I got the idea of this stock from Prof. Sanjay Bakshi
discussion on Safal Niveshak.
About the Company
IL&FS Investment Managers is listed private equity which
invests in Real Estate and Infrastructure sectors.
It raises funds from Institutional Investors to invest
primarily in India. They have many funds and each fund has separate mandate to
invest in Real Estate, Private Equity and Infrastructure sectors.
Its Revenue is made of two parts - AUM fee and carry. Growth
and Private equity funds have higher fee in the range of 2%. Infrastructure
funds have lesser fee which is in the range of 1.5%. Future fund raises might
have some pressure on Fees
Each Fund has a threshold. If the management is able to
deliver over and above the threshold, then 6% of the return above threshold
accrues for the shareholders.
Al the funds have threshold in the range of 9-11% in USD
(except Leverage India Fund which has threshold in Indian rupees).
Company has been able to generate carry on one of its funds
in the past. Probability of carry seems to be remote (Except Leverage India
Fund) currently because of capital market situation as well as INR
depreciation.
For LIF Fund, company should be able to generate some carry
as it has retuned most of its capital and more importantly its threshold is in
Rupee which is beneficial for company in current scenario. Amount of carry though is difficult to
quantify now as it depends upon fund exits
Positives
- It is biggest Private Equity based in India. It has been listed from 1996, so has seen complete business cycles. Also it has the experience of three fund exits which no other private equity has in India. So if investment capital starts flowing to India again, it is one of the better placed PE to benefit from it.
- Company needs very less capital to grow. If AUM grows, it only has to hire new employees. Only other major expense apart from employee’s salary is admin expenses. As expense will not increase in same proportion as AUM, most of the AUM increase will flow to PAT.
- Also it pays very good dividend. Dividend yield
6.7% at current price. Also its dividends should increase if the company is
able to maintain its AUM
Negatives
- Saffron was acquired at 8.75% of AUM. Acquisition though not very pricey, but it was not cheap either. Management can fritter cash away in further acquisitions - probability low.
- Employee salaries are high. But I think that is part and parcel of PE industry.
- Company is facing difficulties in raising new capital and exits for 1-2 years now. Company will probably face DE growth for 1-2 years.
- Company might liquidate or move into losses if
it could not raise meaningful AUM in next 3-4 years. Probability very low but
possible
Financials –
Company had grown very fast from 2004-2008. But it cannot
see the heady growth seen at that time as it was from lower base of 300M USD.Employee
expense and other administrative expenses constitute majority of expenses ( Almost
45-50%).
Company should be able to pay off its entire loan by Sep
2013. Also company charges 24cr in depreciation/amortization, major part of it
is due to its acquisition of saffron.
This would continue for at least 3-4 years and it also would accrue to
shareholders as company doesn't need to replace any asset
Valuation
There are 3 possible scenarios facing this company
- First Scenario - Company is able to maintain its AUM in long term with some short term pain. I think possibility of this is high. In this scenario, it seems cheap by any valuation metrics at current Market Cap of 470Cr. Its PE is 6.5 and P/Free Cash Flow is less than 5. Enterprise value less than 4% of AUM.
- Second Scenario - Heaven smiles and we have bull market in India. Company will be able to earn carry as it will be able to exit faster and at good valuations. If it earns carry, it will act as a positive feedback loop on AUM. So AUM also will most likely increase. Apart from that company PE re rating will happen. In short , valuation could multiply a few times. Probability of this happening is less but can not be ruled out as fund has 3-4 years’ time at least.
- Third Scenario – Company is not able to raise AUM and not able to earn carry on any of the funds. Valuation for this scenario is below.
Assumptions
- EBITDA will remain constant at 52% ( it can vary due to USD-INR rate, but I am presuming a constant conversion rate of 50%). It means company will fire employee timely as its AUM faces de growth.
- Discount rate of 6% ( after tax Fixed deposit return)
- There could be other costs (liquidation costs) ,
but some of the funds have extension feature also. So they can possibly negate
other negative factors. Also LIF can get some carry for which I am not
ascribing any value.
I foresee Free Cash Flow for the company as 98 cr, 60 cr, 48 cr, 31 cr, 12cr for next
5 years. Current cash
is of around 100 cr. if I don't consider time value of money , then value comes
at 350cr.
If I use discount rate of 6%(opportunity cost of Fixed
deposit), then value comes around 320 cr.
So if i buy the stock when its Market Cap is less than 320cr it will at least return my Capital with
the possibility of big upside if the scenario 2 materializes. Worst case – I don’t win lottery (But I get my
money back). Best case – I win lottery (I get handsome
return on my capital.)
Disclosure – I have just invested a token amount in this stock
for tracking perspective.
