Il&fs investment managers hbj capital

IL&FS Investment Managers (IIML)
- A Perfect Dhandho Investment with Low Risk & High Reward

Content Index
• IL&FS Investment Managers – Investment Snapshot :- Slide #3
• Industry Opportunity – An Overview:- Slide #5
• IL&FS Investment Managers – Business Overview :- Slide #10
• Investment Rationale :- Slide #17
• IL&FS Investment Managers – Financials:- Slide #26
• Concerns & Reasoning :- Slide #28
• Conclusion :- Slide #31
“ Specialists in discovering Multibagger stocks “

IL&FS Investment Managers – Investment Snapshot
(as on October 30, 2012)
Recommendation :- BUY
Maximum Portfolio Allocation :- 7-8 %
Investment Phases & Buying Strategy
1st Phase (Now) of Accumulation :- 40%
2nd Phase (July -2013) of Accumulation :- 60%
Current Accumulation Range :- 23-26 Rs
The 2nd Phase of buying can happen after 6 months, when there
would be more clarity of future Fund Raising – even if it means a
Higher Buying price as it would clear a lot of uncertainties and
Position this stock as a Core Portfolio Pick.
Core Investment Thesis :
An Unique Business Model (Only Listed Pure Asset Management)
which has the Potential to deliver Strong Return for Shareholders
by focussing on a Strong Structural Growth Opportunity. This
Company like CRISIL is one of the few Financial stocks which
doesn’t require Capital for Growth and has a High Dividend
Payout. Valuations are attractive enough to limit the Downside,
while positive Improvements can help earn Multibagger Returns.
Current Market Price – Rs. 25.3
Current Dividend Yield – 5.85%
Bloomberg / Reuters Code –ILFS IN/
ILFS.BO
BSE / NSE Code – 511208 / IVC
Market Cap (INR BN / USD Mn) – 5.32 /
98.5 [1 USD – Rs. 54]
Total Equity Shares [Mn]– 210
Face Value – Rs. 2
52 Week High / Low – Rs. 32 / Rs. 23
Promoter’s Holding – 50.32 %
Institutional Holding – 4.88 %

Key Investment Highlights
1) A One-of a kind Unique Company in the New Generation Private Equity Industry with has Huge Growth Potential.
2) Company is a Leader in the Private Equity with Strong and Durable Competitive advantages to sustain it going forward,
especially in the Infra and Real Estate sector where it has good Moats.
3) The Business doesn't require any Capital for growth which can be seen from the abnormally High Dividend Payout ratio
of > 80% in the Standalone entity. This ensures consistently High Dividend and Return on Invested Capital.
4) Business Model of the company makes sure that Share Holder's are rewarded heavily and this can be seen from one of
the Best Return on Equity (ROE's) of >50% consistently. These returns can in fact inch Higher with increased AUM.
5) This stock is a high Dividend play and would give Stability and Cash Flows for your Portfolio with its Dividend Yield of >
5.5% at current market prices. Moreover, High Dividend Yield will allow Investors to continue Holding onto the stock.
6) The Management which is Top-Notch in both Competence and Integrity in an Industry where the stability of the Core
team along with their Network and Skills is the Differentiating factor.
7) Company is promoted by one of India's Top Business Houses (IL&FS Group) which is known for its high Quality
Corporate Governance practices and Share-Holder friendly actions. Group has a good working relationship with Govt.
8) IIML Stock which has created a good history of Huge Shareholder Value creation, which can be seen from the following
facts. (By Investing 1 Rupee in the stock in 2002, you would have received over 10 Rs as dividend by now and also the
current Share value would be over 33 Rupees.)
9) Stock has two Key triggers in the form of New Fund Raises and Carry Profit which is not being discounted by markets
and the stock has the potential to generate very strong returns over the next 3 years for Investors.
10) In spite of all these positives, share is available at attractive valuations. It is available at a Price to Earnings (P/E) of < 8
and Price to Book (P/B) multiple of < 2. In fact the company is quoting at a 50% discount (~ 4X AUM) to its Global Peers
which have a much lower Growth potential.

Industry Opportunity & Potential
- An Overview

Private Equity Industry
• Globally Private Equity Industry has shown good growth over the past 2 decades providing the much
needed Risk Capital to Private Enterprises and has helped scale several Businesses.
• Good Fund Managers have been able to scale up their Business successfully and now there are a Handful of
Private Equity investors who have a Portfolio size of > 100 Billion $’s.
• Globally different models of Private Equity has evolved over the period including Leveraged Buyout’s
(LBO’s), Control Investing, PIPE Investments, Venture Capital, Roll-Ups etc. Most of Indian Private Equity
managers work on simple PE Model.

Successful Private Equity Requirements
Fund Raising Deal Sourcing Deal Making Portfolio Value- Add Exit
• Successfully managing a Private Equity Asset Management involves Fund Raising, Deal Sourcing, Deal
Making, Portfolio Value Add and a good Exit. Strengths on each of these areas is of prime importance for
being a successful Private Equity Asset manager.
• The Business as such may not have direct Moats – but there are several Indirect Competitive Advantages
like Track Record, Exit Record, Sector Specialization etc. All these would help a successful Private Equity
Investor to become even more successful. Here clearly, Success breeds Success in this Industry.

Indian Private Equity Opportunity
• Indian Private Equity industry has grown with the Indian growth story with the boom years of 2003-08
attracting huge amounts of Global Capital into India.
• India still has a lot of potential considering its Fast Growth requiring Huge Foreign Capital and the Scale of
Opportunity. Penetration of PE Investment as % of GDP can improve from the current levels.
• Over the past 15 Months, the India growth story has lost some of its sheen due to Macro Economic
problems (Twin Deficits) and Political instability. The Tax uncertainty which arose out of GAAR also made
most Global Investors nervous on India. While a few of these issues have been sorted out, still the levels of
Optimism is far from the 2008 levels.

Sectoral PE Funding Opportunity
• The Biggest requirements
for Capital will come from
Capital Intensive sectors
like Infrastructure and Real
Estate across the country.
• As can be seen from the
images, the requirements
for Equity Capital in
Infrastructure space would
be huge going forward and
there is a definite need for
Private Equity Investors in
this space.
• Infrastructure and Real
Estate together contribute
to over 60% of total
disbursements in the
Private Equity Industry and
they target for an IRR
upwards of 18% which will
help them earn good Net
returns for Investors.

IL&FS Investment Managers – Business Overview

IIML – Business Model
• IIML has a very strong
Business Model where it earns
a recurring and stable
revenue of 1-2% of AUM as
Management Fee.
• There is also a volatile and
unpredictable Revenue stream
in the Form of carry profits,
but it can generate Bulk profits
with Good Performance of its
Invested Funds.
• There is no Investment Risk
as such, as these Investments
do not reside in the Balance
Sheet and there will be no
Write-Off or decrease in Value.
• Also the High Share of Carry
Profits to Management which
is inline with Industry
standards helps IIML to retain
talent. Average Hurdle Rates
range around 11%.

IIML Fund History
• IIML is one of the pioneers of
Indian Private Equity Industry
with its Fund Management
business started as early as 1995.
• IIML as a company has seen
more than 2 Economic cycles and
hence has the experience of
surviving through the tough
times unlike the New PE firms.
• IIML has pioneered in Raising
several New fund formats like
Real Estate, Infrastructure, PIPE,
Auto Fund etc.
• IIML has a strong Collaboration
with specialized Investors like
Milestone, Stand Chartered etc
which shows the Growth
intentions of IIML.
• IIML has been on the road to
raise 3 New Funds, most of which
are expected to reach First Close
by March of 2013.
Current Fund Raising
-Tara IV Growth Fund
- PIPE Fund
- Middle East Infra Fund

IIML – Overall Snap Shot
• IIML is India’s Largest Private Equity
Manager with AUM of over 3.2 Billion S’s.
Out of which around 2.4 Billion $’s fall under
Earning AUM slot.
• IIML has consistently grown its AUM from
0.3 Billion 6 years back. The rapid rise is what
contributed to strong Profit Growth.
• IIML had also gone in for Inorganic Growth
through acquisition of Saffron Asset Advisors
at around 8.5% its AUM, which helped it to
acquire Yatra Capital which is an Open Ended
Real Estate Private equity platform.

Growth Private Equity
• Growth Private Equity is the foremost vertical
in which IIML has first started PE operations.
• It has a very strong track record in Growth
Private Equity which can be seen from the 4
Fund raises which is has done in this Sector
with successful divestment of 2 Funds.
• IIML has expertise across Sectors in Growth
Private Equity with its Portfolio across different
sectors of the Economy.
• Growth Private Equity has become highly
crowded with several new PE Investors
sprouting in this segment. But still Growth PE
gives the best Fund Management Fee in the
form of 2% of AUM.
• Also considering higher IRR of these funds,
the Carry Profits are good for Investors.
• With the economy growing across sectors,
there would be several opportunities for
deploying Growth Capital in several private
companies in these sectors.

Infrastructure Private Equity
• Infrastructure Funds are usually much large
compared to Growth Private Equity, but
have lower Fund Management Fees.
• IIML with its Parentage has a strong
presence in the Infrastructure PE segment
and will continue to dominate this space.
• Infrastructure in itself encompasses a
whole range of Sub-Sectors which can be
seen from the Investment Break up.

Real Estate Private Equity
• IIML has a strong Profile in Real Estate with several successful investments across the sector. Its portfolio is
also well diversified across Geographies, minimizing the Risk of the Portfolio.
• IIML also has its own proprietary Real Estate arm QVC which undertakes real estate projects by leveraging
the parent’s contacts and Knowledge in this space.
• Indian Real Estate continues to be very buoyant and IIML would be able to generate decent returns on its
portfolio. It also structures Investments in different ways like Fixed Return, Lease Rent Models etc. With its
strong expertise in this sector – IIML will continue to be one of the leaders in this segment helping Investors
earn a decent return on their capital.
• IIML is the first company in
India to raise a Pure Real
Estate focused fund.
• It also has a Open End
Platform in the form of Yatra
and a collaborated Real Estate
fund with Milestone Advisors
whose entire focus is Indian
Real Estate Market.
• IIML has several exit routes
in its Real Estate funds and
companies has a very diverse
Portfolio across sub-segments

Investment Rationale

Key Highlights
IIML’s Business Model makes sure that it has a
Predictable Revenue Stream in the form of
Management Fees + an Upside for Good work
in the form of Carry Profits which provides the
right Incentives for Long Term Share Holder
Value Creation.
Great Business Model
The Opportunity for Private Equity
Capital into a developing country
like India is huge and considering
the Moats of IIML, it would be the
best way to play the growth of PE
Industry in India - especially in
Infrastructure and Real Estate.
Huge Growth
Opportunity
IIML has strong Record across all stages of
Fund Management from Fund Raising,
Selecting Investments, Nurturing them to
Exiting out. Also IIML is one of the few
Investment Management companies in
India which has seen two Full economic
cycles and has delivered strong returns to
all stake-holders.
Strong Track Record
We believe the Markets are not factoring
two potential upsides to the stock in the
Form of New Fund Raises once the
overall environment improves + Potential
Carry Profit. If these materialize the
profit from the stock would be
tremendous for Share-holders.
Potential Upsides
IIML is available at attractive
valuations which factors in several
risks. Under-Valuation can be seen,
1.) MCAP/ AUM = 0.4X
2.) Price/ Earnings = 7X
3.) Dividend Yield = 5.85%
4.) Price/ Book Value = 2.27X
Healthy Valuations
IIML

Strong Competitive Advantages
• IIML has strong Invisible Moats in the business which will help it to maintain its dominance in the Indian
Private Equity space. Company’s moats extends to all processes of a Fund Management company which is
from Fund Raising, Deal Sourcing, Portfolio Management to Exits.

Fund Raising Capabilities
• IIML has well established relationships with several Institutional Investors built over the past many years.
Company continues to strengthen its Fund Raising abilities by partnering with various Institutions and also
expanding its Geographical reach. In fact, IIML has been working on establishing Offices across the Globe to
raise Funds from Local Investors like in Middle East where it is starting a new Infrastructure Fund.
Considering IIML’s track record, Parentage and Management – it will continue to have an edge over other
Asset Managers to raise funds during tough phases as it did during 2008 & 2009.

IIML – Strong Parentage helps Deal Sourcing
• IL&FS (Infrastructure Leasing & Financial
Services) is one of India’s largest
conglomerates with annual revenues in
excess of 2 Billion $’s.
• IL&FS is promoted by several reputed
Institutions and is a Board run company.
The group has very good relationship with
the Government which has been
established in several instances.
• The Group is especially strong in
Infrastructure where it currently is
involved in over 30 Billion $ worth of
projects which is next only to L&T.
• This Strong parentage helps in better
Deal Sourcing, Value Addition etc in the
Infrastructure space which is a huge
positive for IIML.
• IL&FS group’s backing also helps the
Investee companies in several ways,
helping IIML to land on several sweet
deals and generate strong returns.

Successful Investments
Infrastructure PE
Real Estate PE
Growth PE

Good Track Record
• IIML’s fund performance impacts its Future Fund raises and also in the amount of Carry Profit generated.
The usual Hurdle rate is around 11% and the recent funds are pegged to Dollar Returns.
• On a base of 2 Billion $’s any outperformance over its hurdle rate will throw huge amounts of Cash for
shareholders in the form of Carry profits. While the dollar appreciation would have hit the Investment
portfolio of IIML, any shift in the same would provide good benefits on overall IRR.
• IIML has a strong Track record of earning good returns for its Limited Partners over all its Funds. Its also is
comfortable in several Exit Formats which can be seen from the exits which it has been able to get even in
the tough Market conditions of 2011 & 2012.

Healthy Financials
• IIML has been able to grow its profits over 10X in the last 10 years. The good thing has been the
consistently high Dividend Payout Ratio along with Operating profit Margins > 50% sustainably. It can be
clearly seen that the growth of IIML doesn’t require any additional capital helping Investors to fully profit
from the growth of IIML’s business.

Attractive Valuations
• It can be clearly seen from the No's below that,
Markets are pricing in the Worst Case scenario
where there would be no significant Carry Profit and
also the AUM will dip sharply over the next 3-4 Years
• We strongly believe that with these kind of
Negatives priced in, the further downside is very
negligible and can arise only from a complete Write-
Down of India Growth story.
• On the Upsides, with the Environment changing
IIML will be able to generate significant Carry Profits
(even small Outperformance on AUM of 2 Billion $’s
will give Huge Profits). Also future Fund raises can
help the company to sustain and grow its AUM.
Present Market Capitalization = 532 Cr
Current Enterprise Value of IIML = ~ 450 Cr
Visible Management Fee Revenues = Till FY-16
Average Free Cash Flow (FCF)/ Year = ~ 65 Cr
Conservative Estimates of Total FCF till FY-16 = ~ 260 Cr
Present Value (PV) of FCF till FY-16 = ~ 220 Cr
Decoding Current Market Valuation :
So, basically the PV of Terminal Value of IIML by Stock Market = ~ 230 Cr which is (450 of Current EV -220 of PV of
FCF till FY-16)
Hence the Terminal Value of the Business based on current Market Capitalization in FY-16 = 300-320 Cr
Required FCF after FY-16 to hold on to the desired Terminal Valuation = ~ 30-40 Cr
So, Average Asset under Management dip after FY-16 which the Market is pricing in = over 40% ( Since even 1.5
Bn $’s of Earning AUM can generate 30 Cr of FCF)

Financials

Earnings Projection
Financial Parameters (INR Cr) FY 11 FY 12 FY 13E FY 14E
Revenue 197.33 220.60 220 221
Operational Expenditure 34.7 44.88 44.4 48.4
Staff Costs 46.07 57.12 56.6 61.6
PBIDTA 116.56 118.61 119 110
Interest Charges 12.61 15.69 15.5 6
Depreciation 26 26.5 27 27
Other Income 11.18 12.5 14 14.4
Profit before Tax (PBT) 89.13 94.92 90.37 91.01
Tax Payable 20.11 21.39 20.37 20.51
Profit After Tax (PAT) 69.02 73.53 70 70.5
Diluted EPS 3.11 3.29 3.21 3.20
Cash Earnings per Share 4.5 4.6 4.5 4.5
Book Value per Share 8.62 11.2 11.3 11.4
• The Changes in the Topline for
the next year would vary, if the
Rupee is to move in either
direction substantially. All
estimates are slightly on the
Conservative side.
• Management has been able to
control its expenses in line with
Revenues, which has helped it to
maintain its Margins consistently.
• Cash Earnings per Share is a
little higher considering the
higher levels of Amortization
owing to Saffron Buyout.
• Company will be able to
generate Free Cash Flows
consistently over the next 4 Years
in excess of 60 Cr Rs which will
help it to reduce Debt and
increase the Profitability slowly.
Specialists in discovering Multibagger stocks “

Concerns & Reasoning
1.) Low Volume Stock :
IIML Stock has very low Volumes which is a Risk for Liquidity of any Portfolio. But considering the fact that
it’s a Long term bet, Investors can both accumulate and exit out of the stock in phases.
2.) Macro Economic Issues + Political Uncertainty :
At the end of the day, growth story of IIML is nothing but the increasing Capital Requirements for the Infra &
Real Estate Industry based on India’s development. Hence any issues with respect to India’s Macro Economic
variables will affect IIML – especially Rupee Movement. On the converse, wit India’s growth IIML will be able
to capitalize on the Increased Global Investors appetite for investing money in India.
3.) Investing Mistakes which can dent Further Fund Raises :
Though none of the Investments directly lay on IIML’s books directly, a bad decision will affect further Fund
Raises. IIML’s investing failures in DB Realty & karturi Global has not been taken well by the Market. But we
feel, in any portfolio there would be duds – but the Management's experience will enable better
performance than most other Fund Managers.
4.) Not able to Deliver Sustainably High Returns + Exit Issues :
Exits in India have been one of the key issues for most PE Investors and IIML would also be affected to an
extent by the subdued environment especially over the next 4 years when it needs to Exit profitably for
receiving any Carry Profit.
5.) Increasing Competitive Intensity and High Cyclicality :
Private Equity as an Industry has seen immense competition in the Boom times & also has Cyclical
characteristics. But buying the stock at the bottom of the cycle will enable good returns for Investors.

Conclusion

Price Chart
• IIML Stock has been in a consistent Correction phase since
late 2010, from which the India Growth Story started
receding amongst Global Investors.
• Stock has strong Support at 24 Rs, below which its
Dividend Yield will start looking better than Fixed Income
Products – hence capping off further decline to an extent.
• Promoters share has been consistent for the past many
years as there has been no major dilutions except for
regular ESOP’s. There has been several purchases over the
past few months from Company Insiders which is a good
Sign for improvement in the Stock.
Share
Holding %
June
2012
Mar
2012
Dec
2011
Sept
2011
Promoters 50.32 50.44 50.44 50.44
FII 3.22 2.81 2.77 2.75
DII 1.66 1.71 1.90 1.94
Decent Correction in Share Price

Conclusion
A Dhandho Investment Opportunity is one where an Investor can take an Out-Sized bet in a trade which
has characteristics of Low Risk and High Return on probability basis. As we can see, IIML is one stock where
there is a very low probability of the Investor losing his money – but if things work, the Investor has hit a
Jackpot. Valuations is the one which is providing downside support to the stock while the Upside Potential
comes from its Strong Business Model combined with durable Moats.
IIML is the only listed pure play Asset Management company in India. Actually speaking, the company
like IIML does not have any need for listing as there is Zero Capital requirement for growth and the primary
reason for its listing has been its history (It got listed in Late 90’s when it had other businesses). Company’s
Management has in fact tried to de-list itself through Buy-Back two times in the past, but have been
unsuccessful in it. Its business Model will continue to throw cash going forward as the company would not
like to move into Proprietary Investment or LBO’s etc.
Even though the recent Economic Downturn might have a sentimental impact on the Global Fund flows,
no one can remove the fact that India will continue to be one of the fastest growing economies in the world
with huge capital requirements for Infrastructure, Power and other sectors of the Economy. This will present
huge Opportunities for Private Equity Asset Managers and this is a strong structural trend and the scalability
of the model is very high unlike its Peers.
Considering the High Dividend Yield the stock provides at the current valuations, any Investor can
patiently wait for the positives to occur as he doesn’t have any significant Time loss. At around 6% Post
Tax dividend yield, its almost equal to other Interest Instruments in the Market. In addition to this, we
have chances of Improving Revenues from new Asset under Management (AUM) + Carry Profits (Existing
Funds)+ P/E Expansion (Better Future Visibility) which will help the company to grow its profits and allows
Investors to earn good Returns on their Money. Hence, IIML is a Perfect Dhandho Investment.

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