IIFL Finance Limited (IIFL) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the IIFL Finance Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference call over to the management for the opening remarks. Thank you, and over to you.

Good evening, everyone. I welcome you all in the IIFL Finance investor conference presentation call. My name is Vikas Jain, CFO, IIFL Finance. We have today, Mr. Nirmal Jain, MD CEO, IIFL Finance; Mr. Girish, who is the CEO of IIFL Home Finance; and Mr. Venkatesh, who is the CEO of IIFL Samasta Micro Finance. Now I will hand over to Mr. Nirmal Jain for macro and strategic overview for the quarter.

Thank you, Vikas. Good evening, everyone, and thank you for joining us today. So on the macro backdrop, the West Asia situation has reignited over the last 2 weeks after the June ceasefire framework, keeping crude and shipping volatile. RBI has a repo rate of 5.25% in June with a neutral stance. But [indiscernible] FY '27 growth outlook to 6.6% and nudging inflation up to 5.1% on account of geopolitical and external pressures. However, our domestic credit demand, particularly in retail and MSME, has remained structurally resilient, regardless. Coming to our main core business, gold prices, despite corrections, have been elevated through this period of uncertainty and while that has supported our growth which has been [indiscernible] growth as well. But we are equally mindful that a sharp correction in -- is a retail risk in this environment, and we are therefore consciously focused on maintaining loan development discipline and collection. Turning to performance. So in the quarter, our return on equity annualized is close to 20%, 19.5%; return on asset is 3.1% and on a book that is nearly 90% secured. Our AUM has crossed INR 1.15 lakh crores is up 38% on a year-on-year basis. Our gold loan has remained our primary engine, but as I said, we are managing growth deliberately. Our home finance and microfinance businesses typically have a first quarter competitively slower, but both these businesses are structurally on track, and we expect the trajectory to strengthen through the rest of the year. Our core earning continues to escape a bit slower than our plan in the first quarter. But now with 15 active bank partners, we expect it to gather momentum. Also, our AI operating model is moving from final to measurable impact across collection, fraud detection, front line of productivity as well. Also, the Board has upholded an [indiscernible] for fresh equity, which is subject to shareholders' approval in the day after tomorrow's AGM, which will give us flexibility to raise capital during the year as and when needed. So in summary, this was a quarter where our profitability and operations are back to the industrial levels. And from here on, we expect organic growth to continue, and also AI and operating leverage to support the profitability acceleration in the near future. With this, I'll hand over to Vikas for the detailed numbers.

Thank you, sir. To start with the financial numbers for the quarter. For the quarter, IIFL Finance profit after tax before noncontrolling interest was INR 713 crores and up by 14% on a quarter-on-quarter basis. We recorded pre-provision operating profit of INR 2,252 odd crores, up by 50% Y-o-Y basis and 7% on a quarter-on-quarter basis. For the quarter, consolidated loan AUM grew by healthy 38% Y-o-Y and was up 7% on a quarter-on-quarter basis at INR 1,15,523 odd crores, driven by gold loans close to around INR 58,406 crores. Further dissecting the AUM, our core product loan AUM comprising home loans, gold loans, MSME loans and micro finance up by 43% Y-o-Y and was up 8% quarter-on-quarter basis to INR 1,11,717-odd crores. This segment now comprises 96.7% of our overall AUM mix. On the asset quality side, our gross NPA stood at 1.6% and net NPA stood at 0.8%, both which are stable and slightly up by 9 basis points from the quarter-on-quarter basis. The company maintains a cautious stance on unsecured MSME and MFI segment focused on recovery and collections. Happy to inform that provision coverage ratios on NPA stands at 94%. The assigned loan book stands at INR 26,118 crores, up by 73% on Y-o-Y basis and up by 10% on a quarter-on-quarter basis. Besides this, there are co-lending assets of INR 14,647 crores, which is up by 27% and 2% on quarter-on-quarter basis. Quarterly average cost of borrowing has decreased by 3 basis points on a quarter-on-quarter to 9.13 and 33 basis points on a Y-o-Y basis. A brief update on liquidity. During the quarter, we have raised INR 7,183 crores through term loans, bonds, commercial paper, and INR 5,283 crore was raised through direct assignment on loans. Our cash and cash equivalents and committed credit lines from the banks and institutions is INR 7,148 crores are adequate to meet not only the near-term liability, but also to fund our growth momentum. We have a positive ALM, whereby inflows cover or exceed our expected outlook across all buckets and net gearing is at 4.0x. Our ROE for the quarter stood at 19.5% and -- while ROA stood at 3.1%. Basic earnings per share for the quarter was 15.9 per share. As of June [ 26 ], our capital adequacy ratio for NBFC is 17.1%; HFC, 14.7%; and for Samasta is 24.9%, which is well above minimum threshold of around 15%, reflective of our successful book model, which we have implemented. Also in the quarter, Moody's rating has assigned us Ba3 issuer rating and (P)Ba3 GMTN program relating to the IIFL Finance outlook stable. We have raised USD 500 million through social bond issuances proceeds, which are directed to income-generating loans for women, low income and rural semi-urban borrowers. Crisil ESG rating has assigned an ESG rating of Crisil ESG 66 and Core ESG rating of Crisil Core ESG 69 to the company. With this, I come to an end. And now we are open for Q&A. Thank you very much.

[Operator Instructions] Your first question comes from the line of [ Pawan Kumar ] with [ Edelweiss Public Calls ].

Congratulations on a really good set of numbers. Two questions. At the current rate of growth, when will you be required to go for equity raise considering CET1 is already at 12.24 in the stand-alone entity? Because the gold loans, I understand the risk rate of [ 125% ]. I know you have alluded to reduction in the gold loan growth rate. But I mean, even then, we are very close to the regulatory mine. So that's one question. Second question, in the IIFL Home Finance entity. Can you give us the disbursement separately for home finance and the LAP? And do you think that from Q1 is the bottom for the disbursements and the AUM growth going forward, the housing finance growth and their LAP growth will pick up? What is the kind of expectation there for FY '27?

Thanks, Pawan. So gold on industry growth has slowed down in this quarter, but we are still growing maybe faster than the industry. That's what I would -- I don't have the data, but that's what I think so. And then about capital, I think we need to fix the capital adequacy issue in the parent company. And so this is something -- that's why we are taking shareholders' approval on -- in this meeting, which is the after tomorrow. Now we have multiple options. Basically, we can raise the -- we can raise QIP or we can sell -- do a secondary sale of subsidiary companies. We are also looking at a strategic divestment partly or listing of micro finance, so we can raise equity through subsidiary companies. Also co-lending is gaining momentum now. So that will also ease the pressure this quarter, and we can raise subordinate debt and our [indiscernible] debt also, which we had raised quarter before. That will also help us. So we are very conscious of the capital adequacy, which in the parent company is kind of in the edge, and we are like -- we got to fix it. So all these options are open, and we have to keep all the options open so that -- at appropriate time. So once we have said the approval is valid for full year. So at appropriate time, we can make sure that the capital adequacy for this business is properly maintained. And about Home Finance, Girish will give you the disbursement data. I think there's a strong pickup in the disbursement, but I'll let Girish give you the data.

So before Girish gives -- just one clarification. Because share sale -- I mean, stake sale in the subsidiaries takes time, right, the due diligence, everything will take some time. And even if you're faced Tier 2 debt, again, Tier 2 debt, that will be Tier 2, right? It won't be counted towards Tier 1 and the way...

The particular is counted to Tier 1 subject to certain numbers. So the particular debt is counted as Tier 1, up to 50% of the equity. And I think maybe there's some certain restriction on the total quantum, but it is counted as Tier 1 and some of it is counted as Tier 2. And we have been working on -- I'm not saying that it will happen tomorrow, but it can happen very quickly.

Got it. So your preference is towards not raising debt equity in the immediate term but...

We can raise equity also. It all depends on the resolutions in the market. And -- but it's -- we don't want to be in a desperate situation. So we are trying to work on everything, including core lending, particular subordinate debt in this quarter. But yes, something which is equity, we are open to raising equity also then no -- I mean, it's not that we don't want to raise, but we want to raise at some reasonable valuations.

Got it.

And then home loans, we had a very good quarter 1. So if you look at last few quarters, I think we registered the highest disbursement growth. So sequentially, we have grown disbursement by 39%. And this is high compared to last few quarters. And even we could see good growth on the AUM, which is 4% sequential and book growth of 7%. So this trend will continue. Generally in housing loan industry, quarter 1 is soft. And from quarter 2, it's picked up, so we expect that this momentum to continue, and we will be able to further improve on it. And not just this, we have also improved our onboarding. In last 2 quarters, we have increased about 68 to 70 bps on the overall book, very incremental.

Sir, the 39% growth is between home loan and LAP together, right, in IIFL Home Finance?

Yes. This is overall sequential growth in...

Yes, both put together. Home loan is about 80% of the portfolio and our LAP is about 18% or 18%, 19% kind of thing.

Sir, can we say that like this quarter, like going forward, the growth will be much faster? Like home, particularly home loans, which has grown only 3% quarter-on-quarter.

So this is sequential. So if you look at the overall year, we are looking at growth of about 17% to 18% on book and area. Disbursement growth will be over 30%.

Got it, sir. Is that the kind of growth estimate for the full year also, 17% to 18% for the...

It's for the full year. This is for the full year, the book...

No, no. I mean FY '27, I mean, for the full year.

Yes. FY '27, yes.

The next question comes from the line of [ Chirag Singer ] with [ First WaterFund ].

Congrats on a good set of numbers. So my first question is on the targets that you have given in Slide 20. So in FY '27, the credit cost is expected to be 1.5 to 1.7, which is sharply dropping in the next 2 years. So which segment do you see will be contributing to this higher credit cost in the current year because micro finance, as I can see in Q1, a lot of it turned in favor of the industry. And even the gold loans and all are not witnessing any higher provisioning. So just trying to understand the higher credit cost for this year and what will lead to a steep decline in the next 2 years?

So this year, in our housing finance, because there's a small portfolio of macro LAP -- micro LAP is there. So if you really look at our housing finance [ GNBA ], they are much higher than the peers, and that is what will be fixed in the next 2 years.

So what is the outstanding micro LAP book as of Q1 end?

So the outstanding of micro LAP is about INR 440 crores.

INR 440 crores?

INR 440 crores.

And there any other [ BFC ]?

BFC is about [ 2 60 ].

So this is a problem both.

okay.

It's not significant, but it is just the residuals so it won't have -- it will clean up in this year.

Got it. Second question is on the -- just continuing the previous participant point on the [ foundries ]. So you are looking at taking in micro finance subsidiary. So like what is the multiple that you would be looking at a bare minimum, if you want to exit Samasta? And would it be like a partial stake sale or you are planning to exit microfinance completely?

No, we can do partial stake sale also. Now the business has recovered this year. But it's very difficult to give any guidance on this because these are all -- it depends on the negotiation deals and so the environment has improved up, and therefore, it may be a time to raise capital there. Also in our parent company, the subsidiaries are valued at cost. So that basically is a disadvantage when we compute the capital adequacy for the parent. So even if we demerge, then also the capital equity gets released. So we are looking at various options, but time, as I said in the previous question, that we are very conscious of this, and we want to make sure that this is addressed properly.

Yes, because diluting at the current valuation would be your last option that you would be looking at, right, because at the current...

Yes, I think with the marginal -- we can still continue for a quarter or 2 more with the core earning picking up and perpetual and subordinate capital adequacy will be better as we go along. And -- so we are not -- as I said, that what we are saying is right, but we need to look at the multiple options and take one.

Understood. One more question on this project pace. So you have given some data points on Slide #19. So the ranges are very wide. So loss prevention, you think, 10% to 40%; operating cost, 8% to 20%. So any specific reason why it's such a wide range? And also on the OpEx to AUM, if you can give a guidance, how we should look at it going forward?

So okay. First, you are right. AI is a new animal. And I think we are not [indiscernible] organization are going to do it slowly. And this is something which will be achieved on a period of time. So if you say the cost reduction over 3 years, then I'm very optimistic that might be on the higher side. But in the first year, it will be on the lower side. And as I said, that this is completely -- everybody is sort of talking about it doing it. In my opinion, more or less everyone will get the AI right. I mean just like mobile or any other technology. A few months here and there, everybody will adopt it. But I think we are also looking at it as a completely new thing, and that is why the range is wide. This is not a tested technology. This is not something that we have precedence on a model. And you can say this is what I'll achieve.

Okay. And on the OpEx to AUM, like what is your...

Yes, OpEx to AUM, I think we are down to 3.4. So I mean, from here, there can be a marginal decline because we are also setting up new branches. Last year, we did not set up any new branch. So I mean, I think 3.4, 3.3 or this is the range that you should look at. And again, a black box. We'll see over the next 2, 3 years that probably we can continue further.

So the 3.3, 3.4, are you considering any benefits from this what you have mentioned about project based? Are you...

So AI, if you really look at our fixed costs in this quarter and last quarter, despite growth in the business has grown by 2% or something like this. So obviously, you see that the AI benefit has already start to kick in. But it's very difficult to estimate. But what I can tell you is that the operating cost over next 2 to 3 years, you'll see a download trajectory, which is combat impact of AI and also as our scale goes up. So we are -- our branch model with 4,500 to 5,000 branches. We have a very heavy fixed cost model because the branches costs are fixed, the employees have fixed salaries. So if the scale goes up, the operating level benefit us a lot. I'm also trying to factor in the expansion that we're going to do because, as I said, this year, we want to set up 500 new branches. So that will, to some extent, mitigate the benefit of operating leverage.

The next question comes from the line of Gaurav Khandelwal with JPMorgan.

I've got a couple of those. First, on asset quality, can I understand what's driving the higher gross NPAs, both in home and gold loan segments quarter-on-quarter? Is there anything systemic that we need to worry about?

So I think gold, one should not worry about because these are customers that generally don't default and the [indiscernible] have emotional value. So you have to be a little careful and give us some more time. In housing also, as I said, that we are mending it structurally. So you may -- as we go along, you will see that coming down significantly. But compared to, say, last year, we are significantly down. And now that we are pivoting towards the second portfolio, then you see our credit cost and losses will become minimal.

Got it. And if I can just follow up. So in case of your housing loans on an average, whenever we see a default and an actual loss, what's the LGD on a blended basis for the housing book?

So if we take on the entire book, LGD will be anywhere between 33% to 34% and our coverages also is accordingly that.

Got it. Okay. And my second question on your long-term strategy, and I'm sorry if you've already answered this. But your guidance of effectively increasing ROA by 50-odd basis points, a lot of that appears to be coming from credit cost. But outside of credit costs, are there any areas you think which can also help in terms of getting to the higher ROA in operating leverage or margins or otherwise? And also, I just wanted to understand what's the outlook for margins over the next 2, 3 quarters? Are your cost of funding worries come down, especially after the spike in yields in the initial part of the quarter? So those are my 2 questions.

So ROA, I think 40, 50 basis points post tax like 60, 70 basis points pretax, which is coming a bit more 40, 50 basis from credit cost, 20, 30 basis points from maybe rest of the things which can be operating cost as well as the NIM improvement. Now in terms of credit, the cost of borrowing, cost of funds, I think the general industries of the view that with FCNR, liquidity will ease in the system, and we should be able to borrow at a lower rate. In the last couple of quarters, we have been slightly higher rates and also our dollar bond has been on a higher cost. Margins are stable in the gold loan despite competition. We focus on a very small segment, which is the customers which are -- the ticket side are small. So there -- I personally don't think any pressure on margin because the rate at which we lend, given our scale, we afford. But otherwise, for small ticket loan, there's a very fair rate. So we expect margin to be stable. So margins have remained in this range, and benefit will come from operating cost and also traded cost. Other income cross-sell with AI, we are just trying to -- we should achieve some benefit there also.

Got it. And in fact, in this quarter, the gold loan yields are up slightly. Have you increased pricing for any particular gold product? Or what is driving this almost in the 40, 50 basis points increase?

Portfolio yield. And when we started after [indiscernible]. So initially, the yield was lower, but as we have been talking about in earlier analyst call also. So we have picked up as just quarter after quarter, you see the advantage coming in. So it's -- and as I said that because we are focusing on small ticket loan, we are able to maintain our yield. The portfolio -- typically, we see the loans are for 6 to 12 -- 24 months actually. So as the new loans are at a higher rate, you'll see yield improving.

Your next question comes from the line of Abhijit Tibrewal with Motilal Oswal.

Congratulations on a good quarter. So first on gold loans. Just trying to understand, with so many other larger, bigger NBFCs now following into gold loans in the last 1 or 2 quarters, have you heard anything from the ground in terms of they being aggressive or higher competitive intensity? Or this is still just a narrative right now? Basically, what I'm trying to understand is, while in housing finance, Girish sir said earlier that we have been -- we have managed to take yield high, it's about 60, 70 basis points on the incremental loans that we are doing. Is that something similar we are able to do on gold loan system?

So okay, there are 2 different products in housing. What is happening is that there's a mix. And earlier, we had this micro LAP, which had a higher yield of almost 20 -- 18% to 24%. So that portfolio is declining. So if you see that although Girish talked about boarding yield going up, the portfolio yield has come down in housing finance because that high import is running off. In gold, I mean, it's one product. And here, while the competition is there, I mean, I'm not denying that there is competition is -- and competition can be aggressive in 2 ways. One is they can drop the yield and two is they can increase the LTV. And we are seeing some of the new players getting aggressive in both ways. But it's a huge market, and we have a customer franchise. So we really aren't changing cutthroat competition of our growth because we have our customers, our branches and we are maintaining that relationship as well as our business. And also, there's a learning curve. So many corporations have a set of new branches. You need to get the system, security, people, training, everything right. And there's a process. It's a massive market. So it's a very large market, still part of the market in other ray sector. Banks have a very large market. Many 2, 3 large public sector banks are more than INR 3 lakh crores of portfolio. So I think the market is there and also now the nonsecured lending has become difficult. More and more customers are wearing towards lending or borrowing against gold.

Got it, sir. Sir, the second question I had was about a lot of these management changes that you've seen in the last 1 year. I think you had a change in our CFO. I think today, we have said that our business had unsecured lending is moving to another role within the company. Girish sir come on board for us. So I mean, what -- how...

So let me explain. Unsecured lending will discontinue. So obviously, that role has to be redeployed somewhere. CFO is -- still there is lending strategy, but there are personal [ health ] issues. So that is a different question. But other than that, the -- many of -- if you really look at our Tier 2 management or Tier 1, many of them are there for 15, 20 and 30 years. So if we look at our gold loan head, he has been here in the company almost for maybe 30 years or almost 25, 30 years. So there are many old people and the strength of the company. But some changes will happen in the company as an organization.

Got it. And sir, are we looking to introduce any new products in the stand-alone entity now while gold will remain the core product? Any new products that you're looking to introduce other than...

I think the LAP or secured MSME is another product which will be there in our listed company. A very small product loan against shares continue. But other than that, we don't have any plans to introduce any new products.

Got it. And lastly, sir, one clarification. When we said that we have discontinued unsecured lending, we'll stop being unsecured business loans as well?

Yes, that is what -- yes, absolutely right. Unsecured business loan personal book will be discontinued.

Got it. And lastly, Girish sir, I'm just trying to understand why you laid out that you're looking at about a 30% disbursement growth, 17% to 18% loan growth this year and the fact that what Nirmal sir has explained that disbursement yields are higher, but given that micro LAP used to be a higher-yielding product and that is running off and you're not doing that product anymore. How are you thinking about kind of improving the ROE trajectory over the next couple of years?

So, yes, I think if you talk about -- I spoke about what is going to be the plan for this year in terms of book growth, AUM growth and disbursement. I think that trend will continue for next few years because we see a lot of potential. In spite of quarter 1 being soft, we have done pretty well on all the 3 fronts. Yes, to a certain extent, probably last year was soft. But even if I compare quarter 4 sequentially, [indiscernible] based on disbursement book are. So if I continue with this, maybe in next 3 years' time. So we are looking at ROE of about mid-teens. So I think that's the plan. We are focused on that. Now we are pivoting more towards affordable. And the balance, we are also into emerging. We have completely cut down on trying, which will slow margin business. So every year you take, if you look at any company's portfolio, I think the year disbursement in account to 18% to 20% of the entire book, right? So next 2 to 3 years' time, it's been 50% to 60% of the entire book can change, and that should lead to profitable growth, and we can also give a good return.

So Girish, like in terms of trajectory, probably what we are trying to understand is that how the acceleration will happen. But based on [indiscernible] plans, I mean, quarter after quarter, we should see profitability improving faster than the loan growth.

The next question comes from the line of [ Priti Raj Patil ] with Investec.

So I just had -- the first question on the income tax note that the footnote that's there in the financial statement, if you could just elaborate on the INR 470 crores impact that's there?

So there's nothing which is what we discussed last time. So there's no new development on that. So there's a demand of INR 475 crores, which -- against which we have final update of the CIT. And the process of income tax is a [indiscernible] CIT, then you can go to tribunal and then you're going to go to high court and supreme court. So there's no new development there.

Okay. And also for the [ SR ] size, I see that the stand-alone entity, the SR or the same quarter-on-quarter. And if you could just elaborate on the SR position for the subsidiaries and...

So SR is basically, the redemption will happen in a lumpy way. But as we had guided last time that in 12 to 18 months, probably more or less, all the SRs will be fully redeemed. And as I said last time also that we believe that we'll realize more than what the book value is. And actually, last quarter, there was not much movement. But in the rest of the year and -- so I think by September [ '27 ], more or less this book would be completely wound up.

Your next question comes from the line of [ Love Sharma ] with [ Point72 ].

If you could just highlight what was the credit cost for FY '26 in this quarter? That will be useful. And secondly, on the credit ratings on the international market, given that you have been very active, any indication of what your engagement has been with the agencies given you are on positive outlook from 2 of them? And I know you recently got a higher rating from Moody's, but just from the other 2, where do we stand in terms of your communication and your discussion.

Thanks. So Moody's has upgraded our rating with [ one notch ] above Fitch and S&P. Fitch has been actively engaged and immediately after the results, they will take it to the committee. We are very optimistic that even Fitch ratings would get upgraded. So -- and also we'll engage in other agencies, other international agencies as well as local. Our credit cost for the first quarter is around 1.6%. 1.6%. Okay. When we say credit cost, it's based on the average loan book. And I think we have guided similar of around 1.5%, 1.7%. Going forward, gold loan reported GNPAs can be slightly higher as the book grows and the prices are monetized. But we always have enough questions. So the gold prices have fallen, then we don't press the button trigger and just auction everything depending on the margin that we have. So in terms of reported number can vary. But the [indiscernible] defaulting in the last 15, 16 years has almost been 0.