IL&FS Investment Managers — Buy

Investors with a high risk appetite can consider accumulating the stock of IL&FS Investment Managers (IIML). With its business entirely focussed on asset management, the company gives investors a good exposure to the long-term growth potential of private equity investments in India. What also helps is that valuations aren't pricey.

At current market price of Rs 33 a share, the stock trades at a price earnings multiple of 10 times its trailing 12-month earnings. Its market capitalisation is just about 5 per cent of its total AUM of about Rs 14,200 crore ($3.2 billion). The low valuations are partly a function of the weak market conditions. Once the markets recover, the company's proven expertise in managing funds may aid better valuations.

IIML's unique revenue model provides comfort on its ability to grow its revenues and profits. For one, the fee from its funds under management provides it an annuity income across market cycles. This means that any increase in its AUM would directly flow through to the company's topline. With the company looking to raise four new funds over the next year or two, the outlook looks promising.

Though the current investment scenario may not make it easy to raise funds, the company's track record of attractive returns and timely exits besides the vintage of its team puts it in a position of strength. For the coming year, the company expects to generate added fee income on at least an additional half a billion funds. Two, income by way of carried interest provides it with an additional boost. The management expects carried interest from its Leverage India Fund to begin accruing by the end of the current financial year. The next financial year could therefore see a substantial increase in carry income.

IL& FS Investment Managers specialises in three verticals — growth, infrastructure, and real estate — and manages ten funds on a consolidated basis. So far it has made over 140 investments and 69 exits, delivering a gross internal rate of return of over 25 per cent (in dollar terms). Last year alone, it made 15 full/partial exits across its three verticals, realising $221 million (about Rs 980 crore). Net growth in net AUM therefore is the key here.

Over the last five years, its AUM has grown at a compounded rate of about 60 per cent to about Rs 14,200 crore now. In the same period, it managed a compounded sales growth of over 24 per cent. Profit growth came higher at 31 per cent (compounded). For FY11, while consolidated revenue was up by 11 per cent to Rs 202, profits fell by about 6.5 per cent to Rs 69 crore. Profits were dented mainly due to the merger of Saffron Asset Advisors. While it added to the top line, a higher amortisation kept the total profits low.

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