd. Market position benefits from a wide network of 4,789 branches as on March 31, 2024, which allows the group to cross-sell financial products of other IIFL entities.
On a standalone level, IIFL Finance had an AUM of Rs 29,250 crore as on March 31, 2024 (Rs 25,573 crore as on March 31, 2023, and Rs 21,109 crore a year earlier), primarily comprising gold loans (79%), digital loans (15%), developer and construction finance (4%), loan against property (1%) and capital markets (1%). IIFL Home had an AUM of Rs 35,499 crore as on March 31, 2024 (Rs 28,512 crore as on March 31, 2023), comprising home loans (78%), followed by LAP (20%) and construction finance (2%). IIFL Samasta had an AUM of Rs 14,211 crore as on March 31, 2024 (Rs 10,552 crore as on March 31, 2023, and Rs 6,484 crore as on March 31, 2022).
Sustained profitability metrics supported by stable asset quality
Consolidated RoA and RoMA were 3.4% and 2.3%, respectively, in fiscal 2024 and 3.3% and 2.3%, respectively, for fiscal 2023. On an absolute basis, consolidated net profit was Rs 1,974 crore in the fiscal 2024 and Rs 1,608 crore in fiscal 2023 (Rs 1,188 crore in the previous fiscal). Earnings continue to be supported by lower credit cost (provisions and write-offs/average managed assets). Credit cost was marginally better at 1.1% during fiscal 2024 vis-à-vis 1.2% in fiscal 2023 (1.6% in fiscal 2022).
On consolidated and standalone basis, gross NPAs (GNPAs) of IIFL Finance stood at 2.3% and 3.7%, respectively, as on March 31, 2024 (1.8% and 1.3%, respectively, as on March 31, 2023 and 3.2% and 2.9%, respectively, as on March 31, 2022). GNPAs spiked during March 2024 on account of gold loans being classified as NPAs if they were rolled over where LTV criteria was met, however actual payment was not made by the customer. Provision coverage ratio[1] as on March 31, 2024, stood at 49%, while the total provisions coverage ratio (total provisions/GNPA) was 104%. On a standalone basis, IIFL Home and IIFL Samasta reported GNPAs of 1.5% and 1.9%, respectively, as on March 31, 2024 (2.2% and 2.1%, respectively, on March 31, 2023, and 3.1% and 3.1%, respectively, on March 31, 2022). GNPAs for the home loan segment stood at 1.2%, for the gold loan portfolio at 3.8%, LAP at 2.7%, digital loans at 3.5% and microfinance at 1.9% as on March 31, 2024.
Ability to keep delinquencies under check and manage credit cost will remain critical for sustaining healthy profitability. With regard to the gold loan business, until the restrictions are lifted – the extent of decline in profitability, if any, remains a monitorable.
Weakness:
Limited diversity in resource profile with comparatively higher cost of funds; degree and nature of impact, if any, the current restrictions shall have on the resource raising ability, is a key rating sensitivity factor
As on March 31, 2024, banks and financial institutions (FIs) constituted 71% of the on-book borrowings of the group-these were primarily in the form of term loans (44%), refinance (17%), short-term borrowings (5%), external commercial borrowings (4%) and others (2%). The remaining 29% of borrowings were in the form of non-convertible debentures (18%), external commercial borrowings from DFIs (8%) and commercial paper (3%). Of this, capital market lenders (such as mutual funds, pension funds, trusts) had limited share. IIFL Finance group has been able to tap the public NCDs route but the cost of funds remains higher than some of the comparable peers. Nonetheless, the company has a comfortable liquidity profile with no negative cumulative mismatches across time buckets as per the asset liability maturity (ALM) statement dated March 31, 2024.
Under the prevailing regulatory developments, any potential impact on the liability franchise, especially in terms of resource raising ability or/and pre-mature calling of existing lines, is a key monitorable. Over the medium to long term, ability to diversify the resource base at an optimal cost will be a monitorable, given the relatively higher reliance on banks and FIs.