Shares of IIFL Finance tanked 20% on Wednesday to fresh 52-week low of Rs 382.20 on the NSE following a downgrade by global brokjerage Jefferies. The US brokerage has slashed its target price to Rs 435 from an earlier target of Rs 765 while recommending a ‘hold’ rating versus ‘buy’ it held earlier.
The downgrade comes after the Reserve Bank of India (RBI) directed the company to cease and desist from sanctioning or disbursing gold loans or assigning/securitising/selling any of its gold loans.
Jefferies in a note said that RBI’s restriction should dent earnings due to rapid unwinding of profitable gold loan book even as the timing of the lifting of the ban remains uncertain. Assuming the ban stays for 9 months, it cut FY25-26 EPS by 26-27% and ROE by 460-480 bps. The profit is expected to fall 6% in FY26E, the brokerage noted.
Another brokerage, B&K Securities also saw the gold loan portfolio as the major growth driver for IIFL Finance. Around 25% of consolidated profitability stems from gold loans and this aspect is likely to be affected by the imposed RBI restrictions, B&K said.
In two sessions, the stock has witnessed a price erosion of 36% while the market cap has plunged by as much amount to Rs 14,580 crore from Rs 22,803 crore on the closing price basis on Monday, a day before the RBI action.
With today’s losses, the stock has extended its losing streak for the fourth straight session.
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The RBI decision came following an inspection of the company by the RBI with regard to its financial position as of March 31, 2023, where the banking regulator found discrepancies in the company’s functioning in certain areas.
“Certain material supervisory concerns were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in Loan-to-Value ratio; significant disbursal and collection of loan amount in cash far in excess of the statutory limit,” the company filing said quoting RBI’s order.
Among other things, non-adherence to the standard auction process and lack of transparency in charges being levied to customer accounts, etc were other regulatory violations found by the banking regulator.
RBI said that the above violations “significantly and adversely” impact the interest of the customers.
Over the last few months, the RBI has been engaging with the senior management and the statutory auditors of the company on these deficiencies, however, no meaningful corrective action has been evidenced so far, the company said in its exchange filing.
However, RBI has allowed the company to continue to service its existing gold loan portfolio through usual collection and recovery processes.
The company issued a statement which said, “We reaffirm our commitment to rectify observations of the RBI in gold loan portfolio to comply with RBI findings at the earliest and will continue with our endeavor to provide gold loan services in the overall interest of customers”.
Commenting on the development the IIFL Group Founder Nirmal Jain acknowledged RBI’s flagged-off of some concerns in the gold loan portfolio. He told ET Now that 82,000 cases went for auction out of 18.9 lakh and RBI has only taken sample auction cases out of these. The company has taken corrective action to ensure differences in gold quality and weight assessment are minimal, he said.
On LTV breach, he said that there has not been a single case of violation at a branch level and most of the co-lending partners assess the quality of the gold and its weight.
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