ILFS Investment Manager- Free Lottery?

Background: 

ILFS Investment Managers Ltd (IIML), is one of India's premier & probably one of the oldest PE funds. It manages various schemes/funds which invest in Real Estate, Infrastructure & other similar sectors.

Business Model: As IIML is a PE Fund, its basic function is to raise funds under various schemes and then invest the same in opportunities available in Indian space. 
The invested amount also known as the Earning AUM is what it earns fee income on . 

The income on this AUM has 2 components

1. Annual Management Fees: This is around 1.75-2 % charged annually, and is taken every year till the tenor of each scheme. This is the predictable revenue stream for IIML.
2. Carry Income: Each scheme has a defined hurdle rate ( around 11-13%). This is the bare minimum rate the fund will try to return, although this is not an obligation. If the fund is able to generate returns above the hurdle rate, IIML gets a certain percentage of the additional return generated ( 20-30%). These are accrued to IIML usually after the scheme ends and money is returned to investors in scheme.

From the above income, majority expenses are in form of salaries and overheads. The profit margins are around 33% and IIML distributes around 70% of these earnings in form of dividends. 

Present Situation:

The AUM of IIML is primarily invested in real estate and infra. Both these sectors have been in doldrums for last 3-4 years. This has led to the following for company

1. Negligible or no growth in AUM of IIML- Company has been trying to raise funds for last 2 years now, but might be able to raise just USD 100 mio by FY13. Management con-call says that outlook for raising funds remains bleak. Also, IIML will start having large exits of funds starting FY14-15 and thus AUM will further dip. No new funds and foreseeable exits, will lead to IIML having falling Earnings going forward
2. Negligible carry income- Since, real estate and infra have not performed there has been no carry income for the company. This has led to no kicks in earning of the company.

What is the bet now?

As discussed the revenue stream of IIML has 2 components, fixed income through annual fees and variable income through carry.  Let us assume the worst case scenario in which  IIML is niether able to raise fresh funds nor gets any carry income. 

Even in such a scenario IIML will earn the fixed annual fees. By understanding when do these schemes end we can predict the fixed revenue which will accrue to IIML over next 5 years or so and thus do an estimation of the earnings of the company. 

If the above exercise gives me a value which is higher than the market cap of company less cash, then we are entering a well run business with fixed revenues at a price lower than its liquidation value. This also exposes us to some other events like improvement in economic scenario leading to growth in AUM and subsequent increase in carry income. Also, by entering at this value my downside is protected since IIML pays out almost majority profits in form of dividend.

Estimation of Value:

I took the following assumptions ( based on historical data of company)  while try to find the value of company

1. Cost of capital= 10%
2. Fee income= 1.75%
3. PAT margin= 33% ( Historically it hovers in this range only)
4. USD/INR rate= 50

Schemes of IIML:
  

Fund	USD Mn	INR Crs	Start Date	Maturity
Growth Funds
Leverage India	153	765	2004	2013
Tara India fund	225	1125	2007	2017
Auto Ancillary	15	75	1998	-
South Asian Regional	25	125	1995	-
Total	418	2090
Infra Funds
AIG Indian Sectoral	91	455	1996	-
SCI Asia Growth	658	3290	2008	2016
India Project Dev	16	80	2000	-
Pan Asia Dev. Fund	45	225	2006	2013
Total	810	4050
Real Estate Funds
ILFS Realty-1	525	2625	2006	2014
ILFS Realty-2*	895	2237.5	2007	2015
Yatra & SIREF	430	2150	2007/09	2016
ILFS Milestone	229	1145	2007	2015
	2079	8157.5
Total	3307	14297.5

 * This is a 50:50 JV, hence I have considered only 50% of total AUM

Basis the above table, the earnings can be projected as given in table below:

Fig. in Crs	FY12	FY 13	FY14	FY15	FY16	FY17
Opening AUM		14297.5	13807.50	11182.50	7800.00	2360.00
Loss in AUM		490*	2625	3382.5	5440	1125.00
Closing AUM	14297.5	13807.50	11182.50	7800.00	2360.00	1235.00
Income
Fee @ 1.75%		241.63	195.69	136.50	41.30	21.61
Other income		13.53	10.96	7.64	2.31	1.21
Total		255.16	206.65	144.14	43.61	22.82
PAT@ 33%		84.20	68.20	47.57	14.39	7.53

* As per latest managment con-call IIML has already raised USD 66Mio and will be able to raise around USD 100 Mio by end FY13. This increase has been accounted for here


Since, we have estimated the earnings in case the fund is liquidated, we can do PV of these earnings to determine the worst case value of the company.

 

Cost of Capital	10%
		PV
1	84.20	84.20
2	68.20	56.36
3	47.57	35.74
4	14.39	9.83
5	7.53	4.68
Total		190.81

  This gives me a worst case value of Rs. 191 Crs. If I add cash of 100 Crs the value of the company is around Rs. 290 Crs. Thus any case IIML is not able to raise any further funds or does not get any carry income it can be approximately valued at around Rs. 290-300 Crs

Conclusion:

The present market cap is around Rs. 490-500 Crs as compared to liquidation value of around Rs. 290 Crs. 

For me it is not a free lottery yet, but i would be watching this idea very closely. Any, indication/ confirmation of IIML being able to raise funds, would lead me to revisit the above numbers.

Resources:
Link for XL sheet used is here
Company presentation is here 

Regards,
Saurabh
PS- Not invested