Key Rating Drivers & Detailed Description
Strengths:
Diversified retail lending portfolio and an extensive branch network
Consolidated AUM stood at Rs 55,302 crore as on September 30, 2022 (Rs 51,210 crore as on March 31, 2022, and Rs 44,688 crore a year earlier). IIFL Finance is engaged in lending across various retail asset classes. Its two lending subsidiaries, IIFL Home and IIFL Samasta, carry out the mortgage finance and microfinance businesses, respectively.
Retail loans accounted for 94% of the AUM as on September 30, 2022, and had high granularity (loans of less than Rs 1 crore). Also, 69% of the portfolio, excluding gold loan business qualified under priority sector lending. The company has four key segments: home loans (36% of the AUM as on September 30, 2022), gold loans (32%), business loans[1] (14%) and microfinance (12%), which together accounted for 94% of the AUM, up from 67% as on March 31, 2017. These segments will continue to drive growth over the medium term. Apart from these, there are two non-core but synergistic segments, construction and real estate (CRE) funding and capital market lending. The company has been consciously reducing the book under these segments, which together accounted for only 6%. Under CRE, the company continues to finance the completion of projects that were already funded by it and is undertaking relatively smaller ticket construction finance, while the capital market segment finances the retail clients of IIFL Securities Ltd. Growth is also supported by a wide network of 3,700+ branches as on September 30, 2022, spread across 1,346 towns/cities. The company leverages its distribution network to cross-sell financial products of other IIFL entities. It has made substantial investments in technology to leverage its geographical reach.
On a standalone level, IIFL Finance had AUM of Rs 22,317 crore as on September 30, 2022 (Rs 21,109 crore as on March 31, 2022, and Rs 19,199 crore a year earlier), primarily towards gold loans (80%), business loans (9%), developer and construction finance (9%) and capital markets (2%). IIFL Home had AUM of Rs 25,718 crore as on September 30, 2022 (Rs 23,617 crore as on March 31, 2022, and Rs 20,694 crore a year earlier), largely toward home loans (77%), followed by loans against property (LAP; 21%) and construction finance (2%). IIFL Samasta had AUM of Rs 7,267 crore as on September 30, 2022 (Rs 6,484 crore as on March 31, 2022, and Rs 4,796 crore as on March 31, 2021).
Comfortable capitalisation, supported by demonstrated ability to raise capital and shift towards an asset-light business model
The group has demonstrated an ability to raise capital from long-term marquee investors, such as Fairfax and the CDC group in the past. IIFL Home also raised Rs 2,200 crore equity from ADIA in the second quarter of fiscal 2023. Consequently, consolidated networth improved to Rs 9,480 crore as on September 30, 2022 (Rs 6,470 crore as on March 31, 2022, and Rs 5,393 crore as on March 31, 2021), with on-book gearing of 3.7 times; CRISIL Ratings-adjusted gearing (on-book borrowings + DA) was 5.4 times as on same date. Networth coverage for net non-performing assets (NPAs) was comfortable at 22 times as on September 30, 2022. Given the growth plans and business strategy with a shift towards asset-light model, capitalisation should remain comfortable for the current and medium-term projected scale of operations.
As on September 30, 2022, IIFL Finance, on a standalone basis, had networth and gearing of Rs 4,828 crore and 3.2 times, respectively. Tier-I capital adequacy ratio (CAR) and overall CAR was 14.0% and 21.7%, respectively. Networth coverage for net NPAs was around 59 times. IIFL Home reported networth and gearing of Rs 5,223 crore and 2.8 times, respectively. Tier-I and overall CAR stood at 43.2% and 52.0%, respectively. Networth coverage for net NPAs was around 19 times. IIFL Samasta reported adjusted networth and gearing of Rs 1,016 crore and 5.6 times, respectively. Tier-I and overall CAR were 15.0% and 19.3%, respectively.
Weakness:
Sustained track record of profitability to be demonstrated
While return on assets (RoA) and return on managed assets (RoMA) have improved to 3.1% and 2.3% in the first half of fiscal 2023 and 2.7% and 2.1% for fiscal 2022 from 2.1% and 1.7% in fiscal 2021, the same needs to be demonstrated on a sustained basis.
On an absolute basis, IIFL Finance (consolidated) reported net profit of Rs 727 crore in the first half of fiscal 2023 and Rs 1,188 crore in fiscal 2022 (Rs 761 crore in the previous fiscal and Rs 503 crore in fiscal 2020). Earnings were supported by lower credit cost (provisions and write-offs/average managed assets) and higher non-fund income from co-lending and direct assignment (DA) transactions. Credit cost improved marginally to 1.4% during the first half of fiscal 2023 from 1.5% in fiscal 2022 (2.4% in fiscal 2021). Elevated credit cost in fiscal 2021 was owing to the Covid-19 pandemic, which led to an increase in delinquency levels.
On consolidated and standalone basis, IIFL Finance’s gross NPAs (GNPAs) improved to 2.4% and 1.4%, respectively, as on September 30, 2022, from 3.2% and 2.9% as on March 31, 2022 (2.0% and 2.4% on March 31, 2021). The spike in GNPAs during March 2022 was due to the impact of the notification released by the Reserve Bank of India on November 12, 2021. Provision coverage ratio as on September 30, 2022, stood at 50% while the total provisions coverage ratio (total provisions/GNPA) was 147%.
On a standalone basis, IIFL Home and IIFL Samasta reported GNPAs of 2.8% and 2.9% respectively as on September 30, 2022 (2.1% and 3.1% on March 31, 2022, and 2.0% and 1.8% on March 31, 2021). GNPAs for the home loan segment stood at 2.4%, gold loan at 0.8%, business loans at 4.3% and microfinance at 3.5%. Apart from this, the IIFL Finance group’s restructured book was around Rs 23 crore as on September 30, 2022.
Ability to maintain delinquency levels and manage credit cost will remain critical for maintaining healthy profitability. Also, the company’s increasing focus on the partnership model, and the expected scale up in co-lending book are expected to support profitability over the medium term.