NBFC stock hits 10% upper circuit after tanking 50% in last 17 trading days

Shares of IIFL Finance were locked in 10 per cent upper circuit at Rs 353.50 on the BSE on Wednesday. This came after heavy volume trades, with only buyers seen at the counter. The stock of non-banking finance company (NBFC) has bounced back 13 per cent from its 52-week low of Rs 313.25 touched in intra-day trade today.

The average trading volumes on the counter more than doubled with a combined 5.6 million equity shares representing 1.5 per cent of total equity of IIFL Finance changing hands on the NSE and BSE. There were also pending buy orders for 2,40,000 shares on both the exchanges, data shows.

Since March 1 or in the past 17 trading days, the stock price of IIFL Finance has tanked 50 per cent after the Reserve Bank of India (RBI) barred the NBFC from sanctioning or disbursing gold loans or assigning/ securitising/ selling any of its gold loans. The regulator has, however, allowed IIFL to service its existing gold loan portfolio through the usual collection and recovery processes.

Meanwhile, the RBI will commence a special audit of IIFL Finance Ltd and JM Financial Products Ltd (JMFPL) to further probe their regulatory breaches from April 12, 2024.

IIFL Finance is barred from extending gold loans, on the other hand JMFPL is facing a ban on financing shares or debentures. While imposing restrictions on both entities, RBI stated that the business restrictions would be reviewed upon the completion of a special audit and after rectification of the deficiencies to satisfaction, the Business Standard reported earlier.

However, the management of IIFL Finance in a conference call on March 5 clarified that all the RBI observations were operational in nature and that there were no governance or ethical issues highlighted by the regulator. Notably, there were no compliance issues related to Anti-Money Laundering (AML) and Know Your Customer (KYC). Additionally, the management shared that there were no ongoing inquiries or inspections in any other product segments or subsidiaries of the company.

The management noted that it would like to rectify all the lapses identified by the RBI. The company will take this as an opportunity to introspect and improve its processes and build a stronger franchise in the longer term.

With the exception of the Rs 20k cap on cash disbursements, which will be implemented upon resuming disbursals, IIFL has implemented and rectified all other RBI observations, Motilal Oswal Financial Services (MOFSL) said in a in report dated March 6, 2024.

The actual financial impact will depend on the duration for which this ban remains in force and we will continue to closely monitor the developments over the next few quarters. While there could be near-term price volatility in the stock, we have maintained our BUY rating with our SOTP-based target price of Rs 560 (based on revised target multiples on each of its standalone, HFC and MFI businesses, in light of the recent observations made by the RBI), the brokerage firm said.

Key risks are sharper run-down in the gold loan portfolio and employee attrition if the ban remains in force for longer, and reputational damage which might necessitate renewed investments in building trust in its brand, MOFSL stated.