IIFL Finance Limited (IIFL.NS) Q2 FY2026 Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to IIFL Financial Limited Q2 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nirmal Jain, MD, IIFL Financial Limited. Thank you, and over to you, Mr. Jain.

Hi. This is Kapish Jain. I'm the Group CFO at IIFL Finance. Ladies and gentlemen, thank you very much for joining this call. This is about the quarter 2 results for fiscal FY '22 and '26. On the call, I'm joined by Mr. Nirmal Jain, our Founder and Promoter and MD for the group and the company. I'm very happy to also introduce Mr. Girish Kousgi, who joins us as the MD and CEO for IIFL Housing Finance. We also have Venkatesh on the call. Venkatesh, as you know, is our CEO for the Samasta Microfinance Company. So on this call, we will talk to you about our results for quarter 2. And before I talk into detail on the numbers, I hand over to Nirmal to just give you a quick update on our business progress and the strategy for the fiscal.

Thanks, Kapish. Good afternoon, everyone, and thank you for joining us. Maybe I'll just share my thoughts about the global macro and our company strategy. So globally, growth remains uneven amid inflation and geopolitical tensions, but India continues to stand out with strong domestic demand and disciplined policy. The RBI has maintained stability with manageable inflation and improved liquidity while the government's focus on MSME, housing and digital infrastructure continues to create opportunities for formal lenders like us. Against this backdrop, Q2 was a quarter of renewed momentum for IIFL Finance. Our gold business has fully normalized post embargo and reached a record AUM in the last quarter. The MSME focus continues to be on secured portfolio amount and which is scaling up well with AI-driven underwriting and strong co-lending partnerships. In housing finance, our growth are cautious given leadership changes and a sharper focus on collection, particularly in micro LAP portfolio. And we are delighted to welcome Mr. Girish Kousgi as the new CEO of IIFL Finance. His vast experience in housing finance and retail lending brings renewed leadership energy and strategic direction at an important stage of our growth journey in the housing finance company. About guidance for loan losses and provisions, we expect lower loan losses and provision in the second half. And we have tried to analyze the data more in our presentation, you'll find that the discontinued businesses of micro LAP and unsecured digital loans, which are about 2% of portfolio each and have been skewing the loan loss provisions, particularly in the first half have been identified. They are now contained. Both these products have been discontinued. And we expect in housing in our home loan and gold loan LLP to continue at 1.3% and [ 2.4% ] and about 2.5% in our continuing secured LAP and unsecured business loan, which is in line with the trend in the last few quarters, whereas in the discontinued businesses and also in MFI in the second half, it will be about 8%. On a weighted average basis, we may have second half loan losses provision around 2.2% to 2.4%. And that coupled with 3.5% in the first half will give us full year loan losses provisions that what we expect to be between 2.8% to 3%. In the second half, we expect disbursement movement to gather pace, particularly in home loans and LAP. And I think gold loan will continue to grow strongly. Our balance sheet remains strong. On a consolidated basis, our capital adequacy is 28.2%. Liquidity for the group was above INR 8,000 crores. Our net gearing is 3.6x and provision coverage ratio was 93%, which is positioning us well for a sustainable and high-quality growth. With this, now I hand it over to Kapish, our CFO, for the latest financial commentary on our quarterly performance. Thank you.

Yes, thanks a lot, Nirmal. So some of the numbers that was highlighted by Nirmal, but however, just to go into further details. For quarter 2, our IIFL Finance profit after tax before noncontrolling interest was INR 418 crores. It moved up by 52% on a quarter-on-quarter basis, led by the growth that we've seen in the gold finance business. We recorded pre-provision operating profit of INR 1,033 crores, which is up 38% Y-o-Y and up 23% on a quarter-on-quarter basis. For the quarter, ladies and gentlemen, our consolidated AUM grew by 35%, and it is at INR 90,122 crores. It records a 7% quarter-on-quarter growth. This is driven by gold loans, which crossed, as Nirmal mentioned, a historical high of INR 34,577 crores. And together, as been our stated intent, our home loan and gold now together constitute around 74% of the total AUM. If I further dissect this AUM, the other businesses on the core product side, comprising home, gold and MSME and micro is up 37% Y-o-Y and they aggregate INR 88,477 crores, which for 98% of our total AUM being largely retail. Our gross NPA has shown marginal improvement. It's at around 2.1% and the net NPA is 1%. Both are down by 21 bps, 11 bps on a quarter-on-quarter basis. The company maintains a very cautious status on the MSME and MFI business and the focus has largely been on recovery and collection. This is also resulting into the fact on our guidance for the credit cost, which is expected to go down in second quarter and in quarter 3 and 4 of this particular fiscal. The assigned loan book, since we have been assigning our portfolio and we've got very healthy traction with banks, our assigned loan books now comprises around 34% of the overall AUM book primarily. Assigned book is standing at INR 18,607 crores, which recorded a growth of 33% on a Y-o-Y basis and 24% on a quarter-on-quarter basis. The co-lending book also has improved sharply at INR 11,848 crores, up 40% Y-o-Y. The quarterly average cost of borrowing, it has gone down by 7% on a Q-on-Q basis. It's up 23% on a Y-o-Y basis. Healthy liquidity has been maintained at around INR 8,174 crores and the ALM has always been matched across pockets and buckets with net gearing at around 3.6%. Our annualized ROE for the quarter stands at 11.9% and ROE is around 2.2% basic earnings per share for the quarter is around 8.9%. Our capital adequacy is far higher than the regulatory requirement. We stand at around 18.6% for the NBFC, HDFC is 46.2% and for [indiscernible] is 33.4%, much higher than the regulatory requirement of 15%, led by the off-book strategy that we have with our bank partners. Key highlight for this quarter is, as I already mentioned, that Mr. Girish Kousgi has joined us as MD and CEO in the housing finance company. And we also have a good view that we got a rating outlook change from Fitch for our international rating from stable to positive. With this, I come to the end of my submission and would open the floor for question and answers.

[Operator Instructions] The first question comes from the line of Shubhranshu Mishra with PhillipCapital.

So 3 questions. The first part is on gold loans. Congratulations on that strong growth. How do we look at the gold loan momentum going forward, if one can give a Y-o-Y or a Q-o-Q guidance for the next 3 to 4 quarters? First. Second is in terms of home loans, especially the affordable home loans, what kind of growth are we baking in for the next 2-odd years? And which all geographies will drive this particular growth? The third is on IIFL Samasta. Bihar is ballpark around 22% of the portfolio. What would be the IIFL Samasta plus 4 lenders as a proportion there? And what kind of par numbers are we seeing in the Bihar portfolio?

Can you repeat the last part of the 22%?

So Bihar is 22% of IIFL's book. So what is the IIFL plus 4 lenders in Bihar -- and what is the par numbers in IIFL Samasta’s book?

So in gold loan, momentum is very strong. It's very difficult to give any guidance in terms of percentage growth because what we have seen in the first half that growth has been significantly higher than probably what we expected. And it's also a function of gold prices. So at this point in time, I think I probably will refrain from giving any guidance. Only thing is that the momentum is strong as we have seen in the first half. It might taper off a little bit or might continue, but it's going to be strong. As far as our home loan is concerned, I think our trajectory for growth has been around 15% to 18% on a Y-o-Y basis -- as I said that the first 2 quarters have been a little cautious for multiple reasons. And now Girish has taken as a new leader. And I mean he has tremendous experience, and I think we should be able to get anywhere from 15% to 18% loan AUM growth in the home loan portfolio in the second half. Microfinance Venkatesh, you are there online?

Yes, I am. I'm hearing.

Can you take this question, please?

Yes. I mean in Bihar, we had -- the first one to implement the guardrail. So if you look at the plus floor is less than around 5% now. And this penetrates to all the older book, which we have -- it is prior to the guardrails actually. So you had a second part to this question?

What is the par zero number in Bihar?

We are at a collection percentage of close to around 99% in Bihar and par zero...

Current bucket, right? What are the arrears there?

Our arrears would be close to around 4.6% actually in Bihar.

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

Firstly, what I wanted to understand is other than gold loans, when I look at our MSME business, if I look at other LAP that we call out, which is excluding the micro LAP or whether I look at the unsecured businesses that we call out, excluding the digital and MFI sourced unsecured business loans, which we have discontinued. Even there, we are seeing that the asset quality kind of continues to deteriorate. So I'm just trying to understand was it a bad origination? Or are you seeing that overall at the industry level, unsecured business loans are still going through a little bit of a weather. And sir, just wanted to add what is exactly happening in the LAP segment today? We are seeing very strong growth across the industry in LAP. But at the same time, in this quarter as well, we have reported a deterioration in asset quality in the other LAP segment. So if you could just help us understand that?

We are reorienting these businesses and there is a legacy of this business where the micro business basically cross-sell product to the microfinance customer and that's where you are seeing the deterioration -- one caveat there is that the denominator is because we discontinued the disbursement. So on a small base, the percentages might look a little worse because obviously, the base is sinking and we are trying to sort out, I mean the business discontinued, obviously, these kind of things will happen. But even in the continuing businesses, as we say that we should be prepared for 2.5% to 3%, particularly in unsecured business, maybe around 3% to 4% -- and this book is maturing and probably at a mature level, we are seeing the full impact of what is going to be likely to be. Also, we are trying to strengthen our collection -- I mean there have been a few challenges in the last quarter. And so we hired, we have made some changes in the leadership and also we implemented certain -- more agencies and a better clear structure and that should improve our collection efficiency in these segments going ahead. Now when you talk about LAP, it's a very encouraging as products. From a INR 50,000 to INR 50 crores can be the yield also varies and also the demographics and the customer segment can vary. Historically, we were doing this business, as I said, as a cross-sell product. And in case of microfinance, what used to happen is that if the customer has done 2 cycles well as a group, then usually probably we will try to give them unsecured or LAP product. Unfortunately, the guardrails hit actually the larger customers more, the new guardrail came last year, in fact year before, July '23 year.

Okay.

Now but I think that impact is taken and going forward, things will get better.

Got it, sir. Sir, just a related question, have we done any ARC transactions in this quarter? If not, any plans of doing transactions, particularly in these 2 segments where NPAs are elevated in second half?

In digital segment, we are not done. But in home loan, we have done a small ARC transaction. And in digital segment, we'll see how much we can see. In the small loans, our collection has to be done by us only. So we have really valued that ARC transaction make sense. But next quarter probably we'll look at some ARC transactions, which we'll let you know after the quarter.

Got it, sir. And sir, was there any one-off in your operating expenses in the stand-alone entity this time around? Or is it more in the nature of a strong gold loan growth leading to higher incentives?

Yes. So in gold loan, actually, the competition has become intense and quite a few players have got in and they obviously try to poach people from established players like us. So there has been a bonus incentive -- and actually, many of our gold loan employees who have been loyal long-term employees. Last year, they suffered last year with the RBI embargo, the business did not do well and the incentives and bonuses were lesser. So we have given salary increment and bonuses in the last quarter primarily to gold loan employees.

Got it, sir. And sir, the last question that I had is, I mean, this quarter, again, I'm not comparing Y-o-Y, but Q2, we have seen some slowdown in co-lending. Was it to do with the co-lending guidelines that come out and things have been reworked? Is that the case?

So actually, there are co-lending guidelines CLM 1 and industry is also seeking some clarification from the banks about the weighted average rate, how it work. And people are also -- there are many banks actually are -- they are just putting their systems and technology in place. And in the interim, they put the co-lending thing on hold, but there's tremendous excitement and also I think banks as well as NBFCs, both are keen to continue this with the new guidelines which come in effect from 1st Jan. So I think we'll see momentum in this from the next quarter.

Got it, sir. And then sir, I mean, sorry for squeezing one last question. You briefly touched upon it.

Hello, have I answered the question or…

Yes, sir. Can you hear me? Can you hear me? Sir, I can hear you. Can you hear me?

So, Abhijit, the new [indiscernible] guidelines will be effective from 1st January, and many banks are waiting to put their technology system processes in place and have complete clarity on it. If there are more clarification on this or FAQ is expected from RBI, then they'll get -- this will get a momentum from 1st January next calendar year.

Got it, sir. And sir, I just want to squeeze in one last question, while you briefly touched upon this in the last participant's questions. I mean we understand it's early for Mr. Kousgi, he just joined us yesterday, but we know him in his previous role. So just trying to understand that from here, given that this book has been consolidating for some time, the home loan book has been consolidating for some time. Now from 3Q and the second half onwards, can we see better momentum?

See, if you look at the market segment...

This is Girish, in fact, sorry. Okay, go ahead please.

So if you look at the market in all the 4 segments, we are predominantly present in affordable and emerging that is cutting across EWS LIG and MIG. So market is quite robust across geographies. And if you look at the industry, industry is doing well. H1, of course, the growth has been slightly lower, but of course, there are reasons for that. Otherwise, even this year, if you see HDFC, the book growth is going to be -- at industry level, it will be in the range of 13% to 14%. So as Nirmal mentioned earlier, obviously, we had some challenges in last couple of quarters. Now we are almost nearing to come out of that. So you can see good traction in H2. And going forward, we will be at par and maybe surpass the industry guidelines. We have already guided that home loan is going to be over 15%, and this should improve as we go along. So because market is quite good, team is good. There are certain challenges. We have sorted off kind of. And next couple of quarters, we will see growth and further strengthen going forward.

[Operator Instructions] Next question comes from the line of Anusha Raheja with Dalal & Broacha.

Sir, I just want to understand what is your reading on the asset quality in MFI given the fact that we have seen last few quarters pain is there on the MFI side. But as per your assessment, how do you see the current asset quality? And secondly, if you can have in gold loans tonnage-wise increase in the gold so that we can understand how much is the impact of -- on the AUM because of the gold prices. And thirdly, what will be the change? What are your initial readings in terms of what could be the key changes with the new management coming in, in the home finance subsidiary. So it's more broad things that we might expect the key changes that can be brought?

Yes. MFI, I think the worst is over, but still the second half will not be as good as the normal times till FY '24. And the loan losses and provisions, the guidance is almost about 8% for the year. So second half will be a little better than first half, but still not to the -- like the normal times before these guidance were introduced until FY '24. The 3 lender guidelines, maybe Venkatesh can add in case there's something more they have been implemented. Over medium to long term, they will reduce the leverage of these customers at the bottom of the pyramid and improve the credit quality and the behavior. But in the interim, we will see that the pain continues, maybe a little lesser than the first 2 quarters, but still it will not be fully normal in this year. Gold tonnage, I mean, in the last quarter-over-quarter around 16% growth Y-o-Y, but it's not very relevant because we started on a low base is 115% growth because just actually about a year ago or maybe 13 months ago, we had the ban was lifted, RBI embargo was lifted. So we started at the bottom. But maybe quarter-over-quarter, we have grown by 16% in terms of volume on the tonnage.

And in terms of what can be the key changes that you might bring in the home finance business?

Key changes in home finance.

Key changes in home finance.

With the new management coming in.

I know it's too early just one day, but I think given the experience in this space and having worked for many institutions in the space, not too many changes. I think a little bit of rigor on business, a little bit of rigor in collection, improvement collection efficiency and a bit of in because if you look at the overall challenge what we had, it was largely to do with the team and the efficiency, both on business and collection side. I think that we will correct it in the next couple of months. Not too many changes in terms of product policy or program because by and large, it's a very simple product, simple program. So one product what we had that we have already discontinued. But for that, in none of the other products, there's going to be any major change. There be change in terms of process, there will be a slight change in terms of credit policy process in terms of aligning the team. Otherwise, no major changes.

Okay. And just one last thing, if I heard it correctly, in the second half, you're anticipating credit cost to be 2.2% to 2.4%?

Yes, that's right. And the full year at 2.8%.

[Operator Instructions] Next question comes from the line of Deepak Poddar with Sapphire Capital.

So just wanted to understand, I mean, in one of your income item, the derecognition of financial instrument. So in last 2 quarters, we are seeing a good income in that. So just wanted to understand the nature of this income and how should one look at going forward?

You're talking about interest with income, right?

Yes. So I'm talking about the derecognition of financial instrument, the net gain from that. So this was around INR 350 crores this quarter and last quarter, it was about INR 230 crores.

So this is -- as I mentioned earlier in the call, given our strong partnership that we have with bankers, we have been successfully selling our assets to bankers on a seasoned portfolio basis on the direct side. So this is -- with the increasing share of that portfolio, there have been income that is coming into the portfolio on a pure annuity basis where we earn and we get into the P&L. And second is since the accounting requires you to upfront some of the income, the [ VA ] transactions have almost doubled from what it was in quarter 1, and that is causing the upfronting of this income, which is coming into the P&L. So that's one element which is coming around in the P&L from an overall aggregate perspective. This is a technical terminology for Index. Can you hear me?

Yes, yes, I can hear you.

Yes. So this is basically the upfront income on the portfolio which is sold after providing for -- I think this is a question that earlier also. So a portfolio when there's a true sale along with the risk, then the NPV, which is a profit gain net of expenses to service the loan is taken as upfronted income.

Correct. I got it. So this portfolio is already -- I mean, the securitization percentage of total your loan book is already at 30%, 35%, right? So how should one look at this income? I mean, in terms of trend or trajectory, I mean, this INR 230 crore INR 354 crores, is that a sustainable income or you expect it to...

Normally... See what happens in -- typically, we'll have 40% to 45% as our off book loan assets. So this should be sustainable. And this has been there for the last several quarters actually.

Okay. And what is your target to reach this securitization book of book?

You know what happens in this that on one hand, you upfront the new securitization. But by the same logic, whatever you have done earlier, that income will not accrue because that you have already taken. So when basically when the actual interest income comes, you have to reduce the upfronted portion and take the balance as income. You get what I'm saying.

Yes, yes, I got it.

So while you get the upfront on the flow, you lose the normal NIM on the stock in your profit and loss account.

Understood. I got this. And what would be our target for off book?

I think normally, I mean our target is around 40% or so.

Yes, I think 33%, 34% right now.

Yes. So gold loan has grown at a good speed in the last 2 quarters. Normally, the portfolio has to season for less than 2 years for 3 months and more than 2 years or 6 months before you can sell it down. And practically, with the audit verification, it might take some more time. So the portfolio which has been disbursed in last quarter would not have been eligible for DA in the last quarter. So obviously, over a period of time, this will grow.

[Operator Instructions] Next question comes from the line of Shweta with Elara.

Couple of questions. So now that the consolidation has happened and we have discontinued certain portfolios like micro LAP and personal loans, how does the mix shape up now going forward? And what are our growth targets?

So going forward, our focus will be on gold loan and mortgages and mortgages can have 2 components. One is home loan and other is LAP. So primarily, these are the key growth areas. Other than that, unsecured business loan can be a product for cross-sell to our gold loan and home loan customers, but will be a very small component of the whole thing. MFI continues, and we really need to see how the industry evolves from here. In terms of growth target, again, as I said that this year, for instance, while home loan has been lower than our expectation, the gold loan has more than made up -- but over a period of time, I think 15% to 20% should be our loan growth target. And with operating leverage and if we can improve the margin, our profitability should improve at a slightly better rate. So on a steady-state basis, if you take a medium-term perspective, I think this would be the target.

Sure. And sir, just a follow-up question there. So now that we are targeting this 15%, 20% range and the growth is back in reckoning. So if I look at the stand-alone capital adequacy around 18.5-odd levels and the scope and leeway that we have even considering the gearing is around 3.6 then how do you marry this equation wherein are we seeing a capital raising in off considering 20% growth targets?

So the growth, Shweta will also be in the co-lending. So our internal accruals will meet the book that we grow. At appropriate opportunity, we can raise capital also. But the way the book is growing along with the co-lending and bank partnership, it may not be a requirement for capital just to meet capital adequacy. But to be safe and to keep margin at appropriate time, we can raise capital.

Next question comes from the line of [ Navin] with MLP.

Just wanted to get a sense on the ROA guidance for the full year. It's -- we stand at around 3%?

ROA you are saying?

Yes, yes.

Okay. But I think we -- I mean there are so many volatile factors that we don't want to revise the guidance. But maybe I think the first half was around 1.9%. Then probably for the year, we should look at 2.5% now. The losses in the first 2 quarters in particularly unsecured and microfinance have been unexpectedly higher. But again, as I said that it's better -- I mean you know all the components of the businesses. So it's difficult to forecast growth in each and every component with precise accuracy. So ROA will be around 2.5% to 2.8%, I guess.

Okay. And the credit cost guidance, sorry if I've got it wrong earlier, but it remains the same, right? Earlier, it was around 2.8% to 3%, and it still remains over there?

Yes, so it remains intake for the full year.

I think the previous person had asked the question, yes. It remains between 2.8% to 3%. So there's no change over there.

[Operator Instructions] Next question comes from the line of [ Ashwin Kumar ] with Franklin Templeton Mutual Fund.

I joined the call in case any questions addition, feel free to refer me to the transcript I go through it. But just wanted to ask 2 questions. One is with regard to the capital in the stand-alone entity. So I think that's stable Q-o-Q. But if I see the growth in the stand-alone book, that's about INR 7,000 crores, about 20% on a Q-o-Q basis. I understand some of it is coming from assignment. But even otherwise, there should have been some change in the capital adequacy. So just wanted to understand the math there a little bit. That is the first question. And the second question is on the asset quality on the micro LAP side. So any particular reason why there's been such a sharp increase over the last 2 quarters because none of the other players have reported in this segment such a big change. So I just want to understand if there are any specific issues which is causing this? And also I wanted to understand where this micro LAP book sits within the 3 entities, IIFL Finance, IIFL Home Finance and IIFL Samasta. And also given that you are discontinuing this segment and the digital loan segment, could that lead to sort of further asset quality issues given that, I mean, you're moving away from segment book will keep coming down. So at least from an NPA standpoint, it may not come down quite a bit in this segment?

So on the capital adequacy, first question, stand-alone, the growth has been robust, and we are watching capital adequacy numbers very closely. I mean as of now, obviously, we would like it to be higher around 30%. But in a longer-term perspective, there are a few quarters where you can have slightly lower than what your target level is, but well above the regulatory requirement. So as I said that we are watching it, let's see how the growth and co-lending as well as the off-book components grow. And we'll obviously take it up in the Board meeting at appropriate time what is required to be done. But I can assure you that we are watching it very closely on capital adequacy of each and every company separately as well as together. Now coming to micro LAP and okay, why the losses are higher. So one is, okay, this -- as I think we explained this earlier, the micro LAP was cross-sell primarily to microfinance customers. The microfinance customers were very badly hit by the new guardrail, which restricted the loan amount very effectively from INR 3 lakh to INR 2 lakhs and also the number of vendors from no restriction to [ 403 ]. This obviously caused larger customers in the microfinance to be suddenly forced to cut down on their availability of credit. And this is working capital for people who run small businesses. So they are income-generating activities. So that is where the micro LAP has been impacted because of the cash flows of these borrowers. This micro LAP basically sits in mostly in NBFC, although sourced by our MFI company. MFI earlier had a 75% threshold requirement and then the cross-sell product was doing well and also the parent company had a larger balance sheet. So we were booking this on the parent company. Why this is looking higher because once you discontinue, then obviously, your denominator stops growing and whatever has not resolved becomes larger and larger piece. So that is why these numbers are looking unusually high.

That answers my question. But does that mean that going forward also, we will see this number remaining high for maybe a few quarters? Because if I look at your Stage 2 in the MSME secured segment, that is another 11% and 1 to 30 is also another 6.5%?

So, Ashwin, what has happened is that there is only 2% of our total book now. And our focus is just in collection here. So this component may remain a little high. But when we've given guidance, we have taken provisions of that. So -- but it's a very small component, just about 2% of our total book.

Ladies and gentlemen, as there are no further questions, we have reached the end of question-and-answer session. I would now like to hand the conference over to the management for closing comments.

Thanks a lot, everybody, for their active participation. And for any further questions, you may reach out to our Investor Relations team, and we'll be more than happy to address your queries. Looking forward to meeting you again for the next quarter, and thank you very much, and a very happy festive season to all of you.

Thank you so much. Have a good day ahead.

Thank you. On behalf of IIFL Finance Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.