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IIFL Finance Ltd. has presence across home loans, real estate loans, gold loans, microfinance loans, unsecured business and personal loans. Two factors will help IIFL maintain strong AUM growth in the medium term:
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Aggressive expansion of logistics and digital capabilities;
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First-mover advantages in co-financing with banks are complemented by an effective direct allocation strategy.
The company's net interest margin (as a percentage of total assets under management) is expected to improve from 6.2% in FY2019 to ~8.0% in FY24E due to improved product mix and lower borrowing costs. IIFL expects him to maintain his NIM at current levels in FY25/26, with upside potential due to credit rating upgrade.
The average AUM to assets under management ratio was high at around 3.9% in FY23 as IIFL invested aggressively in expanding its footprint in home loans, gold loans and MFI businesses, which gave it a strong distribution advantage . IIFL's slow branch expansion and improved branch productivity are expected to improve operating expense to average assets under management ratio by up to 3.5% by FY26.
Gold loans and mortgages, which account for up to 65% of the AUM mix, demonstrate solid asset quality and low credit costs. These will help IIFL reduce the relatively high vulnerability of MFIs and digital loans. We estimate that credit costs will remain in the range of 2.2%-2.3% over FY25-26.
Asset-light model leveraging co-financing/direct allocation and diverse product suite enable strong AUM CAGR of approximately 25% from FY2023 to FY2026. With current valuations of 1.8x/1.5x per 25E/26E price/book, for a franchise that can achieve ~27% PAT CAGR and ~~ return on assets/equity over FY23-26E. The risk and reward are considered favorable. 4.1%/22% by FY26E. We reiterate our 'buy' rating with a target price of Rs 800 (based on SOTP valuation).
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