IIFL Finance shares will face this near-term overhang, Jefferies warns after cutting price target

Shares of IIFL Finance Ltd. gained as much as 8% in early trade on Friday, January 23, following its December quarter earnings, before paring gains to trade about 2% higher.

Brokerage firm Jefferies maintained a 'Hold' rating on the stock while cutting its price target to ₹600 per share.

IIFL's December quarter profit after tax, excluding a one-off wage provision, came in at ₹480 crore, up 28% quarter-on-quarter and ahead of Jefferies' estimate of ₹450 crore, aided by lower provisions.

Assets under management rose 38% year-on-year, broadly in line with expectations.

Net interest margins edged up sequentially, while asset quality improved with Gross NPA declining quarter-on-quarter, aided by the sale of stressed assets to an ARC. Credit costs also surprised positively.

Jefferies said that while core operating trends improved, a large part of profit before tax and return ratios was driven by distribution agency income, which tends to be lumpy and volatile.

Separately, tax authorities have directed a special audit of the company's accounts. Management said the move is procedural in nature, but acknowledged it could act as a near-term overhang on the stock.

For the December quarter, IIFL Finance reported a 189% year-on-year jump in gold loan growth, which was also up 26% sequentially. Net interest income grew 28% YoY to ₹1,582 crore and rose 10% sequentially.

Net profit rose sharply to ₹484 crore from ₹41 crore a year ago, while revenue increased 40% YoY to ₹3,427.5 crore.

Asset quality strengthened, with Gross NPA improving by 54 basis points sequentially to 1.6% and Net NPA declining 27 basis points to 0.8%.

Home loan AUM grew 5% YoY to ₹31,893 crore but remained flat sequentially. MSME loans AUM increased 17% YoY and 4% sequentially to ₹10,081 crore, aided by a shift towards lower-risk secured lending.

Microfinance AUM, however, declined 19% YoY to ₹8,360 crore amid stress in unsecured lending, and was flat quarter-on-quarter.

Alongside its results, IIFL Finance disclosed that it has received a communication from the Income Tax department directing a special audit under Section 142(2A) of the Income Tax Act, 1961, as part of ongoing assessment proceedings.

The company said there has been no adjudication against it and that no financial impact can be determined at this stage.

Shares of IIFL Finance are trading 2.39% higher at ₹551.60. The stock will exit the Futures & Options segment at the end of the January series, with Tuesday, January 27, being the last trading day in the F&O segment.