IIFL Finance Limited NCD: Review and Should you invest?

IIFL Finance Limited is coming up with their public NCD issuance, they have filed a draft prospectus on SEBI. Let’s understand the profile of IIFL Finance group & its group entities, its business model and competitive analysis.

About IIFL Finance Limited

IIFL Finance Limited (the “Company”) is a Systemically Important Non-Banking Financial Company not accepting public deposits (“NBFC-ND-SI”) registered with the Reserve Bank of India (“the RBI”) under section 45-IA of the Reserve Bank of India Act, 1934 and primarily engaged in financing and related activities. The Company had certificate of registration from RBI bearing registration number N-13.02386.

IIFL is listed on both the exchanges (NSE: IIFL, BSE: 532636). IIFL Finance is primarily engaged in gold finance business, it has other subsidiaries as well for other lending products which will be covered in group detail.

About Group

Over the past several years, group have diversified its products and expanded its presence into segments that are of greater relevance to the evolving business environment and customer demand trends. In the Fiscal 2021 group completed the sale of its commercial vehicles’ financing business as a going concern, in order to focus on scaling up existing business segments of Affordable Home Loans, Gold Loans, Business Loans and Microfinance. Group’s core product offering is detailed below:

Home Loans: include finance for purchase of flats, construction of houses, extension and for improvement in the flats/homes.

Business Loans: include loans against property and small and medium enterprise financing. Loan against property (LAP) is availed for working capital requirements, business use or acquisition of new commercial property. In the medium and small enterprise financing segment (MSME), company provide working capital finance to small business owners. Company provides small ticket loans, thereby being able to meet the needs of small-scale businesses including standalone shops etc.

Gold Loans: includes finance against security of mainly used gold ornaments. Company offers loan against gold to small businessmen, vendors, traders, farmers, and salaried people for their personal needs as well as for working capital needs.

Microfinance: includes credit support mainly to women, who have either limited or no access to formal banking channels. Company provides financial services to the economically weaker sections of society with an aim to bring microfinance services to the doorstep of the rural and semi-urban BoP (Bottom of Pyramid) families in India.

Product wise spilt of Group AUM is as under:

As on September 30, 2022, the company had 3,766 branches across India.

History of IIFL Finance Limited

The company was incorporated at Mumbai on October 18, 1995, as a private limited company with the name Probity Research & Services Private Limited. The status of Company was changed to a public limited company and name was changed to ‘Probity Research & Services Limited’. The name of the Company was subsequently changed to ‘India Infoline.Com Limited’. The name of the Company was further changed to ‘India Infoline Limited’. Thereafter, the name of the Company was changed to ‘IIFL Holdings Limited’ on February 18, 2014. Thereafter, the name of Company was changed to ‘IIFL Finance Limited’ on May 24, 2019.

IIFL holdings was having three business verticals – Lending (IIFL Finance), Brokerage (IIFL Securities) and Wealth Management (IIFL Wealth Management), to grow them independently group demerged all the entities and listed them separately in 2019.

Group is promoted by Mr. Nirmal Jain and Mr. Rajamani Venkataraman, As of 30^th September 2022, promoters group hold 24.90% stake in the IIFL Finance.

Group Companies and their business model

IIFL group has three NBFCs – IIFL Finance, IIFL Home Finance and IIFL Samasta Finance, portfolio is bifurcated as follows among these three entities.

Gold loan industry:

Gold loans (also known as loans against gold) refer to short-term loans sanctioned by banks, non-banking financial companies (NBFCs) and other lenders against the pledge of gold ornaments and jewellery and are popular with farmers looking to meet agricultural expenses and individuals or households who need to meet planned or unplanned expenses. Indians regard gold as a vital symbol of social status, financial security, and intergenerational legacy, and such is the emotional and cultural attachment to gold that households prefer to use gold as collateral for financing for key life goals like healthcare, farming, small business, education, and weddings, rather than liquidate the metal outright for cash.

The gold loan is therefore a historically popular instrument, and the overall gold loan market consists of the organised sector (with regulated players such as banks, NBFCs, and Nidhi companies) as well the unorganised/informal finance sector (run by pawnbrokers and moneylenders). The World Gold Council (WGC) estimates that the overall gold loan market (organised and unorganised) in India has grown from Rs. 600 billion in FY2009-10 to Rs. 9,000 billion in FY2019-20, at a CAGR of 31.1 percent.

Company’s Financials:

Note: The company has significant off-balance funding of more than ₹ 20000 Crore (Direct Assignment and Co-lending), considering this as debt on adjusted tangible net worth (knocking of upfront gain booked on direct assignment transactions from net worth), debt-equity comes out at 6.81 times.

Peer Comparison (Standalone): As of 30^th September 2022

Credit Rating:

Borrowings of the Company:

As of 30^th September 2022, company has total o/s debt of ₹ 15,272.80 Crore, as follows:

Company has more than 25 lenders on its balance sheet, however large private sector banks – Kotak and ICICI are missing.

Top 5 lenders: Top 5 lenders forms ~31% of total borrowings.

Comforts/Concerns on the Entity:

Comforts:

• The company is the third largest gold loan NBFC in India after Muthoot Finance and Manappuram Finance.
• Diversified portfolio at the group level (Gold, Housing Finance, Microfinance), at the standalone level majority of the portfolio, is backed by gold which are highly liquid.
• Stable portfolio quality – Gross NPA stood at 2.42% and Net NPA at 1.22%.

Concerns:

• High group level leverage – Group level leverage is at ~6.8x (including off-balance sheet assets and on-adjusted net worth).
• Real estate exposure – the company has a real estate book of ₹ 2593 Crore (In addition to this they have ₹ 1000 Crore+ exposure in real estate focused AIF), however, book is continuously running down. As on March 31, 2022, the wholesale book (including investments) constituted 63% of the total tangible net worth.

Source of data: Draft Prospectus, Annual Report, Rating Rationale, Quarterly results, etc.