IL&FS Investment Managers Ltd Management Discussions

(I) Business Overview

1. Global Economy

Global growth, estimated at 3.2 percent in 2023, is projected to continue at the same pace in 2024 and 2025. The pace of expansion is low by historical standards, owing to many factors, such as high borrowing costs, withdrawal of fiscal support, longer-term effects from the COVID-19 pandemic, Russias invasion of Ukraine, the conflict in Gaza and Israel and increasing geo-economic fragmentation. Global headline inflation is expected to fall from an annual average of 6.8 percent in 2023 to 5.9 percent in 2024 and 4.5 percent in 2025, with advanced economies returning to their inflation targets sooner than emerging market and developing economies. Markets reacted exuberantly to the prospect of central banks exiting from tight monetary policy. Capital flows to most emerging market economies excluding China have been buoyant

2. Indian Economy

The countrys remarkable growth rate of 8.4% in the third quarter of the fiscal year 2024 surpassed all expectations. The global economy is expected to witness a synchronous rebound in 2025 as major election uncertainties are out of the way and central banks in the West will likely announce a couple of rate cuts later in 2024. India will likely see improved capital flows boosting private investment and a rebound in exports. Inflation concerns remain, however, these we believe may ease only in the latter half of the next fiscal year barring any surprises from rising oil or food prices

The strong tax collection, together with a lower growth in revenue expenditure, has facilitated a 26.5% increase in the capital spending by the government during April-January FY2024 as against same period in FY2023. The infrastructure spending creates a big multiplier effect for the economy. The current estimates indicate that the government would meet its fiscal deficit targets. State governments also exhibited positive growth in tax collections and capital expenditure. Further, the manufacturing PMI rose from 56.9 in February to 59.1, which is a 16-year high, driven by strong growth in both new orders and output. The services PMI too showed growth from 60.6 to 61.2 in March 2024

Buoyant automobile sales, growth in passenger traffic, robust GST collections, rising electricity demand and 18% y-o-y growth in household credit in January 2024, all reflect the continuing domestic demand. Flow of credit for housing from scheduled commercial banks has increased 30% during April-January FY2024 vis-a-vis the same period in FY2023. Rural demand is also increasing as reflected in growth in fertilizer, two-wheeler and tractor sales Slowdown in the hiring of IT professionals point to the need for caution regarding growth in service exports. FDI inflows, VC and PE investments and credit growth from banks to the manufacturing sector have also been stagnant in the current year vis-a-vis the previous year. The RBIs suggestions on the necessity of private players taking up the investment baton from the government imply slowing private investments. Consumer Inflation has been fluctuating between 5% and 6% over the past few months though within the 2% to 6% band set by RBI

Despite the global slowdown, exports performed well, probably because of the depreciated currency against the dollar. A strong digitization drive the world over, cost-cutting measures by business to deal with the impending slowdown, and the growing trend of remote working increased demand for exports of services in technology, where India has a comparative advantage. Interestingly, the share of business and professional services in total services exports also increased as companies globally now prefer outsourcing a wide range of activities, such as accounting, audit, R&D, quality assurance and after-sales service

High capital expenditure spending by the government over the past few years is now expected to crowd in private investments. On the other hand, private consumption improved to 3.5% YoY from the third quarter of fiscal year 2024. The index of industrial production of consumer durables and improved passenger and two-wheeler sales indicated a revival in private consumption over this period

The rapid growth of the middle-income class has led to rising purchasing power and even created demand for premium luxury products and services. Indias per capita income has steadily increased by 140% - from US$ 1,673.95 in 2014 to US$ 2,341.10 in 2022. With the rise of the middle-income class, the demand for luxury and high-end products and services growing faster than demand for basic goods. The number of middle to high-income households with increasing disposable income to rise, this trend will likely get further amplified, driving overall private consumer expenditure growth. But the challenge of rising household debt and falling savings could weigh on long-term growth sustainability. Controlling household debt to prevent it from crossing unsustainable levels will be essential to mitigate risks of debt overhang, maintain economic stability, and protect households against financial vulnerability. As India races to clinch the third spot in terms of GDP, the consumer market is also set to become the worlds third-largest by 2027. By 2030, close to one in two households will belong to either high or upper-middle-income categories with growing disposable incomes

The private sector has improved its balance sheet, indicating potential for increased spending and capital expenditures. Banks have also benefited from corporate deleveraging, improving their balance sheets and helping them emerge from the asset quality cycle. Additionally, high GST and direct tax collections have given the government resources to spend and

support the economy during the global slowdown. Consumer demand among the affluent remains strong, as evidenced by growth in the retail industry and the profit performance of consumer staples and discretionary companies

A continued shift in consumer and merchant behavior, matched with strong investor confidence, has ushered India into its ‘Digital Decade and set the country on a path to reach a $1T internet economy by 2030. Digital services are fast becoming integral to Indias 700M+ internet users, which includes 350M digital payment users and 220M online shoppers. As India undergoes a dramatic boom that will see household consumption doubling by 2030, digital commerce will invariably become even more entrenched in Indians everyday experience

India is in a mini-Goldilocks set-up, with stable hard macro indicators (GDP, inflation, CAD, stable currency) and resilient micros (Corporate earnings). Moreover, the expectations of political continuity with an acceleration in policy momentum will augur well for markets for the short to medium term. Investors continue to demonstrate confidence in India as one of the most promising growth economies in the current decade despite the gloom in global economies

3. Private Equity

2023 was a year of continued moderation as VC funding softened globally - investments in India decreased by nearly 65% over 2022-23, from US$ 25.7 billion to US$ 9.6 billion. Despite the decline, India remained the Asia-Pacifics second-largest destination for VC and growth funding

While overall volumes declined, seed stage deals increased from ~60% of volume in 2022 to ~70% in 2023 - driven by investors continuing to bet on the longer-term "India story," supply of deep pool of pre-seed/seed startups in India and continued participation from family offices. Start-ups prioritized runway and deferred rounds in a valuation challenged environment; investors exercised caution in deploying capital amid macroeconomic headwinds

Consumer tech, fintech, and software & SaaS attracted close to 60% of funding in 2023 and remained the dominant sectors. However, compared to 2022, their share reduced (by about 10 percentage points) as investors directed more focus on traditional industries (e.g., BFSI, healthcare) and emergent domains (e.g., electric mobility, generative AI). Electric mobility funding showed resilience as investors continued to bet on the maturing ecosystem and favorable policies

Fund-raising in 2023 slowed to US$ 4 billion, as previous record-setting raises (US$ 8 billion in fundraising in 2022) and cautious capital deployment stockpiled dry powder. There was a "change of guard" with domestic VC funds leading the charge and driving more than 90% of fundraising. Notably, domestic VCs launched numerous thematic funds focused on emergent themes and sectors, including sustainability. In contrast, major global VC funds remained reserved, having raised substantial funding in the previous year. Notably, maiden funds accounted for a quarter of the fund-raising, underscoring sustained investor interest in India as a promising investment destination

Exits surged almost 1.7x to reach US$ 6.6 billion in 2023 as investors sought to provide LPs liquidity in a high-interest-rate environment. Crossover funds contributed close to 65% of overall exits across a range of modes, including public trades, secondaries and strategic sale. The majority of exits in 2023 were through public market sales, contributing to nearly 55% of the total exit value

Over the longer term, global investors will likely remain bullish on India as an investment destination, as the markets demonstrated macroeconomic fundamentals, fiscal and monetary discipline, latent talent pools, and ever-expanding digital backbone present attractive prospects for venture building

1. Business Review

As in the past, the Fund team continued to focus on undertaking portfolio divestments, thereby enabling return of capital to Fund investors. The Fund teams also successfully furthered the various litigations, paving the path to further divestments

2. Financial Performance

On a consolidated basis, the Income from Operations of the Company for FY2024 was Rs. 519.24 mn and Other Income was Rs. 144.94 mn. Accordingly, the Total Income on a consolidated basis for FY2024 was Rs. 664.18 mn. The Total Expenses on a consolidated basis were Rs. 508.16. The resultant Profit Before Tax and Exceptional Items on a consolidated basis for FY2024 was Rs. 156.02 mn

(III) Outlook for the Financial Year 2024-2025

The adverse developments at the IL&FS Group have impacted all IIMLs business plans for revenue growth. The newly constituted IL&FS Board has been working on a resolution plan for the IL&FS Group. This plan calls for selling identified assets of the IL&FS Group. In this regard, IL&FS has again initiated the process to sell its holding in IIML. This process is underway

(IV) Business Segment and Human Resources

The Company presently operates in one business segment - fund management and related services

The adverse developments at IL&FS have had an adverse impact on employee morale and the Company has witnessed significant number of employee departures. IIML is in the fiduciary business of managing third party money and therefore human capital is key to monitoring and continuing the business model and further its sustainability

The Company presently has 17 employees

(V) Internal Control Systems

The Company has an adequate system of internal controls to ensure accuracy of accounting records, compliance with all laws and regulations and compliance with all rules, processes and guidelines prescribed by the Management

An extensive internal audit is carried out by an independent firm of Chartered Accountants. Post audit reviews are also carried out to ensure follow up on the observations made. The scope of the internal audit is determined by the Audit Committee and the internal audit reports are reviewed by the Audit Committee on a regular basis. The suggestions and recommendations by the Internal Auditors are implemented in a time bound manner to ensure that the internal controls and systems are adequate

The Internal Auditors also review all Related Party Transactions of the Company and provide the necessary reports to the Audit Committee on a periodic basis

(VI) Significant Changes

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefor, is as follows :