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.
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:
(ii) Telecom & Technology
(iv) Media & Consumer services
(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.
Total Income (Rs mn)
Total Cost (Rs mn)
PBT (Rs mn)
PAT (Rs mn)
Networth (Rs mn)
PAT Margin (%)
Dividend (%) for FV 2
Auditors: Deloitte Haskins & Sells
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.
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
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.
Outlook: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.