In the second consecutive trading session, shares of IIFL Finance experienced a drastic 20 percent decline after the Reserve Bank of India (RBI) imposed a ban on the company from issuing gold loans. By 9:41 am, the stock was locked in the lower circuit at Rs 382.20 on the National Stock Exchange (NSE), marking its lowest level in the past 52 weeks.
Reacting to news of the ban, global brokerage firm Jefferies revised its stance on IIFL Finance from ‘buy’ to ‘hold’ and reduced the target price from Rs 765 per share to Rs 435 per share. This adjustment suggests that analysts anticipate a further 9 percent decline in the stock’s value, following its 20 percent lower circuit on March 5.
The Reserve Bank of India (RBI) instructed IIFL Finance to halt the sanctioning or disbursing of gold loans after conducting an inspection of the company as of March 31, 2023. The inspection uncovered operational irregularities in certain aspects of the company’s operations.
According to the company’s filing, the RBI’s order highlighted several significant concerns regarding the gold loan portfolio, including deviations in assaying and certifying the purity and net weight of gold during loan approvals, breaches of loan-to-value ratio, and substantial cash disbursals and collections exceeding statutory limits.
Analysts at Jefferies have projected that the gold loan ban will adversely impact IIFL’s profitability. According to their assessment, the RBI’s directive is likely to result in a significant reduction in earnings due to the rapid unwinding of the company’s profitable gold loan portfolio. Considering the uncertain timeline for the ban’s removal, Jefferies anticipates that the ban could persist for approximately 9 months.
In light of this, the brokerage firm predicts a 1 percent year-on-year decline in assets under management (AUM) and a substantial 51 percent year-on-year decrease in gold AUM for FY25. Additionally, Jefferies has slashed the earnings per share (EPS) estimates for FY25-26 by 26 percent to 27 percent and the return on equity (RoE) by 460-480 basis points (bps). They have forecasted a muted EPS compounded annual growth rate (CAGR) of 5 percent and RoE in the range of 15-15.8 percent over the period spanning FY24-26.
In its exchange filing, the company stated that over the past few months, the Reserve Bank of India (RBI) has been in discussions with the senior management and statutory auditors regarding the identified deficiencies. However, as of yet, no significant corrective measures have been implemented.
Despite the ban on issuing new gold loans, the RBI has granted permission for the company to continue servicing its existing gold loan portfolio through standard collection and recovery procedures.
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