IIFL Finance plummets 20% for second day: Here's why
What's the story
IIFL Finance's stock plummeted 20% for the second day in a row after the Reserve Bank of India (RBI) prohibited the company from issuing gold loans.
The shares hit a 52-week low, locked in the lower circuit at Rs. 382.20 on the NSE.
Global brokerage firm Jefferies has downgraded IIFL Finance to 'hold' from 'buy' and reduced the target price to Rs. 435 per share from Rs. 765, indicating a further 9% decline.
Details
What led RBI to ban IIFL's gold loans?
The RBI's ban followed an inspection of IIFL Finance, which uncovered discrepancies in the company's operations in certain areas.
The RBI found supervisory concerns in the company's gold loan portfolio. The central bank noted deviations in certifying the purity and net weight of gold during loan sanctions.
There were also breaches of loan-to-value ratios along with disbursals and collection of loan amounts in excess cash, which violated statutory limits.
Larger impact
Impact on IIFL's profit and earnings forecast
Jefferies predicts that the gold loan ban will negatively impact IIFL's profits due to the rapid unwinding of its profitable gold loan book.
Assuming a 9-month ban, it forecasts a 1% YoY decrease in assets under management and a 51% YoY drop in gold AUM in FY25.
Jefferies reduced FY25-26 earnings per share (EPS) by 26%-27% and RoE by 460-480 basis points, projecting a subdued EPS compounded annual growth rate of 5% and RoE of 15-15.8% over FY24-26.
Relief measures
RBI allows servicing of existing gold loan portfolio
Despite the ban, the RBI has allowed IIFL Finance to continue servicing its existing gold loan portfolio through standard collection and recovery processes.
The central bank has been in contact with the company's senior management and statutory auditors regarding these deficiencies for the past few months, but no significant corrective action has been taken thus far, according to the company's exchange filing.
Support
Shareholder offers liquidity support to IIFL
Bringing respite to IIFL Finance, Fairfax, one of its major shareholders has offered liquidity support of $200 million. Fairfax owns about 15% of stocks in IIFL Finance.
This support will hopefully help IIFL in curbing the liquidity concerns of investors and creditors.
Liquidity refers to the ease of cashing the assets held by a company, allowing it to conduct timely transactions.