IIFL Finance shares: Jefferies initiates coverage with 'Buy' call, target Rs 760

Foreign brokerage Jefferies has initiated coverage on IIFL Finance Ltd shares with a target of Rs 760, suggesting a 25 per cent upside potential. IIFL Finance, Jefferies said, has strengthened its retail franchise by expanding branches by two times in three years, which it says should drive 23 per cent growth in asset under management (AUM) compounded annually. It also sees a 26 per cent compounded annual growth rate (CAGR) in net interest income (NII) for the diversified NBFC over FY23-26.

Shares of IIFL Finance jumped 4 per cent to hit a high of Rs 631.95 in early trade on BSE. But the stock cut most gains, as the session progressed. It was later up 0.77 per cent at Rs 611.55.

In its initiation note, Jefferies said higher mix of gold and housing loans should keep credit cost in check. "Its thrust on an off-balance-sheet strategy boosts ROA (we estimate 100 bps in 1H) and optimises capital consumption. We forecast a 24 per cent EPS CAGR and 20 per cent-plus ROE over FY23-26E. Initiate at Buy and PT of Rs 760 based on 2 times September 2025 BV," it said.

Jefferies said IIFL Finance has strengthened its franchise in gold/ MFI and affordable-housing loans to salaried borrowers by expanding its distribution 1.8 times to 4,500-plus in the last two years and is building digital capabilities.

"These segments now constitute 81 per cent of AUM. It has increased thrust on assignments and co-lending (40 per cent of AUM) to optimise capital consumption and boost returns. Further expansions and ramp-up of new branches should drive 23 per cent AUM CAGR over FY23-26E. We expect 30 per cent-plus AUM CAGR in MFI, digital/ unsecured business loans (low base), and 20% CAGR in gold, housing AUM," the foreign brokerage said.

Jefferies said IIFL Finance's margins have expanded in the last few quarters and should ease from Q2 highs due to a potential 30-40 basis points rise in cost of funding.

"Lending rate hikes in gold and MFI loans should partly cushion the impact. We expect

NIM (percentage of AUM) to stay healthy at 7.5-7.8 per cent and expect NII to clock 26 per cent CAGR over FY23-26E. IIFL's plan to increase share of co-lending loans to c.50 per cent of its off-book loans (36 per cent 2QFY24) should boost NII sustainably as the spread on off-book co-lending loans is included in NII," it said.

A corresponding fall in upfront assignment gains can be a near-term drag, but this should be partly offset by higher fee income and operating leverage benefits, Jefferies said.

Also read: Stock recommendations by analysts for October 30, 2023: Asian Paints, Shriram Finance, Venus Pipes and Bajaj Finance

Also read: Cello World IPO to open, TVS Motor, Marico Q2 earnings in Top News on October 30: Stock markets, Bank Nifty, Crude oil, gold rate outlook, new Mac launches expected at Apple’s ‘Scary Fast’ event

Also read: Top 10 stocks to watch on October 30, 2023: Adani Green, KPIT Tech, Jupiter Wagons, Pfizer, Zen Tech, DLF and more

Also read: Maruti Suzuki sees EPS upgrades post Q2 beat; here are share price targets