IIFL Finance is back in the game, but clawing back market share to be slow

Shares of IIFL Finance Ltd surged nearly 9% in Friday’s early trade after the Reserve Bank of India (RBI) revoked the ban on the company’s gold loan business. As a result, IIFL can now resume disbursing and selling gold loans.

Note that the stock is still about 10% lower than ₹597.15 apiece seen on 4 March when the RBI decided to ban the company from disbursing gold loans. Remember, IIFL’s shares had tanked as much as 20% in a single day on 5 March. 

Its gold loan assets under management (AUM) stood at around ₹26,000 crore as of 4 March. It dropped to about ₹14,700 crore as of June and to about ₹12,200 crore as of 5 August, said analysts from Motilal Oswal Financial Services in a report. 

Assuming that about 10% of the outstanding gold loans run down every month, the analysts expect IIFL’s gold loan AUM to be about ₹10,500 crore as of 19 September, when the ban was revoked.  

Nonetheless, with gold price near record highs, the lifting of the gold loan ban would help IIFL steadily ramp up its disbursals and normalize the pace in a couple of quarters. Typically, elevated gold prices bode well for gold loan demand. That said, market share gains hereon for the company would be gradual. 

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A couple of factors are at play here. Incremental growth for IIFL Finance will be less aggressive and in line with most peers, as the company is obliged to follow best practices and norms to avoid any future problems from the regulator, said an Incred Research Services report. In the June quarter (Q1FY25) earnings call, the IIFL’s management said it is complying with all observations made by the RBI, which led to the ban on gold loans.

Stiff competition

As such, there is stiff competition from listed peers Muthoot Finance Ltd and Manappuram Finance Ltd and some banks. “Gold portfolio rebuild to pre-ban levels should take time (over 1.5 years) given high rundown rates and difficulty in regaining market share/customers who have switched lenders,” said a Jefferies India report. “We expect IIFL's gold loan portfolio to fall 40% to ₹13,970 crore in FY25 and grow to ₹22,000 crore in FY26,” added the report.

To accelerate its gold loan growth, IIFL may now adopt an aggressive pricing strategy to lure customers. In that case, it may have to compromise on the segment’s profitability. This could also create some pressure for peers who were at an advantage and were gaining market share due to IIFL’s absence. 

On Friday, shares of Muthoot and Manappuram declined by 1-3%. Between these two, the former has relatively high exposure to the gold loan segment.

IIFL was also going slow on the non-lending business amid the RBI ban, but traction is expected to return there as well. In the upcoming earnings call, investors would be keen to understand the management’s strategy on AUM growth outlook. Further, the resumption of gold loans under co-lending tie-ups with banks will be key to track as this was an important driver for IIFL in the past. 

Everything put together, the IIFL stock has fallen by 7% so far in 2024, massively underperforming shares of Muthoot and Manappuram, which have rallied around 35% and 20%, respectively. Meaningful valuations re-rating hinges on how IIFL Finance bridges the gap with competitors and regains investors’ confidence with improved earnings visibility.