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
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
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
- 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.
- 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
- 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
- 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
- Cost of capital= 10%
- Fee income= 1.75%
- PAT margin= 33% ( Historically it hovers in this range only)
- USD/INR rate= 50
Schemes of IIML:
* This is a 50:50 JV, hence I have considered only 50% of total AUM
| 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 |
Basis the above table, the earnings can be projected as given in table below:
* 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.
| 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 |
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 |
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
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
Saurabh
PS- Not invested
Hi Saurabh,
ReplyDeleteInteresting perspective! I have been holding ILFS Investment managers for quite some time and do believe there is a huge potential for value creation. However, with the challenges in infra and real estate, the company has been facing tough times.
With regards to your financial modeling, taking a flat 33% PAT across the years might not be appropriate. As you have rightly mentioned, mostly the costs for the company are salaries and overheads which are largely fixed in nature. Looking at the projections, in FY 13, the total cost would be 170.96 crores (Revenue of 255 less PAT). That cost becomes 15.29 crores in FY 17 as the total income reduces significantly and PAT margin remains at 33%. That seems extremely unlikely. Perhaps a better way would be to look at costs as an absolute number and then do some tweaking to arrive at profit numbers.
Nevertheless, for the patient investor, I still feel this is a good candidate for value investing.
Hi Aditya,
ReplyDeleteThanks for the inputs. The reason why i have taken standard rate is because of the way investment bankers behave. Even though, most are very well paid their remuneration/overheads seldom decreases, which is evident here also.
So, yes maybe we can tweak the figures, but i would want to be on the cautious side here.
regards,
Hi Saurabh
ReplyDeleteRequest you to share your detailed thoughts regarding Magma Fincorp.
Thanks
Rajat
Hi Rajat,
DeleteI have been just to lazy to write about it :). We can discuss this over emails. Do drop me a mail@ constant.seeker00@gmail.com and lets take it ahead. Hopefully i will publish our conversations as a blogpost on Magma ;)
Hi Saurabh,
ReplyDeleteThere are 2-3 issues that i found with the analysis.
(1) If you are considering liquidation value, then you should not consider PAT. You should add Depreciation and Amortization which will also be distributed. Amortization is decent figure in ilfs case because of their acquisition of saffron fund. This should increse your liquidation value estimate.
(2) You are considerting PAT as fixed percentage which is not appropriate. revenues are going to be decreasing if it will liquidate. But my understanding is that expenses ( salary etc) may not decrease at the same pace. Also downsizing has its costs. I think PAT% will decrease .
(3) lastly i think your discount rate is high considering you are using liquidation value. One should consider it like an fd.
Amit
Hi Amit,
ReplyDelete1) Thanks for pointing that out. Let me try and put up the revised calculations.
2) To keep things simple, i have given that benefit of doubt to Investment Bankers at ILFS :). I am sure salaries will not decreased and PAT will be lower.
3) Discount rate is again conservative, but honestly for a period of 3-5 years, 1-2% change in discount rates doesn't change valuation by much.
Regards,
saurabh
Hi, this may be very silly question but need clarification, where do pe funds show aum in the balance sheet?
ReplyDeleteHi Anonymous,
ReplyDeleteFirstly no question is silly :) We all learn from each other. Ideally AUM should reflect in investments of a PE fund. But [practically most PE funds put money in SPV ( which is shown in investments) , which then puts the money in various opportunities. Best way to get details of these investments is through company website and their presentations.
Regards,
Thanks for the explanation, but should it reflect at all, because i believe since the ultimate holders are investors, it should show in the balance sheet of investors and not the Manager?
ReplyDelete