I love companies that produce Free Cash Flow.
In this regard, I find IL&FS Investment Managers Ltd. to be a good investment.
The origins of IIML date back to 1989 when it was founded as Credit Capital Venture Fund (India) Limited (CCVF), an affiliate of Lazard Brothers. CCVF was the first private sector venture capital company in India, and managed a number of small sector focused funds apart from investing its own proprietary capital.
Infrastructure Leasing & Financial Services Limited (IL&FS) acquired CCVF in 1996, completed an intensive management and financial re-structuring, merged its own private equity business into CCVF and renamed it IL&FS Investment Managers Limited (IIML). This is a publicly listed company with IL&FS having a 52% promoter stake. The employees and directors also hold significant shares in their personal capacity.
Infrastructure Leasing & Financial Services Limited (IL&FS) acquired CCVF in 1996, completed an intensive management and financial re-structuring, merged its own private equity business into CCVF and renamed it IL&FS Investment Managers Limited (IIML). This is a publicly listed company with IL&FS having a 52% promoter stake. The employees and directors also hold significant shares in their personal capacity.
Basically, IIML earns a fixed management fee every year on its AUM. It pays its staff from that and the rest is profit. There is also a bonus in the form of carry profits when investments are divested. Pure FCF. The company maintains a mouthwatering 90% payout.
The AUM under the company is currently US$ 3.25 billion up from US$ 2.5 billion in FY 2009. By FY 2013, The company is confident of reaching US$ 4 billion in AUM. One fund is expected to be divested this year (and profits helped by carry).
The boost in AUM is due to a merger with Saffron funds. It has both a pro and a con. The pro is that this fund is listed on euronext so fund raising becomes very easy in form of FPO, hence reducing time to raise funds from close to a year to less than 6 months. The con is the debt raised to tune of Rs. 90 cr on LIBOR+ basis. This is the first time the company has raised any debt.
The company is an established player and has a very very well paid staff. The risk of staff going out of company is somewhat negated by these high salaries and somewhat by their share in carry profits (from team to team on a fund). Another red flag was the absence of a whistle blower policy, which is necessary when huge funds are being handled.
The positives are in abundance. There is good growth in AUM and margins. PAT margin exceeds 40%. The company is highly reputed and is a bellwether for the Indian PE industry. The management is very highly reputed. The funds have provided above average returns.
The management fee received in FY10 was close to Rs. 170cr. This year from Q3, the fee for saffron funds will also come in. So, one can expect close to 200cr in FY11. The staff expense is at Rs.42 cr and we take that for Rs. 50 cr this year. Other expenses also extrapolated from 25cr to 35 cr (which includes interest towards loan). Close to 25 cr will be paid in tax. So it brings us to 90cr of FCF.
The company is available at a market cap of 750 cr at price of 37 which I think is a very good buying price. The company is nothing short of magnificent in some aspects.PAT margins of 40%, ROE of 50%, Payout of 90% and this after paying everyone in the company fucking well.
