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Suresh Krishnamurthy

FRESH investments can be considered in the stock of IL&FS Investment Managers (IIM). The stock trades at Rs 25.30, at a price-to-earnings multiple of nearly 13 times its earnings for the year ended March 2003. However, if the company were successful in enlarging the assets under its management over the next few years, the returns to investors could prove to be substantial.

In addition, the downside for the stock price from the present levels could be limited. The company has a high dividend payout ratio and paid out a dividend of Rs 1.70 per share in 2002-03. This works out to a dividend yield of 6.7 per cent. The company has also maintained dividend at these levels in the last four years.

However, the risk involved in investing in this company is high. The company's market capitalisation works out to only Rs 37 crore. The average daily traded volume is about 2,000 shares. Even this low volume could decline substantially if the company's performance weakens, and the investment can turn illiquid.

The only factor favouring the investment is the possibility of IIM emerging as a major private equity management firm. At end-March 2003, IIM was managing investments of about Rs 672 crore. It is one of the larger players in the Indian industry (ICICI Venture Capital being the largest) and is the only listed entity. It has six funds under its management now and a track record of more than five years.

IIM's major source of income is the fee for managing the funds. Since 1997, the fee income has only increased. The total operating income fell in March 2002 compared to March 2001. This was because IIM did not receive any money as its share from profit-on-sale of investments in that year. But for that, the operating income has shown an upward trend. Importantly, with the stock markets looking up, the prospect of profit-booking and, consequently, higher income as share of such profits is higher in 2003-04. In fact, IIM has indicated in its director's report that it expects to divest from a company in 2003-04. Over a longer term, share price appreciation will depend on the extent of increase in the assets under management.

The prospects appear better now than earlier. Institutional investor funds are flowing into India and the stock market is looking up.

In fact, IL&FS and Punjab National Bank have jointly floated a Leverage Fund, which will be managed by IIM for about 10 years.

Many such developments will be needed to boost the earnings growth of IL&FS to a higher level. Importantly, if it does turn out that way, the pay off for shareholders could be substantial.

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