Buy IL&FS Investment Managers Limited - Motilal Oswal

We are initiating coverage on IL&FS Investment Managers Limited (IIML) with a BUY rating and 12-15 month price target of Rs 65.

INVESTMENT ARGUMENTS:

IIML is unique play as it is only listed private equity asset management company in India. An investment of Rs 10 in year 2000 would have yielded Rs 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.

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.

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 Rs 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.

Source : Equity Bulls

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