The IIFL witnessed a big decline of 20% in its share price on the volatile morning session of Tuesday 5th March 2024. The drastic drop in the share price comes after the Reserve Bank of India (RBI)’ prohibited the company from disbursing gold loans which have left investors with negative sentiments.
Decline in Share Price of 20% after RBI’s directives
This substantial decline follows a similar 20% drop in share price observed on Monday immediately after the RBI’s directive. Currently, trading at approximately INR 382.80 the stock has weakened more than 35% compared to its closing of around INR 596.80 on the BSE last Friday.
According to the Analysts, Gold loans constitute a significant portion, approximately 32%, of IIFL Finance’s assets under management (AUM). Prominent financial services company Jefferies has downgraded IIFL Finance’s stock to “Hold” ratings in light of this RBI action, citing potential adverse impacts on the profitability of the company.
Analysts at Jefferies India Pvt Ltd highlighted in their report that the RBI’s restrictions come imposed by the material supervisory concerns of the Reserve Bank of India, which are expected to affect earnings due to the rapid unwinding of the profitable gold loan book, lower co-lending income, and potentially higher cost of funding (CoF).
The Ban may continue to 9 months
The future is uncertain as to when this ban will be lifted. Jefferies analysts, assuming a duration of 9 months for the ban, have revised down earnings per share estimates for FY 25-26 by 26-27% and Return on Equity estimates by 460-480 bps (basis points). Additionally, they anticipate a 6% decline in profit for FY26.
Responding to the RBI’s directive, IIFL Finance issued a release on March 4th, 2024, stating that the company has been directed to cease sanctioning or disbursing gold loans while still being allowed to service its existing gold loans portfolio through the usual collection and recovery processes.
Following an interaction with IIFL Management post the RBI’s directive, Jefferies highlighted non-compliance issues related to the standard auction process, as IIFL had transitioned to an independent e-auction platform for auctioning gold loans, contrary to the required “Taluka level” auctions. Management has assured corrective actions in response to RBI’s observations and intends to request a special audit.
Despite these challenges, some sectors remain optimistic. Jefferies also recently noted that companies like TCS and Infosys are well-positioned to capitalize on the SAP migration cycle, offering a glimmer of hope in an otherwise uncertain market landscape.
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