Saturday, August 13, 2011

ILFS Investment Managers Ltd

At a time when retail investors are shying away from equity, and are all at sea as far as market volatility is concerned, I thought it will be good idea to discuss a stock related to equity investing itself.

Business & Operations:
1. Operating background
IL&FS Investment Managers Ltd (IIML) is the largest Private Equity Fund Manager in India with funds under management of the order of USD 3 bn. It is probably the only listed company which is a pure play on Private Equity (PE) space in India, covering the entire PE lifecycle right from raising funds, investing, managing, restructuring and going upto exits. There are other companies like ICICI and IDFC but they have a much larger lending business and not a pure play on PE business.

2. Parentage
IIML is a subsidiary of Infrastructure Leasing & Financial Services Ltd (IL&FS) which holds 51%. Latest shareholding pattern can be viewed here.
IIML manages funds on behalf of leading Indian and International institutions.

3. Revenue Model
I hope you are familiar with how AMCs in PE space work. Well, to keep it brief, there are 2 main revenue sources:
(i) Fund management fee – This is a fixed % fee that IIML earns on the AUM. Typically 1.5% to 2%. This fee is fixed for a fund and insensitive to market conditions. AUM has grown at an impressive CAGR of around 60% from 2006 to 2011, giving good revenue visibility on this component.
(ii) Carry profit share – This is a share in profit that IIML generates for its clients. Hurdle rate ranges in the region of 10-11% and carry is 20% of profit from investments at the time of fund exits. Shareholder share is typically 30% of the AMC share of carry. Realistically speaking, carry profits will begin accruing from FY13 and need not be factored in current year.

4. Business verticals
Over the years, IIML has managed funds investing across many business verticals:
(i)             Infrastructure
(ii)           Telecom & Technology
(iii)          Manufacturing
(iv)          Media & Consumer services
(v)           Retail
(vi)          Real Estate

5. Funds under deployment
(i)             Tara II – Fully deployed. It made 2 investments during Q1-FY2012.
(ii)           Real Estate II – Not yet fully invested, USD 150mio to invest.
(iii)          Infrastructure Fund - Not yet fully invested, USD 200mio to invest.
 Funds mentioned at (ii) & (iii) above are likely to be fully invested before end of this fiscal.

6. Exit experience
(i) Investment horizon is generally long term, say 3-5 years, and investment mostly in unlisted companies. Liquidity is mainly through IPO, Strategic sale, Buy-backs etc.
(ii) 3 funds are fully divested.
(iii) 51 investments are realized besides 21 partial exits/liquidity events.
(iv) Gross IRR of about 25%.

7. Notable Exits
Some of the prominent exits made by IIML over the years include Indraprastha Gas, Noida Tollbridge company, Hotel Leelaventure,Shoppers Stop, ABG Shipyard, Sasken Communications, IBN18 etc.

8. Fund raising
Following 4 funds are in the market:
(i)             Tara IV
(ii)            IL&FS Milestone Fund
(iii)           PIPE Fund
(iv)          Middle Eastern Fund

9. Strategic Initiatives
(i) During last year, IIML successfully completed merger with Saffron Asset Advisors which became effective since August 2010. The deal brought 2 new funds – Euronext-listed Yatra capital Ltd (Euro 220mn) and Saffron Real Estate Fund (USD 103mn).
(ii) The cost of acquisition was worked out at 8.75% of combined AUM that worked out at USD 35mn. To fund this merger, IIML raised debt of USD 20 mn at Libor related rates.
(iii) IIML opened an overseas office in Dubai to expand business presence in Middle Eastern region.

1. IIML has a well experienced management team with Mr SM Datta as the Chairman, Mr Shahzaad Dalal as Vice-Chairman and Dr Archana Hingorani as CEO & ED.
2. IIML employs 56 professionals handling different streams.
Financial summary:                                                    
Total Income (Rs mn)
Total Cost (Rs mn)
PBT (Rs mn)
PAT (Rs mn)
Networth (Rs mn)
PAT Margin (%)
EPS (Rs)
Dividend (%) for FV 2
ROE (%)
ROCE (%)
Auditors: Deloitte Haskins & Sells

Investment Rationale
1. We like IIML for its excellent business model which is quite de-risked.
2.Management quality makes a lot of difference to this business and IIML team is well experienced across cycles and has been together for fairly long time. They have demonstrated good deal sourcing capabilities.
3. IIML has first mover advantage in many of the verticals and will be benefited when exits are made. Carry profits will be an icing on the cake.

Risks & Concerns:
1.Exposure to real estate is on the higher side and liquidity can be delayed in current concerns over real estate companies.
2. Exits through IPOs are dependent on the state of stock markets, and given their depressed condition, this window would be on hold for the present.
3. One of the directors has sold sizeable quantity of stock in the recent past which is available on disclosures on BSE/NSE.
4. Higher depreciation/amortization due to saffron merger costs.

Stock parameters:
CMP: Rs.27.95 (FV Rs. 2); Market Cap: Rs. 575 crore; 52-week high/low (NSE): Rs.57.85/ 27.75;  200 DMA: Rs.36.64

Valuation parameters:
PE: 8.7; P/BV: 3.1; Dividend yield: 5% (based on DPS of Rs 1.50 for FY11).
But these usual yardsticks do not fit well for valuation of an AMC. We compare MCap with AUM to get an idea of its fair multiple. Since this is a pure play on PE investing backed by high ROE and ROCE with significant growth in earning AUMs, we consider 7% as a fair multiple.

By that estimation, this stock has a decent upside and we assign a price target of Rs 44 in next 12 months.

IIML could give investors excellent appreciation in next 1-2 years. Presently it trades near its 52-week low and offers very good opportunity to accumulate.  In the meantime, enjoy the high dividend yield.


  1. Hi Shikhar,
    Excellent Analysis. Hats off to you.
    I came across your blog through MMB ( Moneycontrol Message Board).
    I know this stock since Parag Parikh suggested it. (as per your liked books, I think you will definitely like his book - Value Investing & Behavioral finance)
    Actually he recommended it when it was 40. But since its falling down and has become more attractive.

    About Business model, No doubts. Unique PE business.

    One worry though,
    The large amounts of ESOPs taken by the directors at peanut valuations.( source -MMB)

    About director selling lacs of share, from MMB I came to know that Mr.Dalal is selling his holdings so as to become eligible for ESOPs.

    Can you please throw some light on the ESOPs.


  2. Hi Vikas,

    Thanks for the compliments.

    I agree with your point - ESOPs mean easy pickings for the top brass and dilution for minority shareholders. Last year alone some 2 mn shares have got added. Having said this, the structure of PE industry is such that quality of (wo)manpower makes the difference between stars and duds.

    You look at it right from fund raising, deal sourcing, leading negotiations, pushing investee companies sitting on their board to planning exits, selling stakes to partners or IPOing them and so on, we’re talking just about a dozen key people. Their total strength itself is 56.

    So obviously incentivisation for the team is a given.

    Actually, it’s not just ESOPs that make them rich (CEO now holds > 1%), you also have to take into account that out of AMC share of carry profits, 70% go to the team and only the balance 30% to shareholders. To add to all this, remuneration is healthy too - CEO’s package for FY11 at Rs 3.17 cr.

    I'd say so long as they do a decent job and on fair basis, everyone benefits and we pin our hopes there.



  3. Thanks a lot for your genuine reply.
    And I take this liberty to ask your opinion on mainly 2 stocks, which are not great business but decent business but definitely undervalued.

    1 - Balmer Lawrie Company
    2 - Bajaj Holdings.


  4. Well buddy, you’re welcome.

    Balmer is in my core portfolio, albeit from much lower levels; the kind of stocks I like. May be, I’ll do a post on it sometime.

    As for Bajaj holdings, I prefer operating businesses to passive holding companies. With 3 companies now in finance & investments verticals within Bajaj group – Finserve, Finance and Holdings – in my opinion, Holdings is the least attractive. If large discount to intrinsic value is one’s hope, the odds of this gap bridging in foreseeable future are low since there’s no practical trigger for that to happen. But classically, it looks a deal with dividends to boot.



  5. Thanks a lot Shikar for your valuable opinion.
    But do you think Balmer is a good buy @CMP?


  6. Shikhar,

    Kudos for a great analysis.

    Will keep a watch on IIML since we can possible get this at still lower price in current market.

    I have 2 questions for your consideration:

    1. How do you see impact of real estate turmoil on investments in IIML funds.
    2. Your views on how these guys post such a high profit margin of above 30%. and whether they can maintain such outsized net margin when the interest rates are moving up.

    Much appreciate your kind response.

    Best wishes,


  7. Hi, Vikas

    On Balmer, you're seeing it's not collapsing like a lot of other stocks.

    Generally, stocks fall more than their DPS when they go ex-dividend, and that's a point to accumulate.

    Ultimately, it's an investor's call.

  8. Hi, Sanjeev.

    Thanks for your observation.

    1. Real estate & Infra is among larger allocations in the funds managed by IIML. In fact, negative news flow regarding DB realty where they have investment, was part of the reason that subdued IIML stock. So, impact of these cannot be ruled out.

    2. For understanding profit margins, you'll have to go back to its business model. In AMC business, it's very much sustainable to have similar margins going forward. That's what I meant when I said taking investment call on a pure PE play.



  9. Hi Shikhar

    As always, neat analysis. i'm trying to understand their business model.
    Suppose one of their investment into real estate turns bad,what happens if they're not able to exit a investment in promised time horizon ? do they've a choice to wait for couple of more years ? or will they exit with loss ? Any idea if this has happened in case of IIML ?
    If they do not exit investment after promised date, will they keep on getting fund management fee for that investment ?

  10. On the business model,
    a) Management fee accrues over life of the Fund.
    b) Exits & Liquidity events are not limited to IPO alone.
    c) There are other modes like Trade sale, Buy-back, Strategic sale etc.
    d) Not being able to exit is not a major risk, though slowdown in economic scene can impact AUM momentum & IPO activity.
    e) Overall IRR of 25% bears evidence to that.