Shares of IIFL Finance Ltd. were down for the second day in a row, locked in a lower circuit of 20%, extending Tuesday's losses after the Reserve Bank of India's actions.
Brokerage firm Jefferies downgraded the stock to "hold" from its earlier rating of "buy" and also cut its price target to ₹435 from ₹765 earlier. The brokerage believes that the gold loan ban will hurt the company's profitability.
It further said that the RBI move can dent earnings due to rapid unwinding of its profitable gold loan book, which is nearly one-third or 32% of the company's Assets Under Management (AUM).
While the timing of the ban lifting is uncertain, it assumes that if the ban stays for nine months, its Assets Under Management may fall 1% in financial year 2025, while Gold Loan AUM may halve.
Jefferies has cut its financial year 2025-2026 Earnings per Share (EPS) estimate by 26% and 27% and its return on equity estimate by 460-480 basis points.
B&K Securities also wrote in its note that Gold loan segment holds substantial importance for IIFL Finance and that it was expected to be a major growth driver going ahead.
It mentioned that 25% of consolidated profitability stems from the gold loan business, which is likely to be affected by the RBI restrictions.
On Monday, the RBI had instructed IIFL Finance to stop disbursing gold loans after it observed some material supervisory concerns in the company's gold loan portfolio, including serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default.
Tuesday's 20% drop for IIFL Finance was the biggest in a single day since its demerger in May 2019. The stock is now down 20% at ₹382.
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