Shares of IIFL Finance, one of the leading NBFCs engaged in retail credit, rebounded in today’s session with an intraday gain of 10%, reaching ₹420.40 apiece after the company on Wednesday announced that Fairfax India agreed to invest up to US$200 million in liquidity support amidst the recent Reserve Bank of India (RBI) embargo on the company’s gold loan disbursements.
“The RBI’s embargo has raised liquidity concerns amongst the company’s investors and lenders. In response to these concerns, Fairfax India has agreed to invest up to US$200 million in liquidity support on terms to be mutually agreed and subject to applicable laws, including regulatory approvals (if any),” the company said in a regulatory filing.
The Canadian investment firm, led by India-born Prem Watsa, first invested in IIFL in 2011, when it acquired a 9% stake through the Hamblin Watsa Investment Counsel Fund.
In July 2015, Fairfax India made a voluntary offer to buy a 26% stake in IIFL for ₹1,621 crore, picking up an additional 21.85% stake. The group also had an economic interest of another 5.15% through derivative instruments.
Fairfax’s total shareholding in IIFL stood at 35.7% as of March 2016. Over the years, it has divested some of its stake in the company.
On February 05, the Reserve Bank of India (RBI) barred IIFL Finance from sanctioning and disbursing gold loans on certain material supervisory concerns. Subsequently, the stock witnessed a sharp decline of 20% in the two trading sessions that followed this regulatory development.
Issuing a clarification on the action, IIFL Finance said, “We reaffirm our commitment to rectify observations of the RBI in the 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”.
Domestic brokerage firm Motilal Oswal said, “It is difficult to predict how long it could take to work with the regulator and get this ban reviewed and revoked. However, in light of some recent episodes where the RBI banned certain activities/products of financial institutions, our base case assumes that it could take around six months to get the RBI to conduct a special audit and subsequently rectify the observations to the satisfaction of the RBI.”
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After incorporating the impact of this ban on IIFL’s gold loan growth, the brokerage cut its FY24, FY25, and FY26 EPS estimates by 2%, 14%, and 15%.
Beyond the immediate impact on incremental gold loans, IIFL will also have to work with its existing customers and co-lending partners to prevent any damage to its gold loan brand and the trust that it has built over the last many years. It will also have to make efforts to retain existing customers and employees, the brokerage said.
The brokerage anticipates ongoing volatility in the stock price in the near term. However, it reaffirmed its ‘buy’ rating and maintained a target price of ₹560 per share. This target is based on revised target multiples for each of its standalone, HFC, and MFI businesses, considering recent observations by the RBI.
Disclaimer: We advise investors to check with certified experts before making any investment decisions.
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