SECTOR:FINANCIALS

IL&FS Investment Managers Limited

STOCK INFO. BLOOMBERG

BSE Sensex: 18,179 S&P CNX: 5,462

(Consolidated) Y/E MARCH

ILFS.IN
REUTERS CODE

26 August 2010
Initiating Coverage
( `CRORE)

Buy
`51

ILFS.BO

FY10

FY11E

FY12E

We are initiating coverage on IL&FS Investment Managers Limited (IIML) with a BUY rating and 12-15 month price target of `65. INVESTMENT ARGUMENTS: IIML is unique play as it is only listed private equity asset management company in India. An investment of `10 in year 2000 would have yielded `62 as cumulative dividend till the end of FY 2010. Apart from this stock has returned 56% CAGR since 2002. Unique Play on Private Equity Asset Management: IIML is the only listed pure play private equity Asset Management Company (AMC). Investors get an exposure to the space in other listed entities like ICICI Bank and IDFC but in these companies large part of valuation is for their lending business.The company has one of the largest Assets Under Management (AUM) at ~$3bn at the end of FY2010 amongst Indian Private Equity Asset Managers. Very good return track record for assets under management: The company has delivered gross returns in excess of 27% for its largest fully divested AIG India Sectoral Fund. The Leverage India Fund, which is in divestment mode now, has delivered gross returns of ~40%. The gross returns, management track record and vintage of the team are the essential prerequisites for a private equity asset manager to keep growing its AUM. Therefore, good track record on delivered returns for its funds augurs well for IIML's future plans, where it plans to raise new funds worth around $ 1 bn during the next 24-30 months. (Table 1 on Page 2 ) Excellent track record in rewarding minority shareholders: IIML has always rewarded its shareholders by increasing its dividend per share.(41% CAGR since 2005) The stock market has rewarded this generosity by delivering a CAGR return of ~56% on the stock since FY 2002 till now. (Figure 3 and 4 on Page 4). Valuation and View: The AMCs generally trade at a 5-10% of their AUMs. IIML currently trades at ~8% of its AUM for FY2010 and 7% of its AUMs for FY12E. At our target price of `65 the stock will trade at around 9.5%/8.4% of its FY11E/FY12E AUMs, which will be around at 30% premium to median valuation range of 7% for the last 8 years. Apart from this, any Carry Profit and more than assumed increase in AUM will lead to further rerating of the stock. The track record of this company towards rewarding minority shareholders and excellent execution over the last 10 years should be the main premise for investing into the stock, rather than too much emphasis on the projected financials. (Figure 1 on page 2)

Total Income (` Cr) EBITDA (` Cr) RPAT (` Cr) BV/Share (` ) EPS (` ) EPS growth (%) P/E (x) P/BV (x) EV/EBITDA (x) Div yld (%) ROE (%)

181 113 74 6.5 3.6 19 14 8 8 3 66

198 121 77 8.6 3.8 4 13 6 8 3 50

215 128 81 10.7 4.0 6 13 5 7 3 41

STOCK DATA 52-W High/Low Range (Rs) Major Shareholders (as of June 2010) Promoter Domestic Inst & Govt. Foreign Public & Others Average Daily Turnover(6 months) Volume Value (` Cr) 1/6/12 Month Rel. Performance (%) 1/6/12 Month Abs. Performance (%) Shares Outstanding (Cr.) Market Cap. (`Cr.) Market Cap. (US$ m) Past 3 yrs Sales Growth (%) Past 3 yrs NP Growth (%) 58/35 51% 3% 4% 42% 325182 1.47 15/15/22 16/29/44 20.3 1031 221 44 59

Maximum Buy Price : `55

Rakesh Tarway (rakesh.tarway@motilaloswal.com); Tel:+912230896679

IL&FS Investment Managers Limited

Valuation and View (Figure 1): The dividend yield at current market prices work out to ~3% with a very good potential for upside in the stock considering environment towards foreign fund flows in India.
IL&FS Investment Managers Market Cap/AUM
30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Apr-06 Apr-08 Aug-03 Aug-05 Aug-07 Dec-02 Dec-04 Dec-06 Dec-08 Aug-09 Apr-02 Apr-04 Apr-10

This period was characterized by one of the highest foreign fund flows in India, which helped IIML increase its AUM by ~6x during 20052008. Optimism on funds flow in India in future augurs well for the stock.

Market Cap/AUM

Median Market Cap/AUM

Concerns: The stock will be very vulnerable to general outlook on Foreign Funds Flow in India. Any kind of adverse news on that front will not be good for the stock price performance. Any kind of adverse developments on key investee sectors of Infrastructure and Realty will be negative for the stock. Assets under management (Table1):
Fund Name AIG Indian Sectoral India Project Development India Auto Ancillary South Asian Regional Apex Leverage India ILFS India Realty I Pan Asia Project Development ILFS Milestone I ILFS Milestone II ILFS India Realty II Tara India III SCI IL&FS Asia Infrastruture Acquisition of Saffron Asset Advisors TOTAL
*Returns are gross of expenses and in US$ terms

Mode Divested Divested Divested Divested Divestment On Monitoring Mode Monitoring Mode Monitoring Mode Monitoring Mode Active Active Raised Raised

Vintage

Corpus $ in mn 91 16 15 25

Amt Invested 40 15 13 38 153 504 43 107 104 595 110

Return %* 27% 23% 18% 15% 41%

Jun-06 Dec-07 Jan-09 Jun-08 Jun-09

153 525 45 107 104 895 225 650 400 2951

26 August 2010

IL&FS Investment Managers Limited

BUSINESS MODEL Private Equity Asset Management Companies (AMC) draw their majority of revenues from couple of sources: Fund Management Fees: It is a fees levied by the company on investors of funds as a percentage of the total AUM. Generally, this fee is ~1.4% - 1.5% of AUM. Carry Profit Share: When funds are divested by asset managers for returning them to investors there is a profit share for the Asset Management Company, which is achieved if the fund delivers more than required return (Hurdle Rate) set by the investors. Illustration of Carry Profit Share:
Initial Investment Hurdle Rate* Realized Return Tenure (Years) Realized Amount Hurdle Amount Total Carry Profit (A)
All returns are on annual basis

100 15% 20% 5 249 201 48

Investor Share of A AMC Share of A Investor Share of A AMC Share of A (B) Employee Share of B Shareholder Share of B Shareholder Share of B

80% 20% 38 10 70% 30% 3

* Set at the time of commitment of funds by Investors

Financial projections and uncertainties associated with it :Generally, it is very difficult to gauge this Carry Profit share accruing to shareholders of AMC by an outsider unless one is fully aware of the investee companies in different funds, returns in these companies, exit periods from various investments etc. Therefore, it is safe not to assume any upside from this Carry Profit while taking investment decisions in the stock of an AMC. The revenue and profit for the AMC will be primarily driven by the Fund Management Fees and associated costs for human resources/operating costs. If shareholders realize any Carry Profit, it should be considered as good bonus! As it is clear now that to project financials of an AMC one has to primarily rely on projected AUMs and costs. The costs for the AMCs generally remain same in nature, with provisions for increase in manpower and operation costs. Future AUMs will depend on primarily two things - track record of the AMC in delivering returns and general environment for fund flows in India. Generally, AMCs set a target for new raising of AUMs with both timeline and targeted amounts. Both of them are not sacrosanct and very difficult to predict. IIML raised a new fund worth $650 mn in partnership with Standard Chartered, where it had targeted a raise of $800 mn. IIML has plans to raise new AUM worth ~ $1bn during the next 24-30 months. The company currently has AUM of ~$3bn. The projected financials for IIML are based on broad assumptions of future AUM taking into account its fund raising plans. We have assumed AUM of $3.1 bn and $3.5 bn respectively for FY2011 and FY2012. We have not assumed any carry profit share for projecting financials. But it is worthwhile here to mention that IIML is in the process of divestment from one of its funds (Leverage India Fund, invested amount $153 mn), where it is reporting to have realized gross returns of ~40%p.a. It will also have divestments starting in IL&FS India Realty Fund I (invested amount $504 mn), which will start some time in FY11- FY12 Growth in AUM : The company has managed to grow its AUM at CAGR of 75% during 2006-2010 from $300 mn to $2.8bn.This is a testimony to the management capability towards raising new funds and delivering returns to investors.(Figure 1 on Page 4) 26 August 2010
3

IL&FS Investment Managers Limited

Growth in AUM (Figure2):

AUM($Bn) 3

AUM growth at CAGR of 75% during 2006-2010.

0 2006 2007 2008 AUM($Bn) 2009 2010

Excellent track record in rewarding minority shareholders (Figure3):

IIML Dividend Per Share 3.50 3.00 2.50 2.00 1.50 1.00 0.50 2005 2006 2007 2008 2009 2010

Dividend CAGR of 41% during 2005-2010

Dividend Per Share

Stock Returns (Figure 4):

Market Cap (Rs Crore) 1400 1200 1000 800 600 400 200 0 Apr-02 Dec-02 Aug-03 Apr-04 Dec-04 Aug-05 Apr-06 Dec-06 Aug-07 Apr-08 Dec-08 Aug-09 Apr-10
IIML CAGR of 56% vs Sensex CAGR of 22% during 2002-2010

Market Cap (Rs Crore)

26 August 2010

IL&FS Investment Managers Limited

IVRCL: Financials and Valuation

IL&FS Investment Managers Limited- Financial & Valuation

INCOME STATEMENT (Consolidated) Y/E MARCH Fund Management Income Investment Income Total Operational Income Change (%) Operational Expenses Employee Expenses Operating Profit Other Income Depreciation PBT Ta x Rate (%) Exceptionals & Minorities PAT after Minorities 2008A 99 6 105 ( ` CRORE) 2012E 208 7 215 9 30 57 128 0 19 109 27 25 (0) 81 RATIOS Y/E MARCH EPS Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.)(%) Valuation (x) P/E(x) Cash P/E(x) EV/EBITDA(x) EV/Sales(x) Price/Book Value(x) MCAP/AUM(%) Dividend Yield (%) Return Ratios (%) RoE(%) OPM(%) NPM(%)
CASH FLOW STATEMENT

2009A 2010A 2011E 154 4 158 50 26 32 100 6 22 85 21 24 (0) 64 170 6 176 11 25 43 108 5 18 96 21 22 (0) 74 191 7 198 12 28 49 121 1 18 103 26 25 (0) 77

2008A 1.6 2.1 3.3 0.7 54

2009A 2010A 3.1 95 4.1 4.4 1.4 53 3.6 19 4.5 6.5 1.5 48

2011E 2012E 3.8 4 4.7 8.6 1.6 50 4.0 6 4.9 10.7 1.7 50

21 28 56 1 10 47 14 31 0 32

14 11 8 5 8 8 3

13 11 8 5 6 7 3

13 10 7 4 5 7 3

59 53 30

79 63 38

66 61 41

50 61 39

41 60 38

BALANCE SHEET (Consolidated) Y/E MARCH Share Capital Reserves Net Worth Minority Interest Loans SOURCES OF FUNDS Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Curr. Assets Debtors Cash & Investments Loans & Advances Liabilities and Provision Net Current Assets Net Deferred Tax Assets APPLICATION OF FUNDS 2008A 27 41 68 3 70 84 30 54 0.27 81 13 44 24 67 15 2 70 2009A 2010A 40 49 89 3 92 93 52 41 0.02 123 0 69 54 73 51 0 92 41 92 133 3 136 96 69 27 0.02 181 28 79 74 72 109 0 136

( ` CRORE) 2011E 2012E 41 134 175 3 178 106 87 19 236 30 132 74 76 159 0 178 41 177 218 4 221 116 107

( ` CRORE) 2008A 55 2009A 2010E 99 107 2011E 2012E 121 128

Y/E MARCH Op Profit Before WC Changes Working Capital Changes: Debtors Loans and Advances

(8) (22) 25

13 (22) (11) (20) (22) 56

(27) 4 (7) (30) (20) 57

(2) 0 5 2

(3) 0 7 4

Current Liabilities and provisions

Total working capital changes (5) Direct Taxes Paid Net Cash from Operations (16) 34

(26) (27) 98 105

(Inc)/Dec in FA 10 296 33 189 74 84 212 0 221 Equity Issuance/Repayment Debt Issuance/Repayment Dividend Paid Interest Paid Net Cash from Financing Inc/(Dec) in cash Add: Beginning balance Closing Balance (Pur)/Sale of Investments Interest & Investment Income Inter Corporate Deposits Net Cash from Investments

(29) 5 1 0 (23)

(9) (0) (4) (20) (33)

(4) 1 (0) (12) (16)

(10) (10) (30) (30) 0 0 0 0

(40) (40)

9 0 (12) 0 (3) 8 13 21

0 0 (17) 0 (17) 6 21 27

6 0 (32) 0 (26) 16 27 43

0 0

0 0

(35) (39) 0 0

(35) (39) 23 43 66 27 66 92

26 August 2010

IL&FS Investment Managers Limited

For more copies or other information, contact Retail: Manish Shah Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com

Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Group/Directors ownership of the stock 3. Broking relationship with company covered 4. Investment Banking relationship with company covered IL&FS Investment Managers Limited No Yes No No

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries.