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You are here : IndiaNotes >> Research & Analysis >> Companies >> Nesco Ltd. >> Research

NESCO: A study from investment point of view

Namrata Shah | 24 Nov, 2015  | Follow Author | Add to my Favourites 
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How I Identified stock


My father is in business of supplying construction material, hardware tools and paints. Most of the Sundays, he would visit Bombay exhibition and convention center located in Goregaon(E). He finds such exhibition very useful for small businessmen like him. In exhibition, he would meet companies’ representative and also representative of competitors and learn about new products and services available by way of live demonstration. Then he would take contact details and analyze how he would incorporate these new products into his current product portfolio.


One Sunday morning, I accompanied him to exhibition. I was thrilled ample of area reserved for parking and permanent structure of exhibition center. We could avoid scorching summer heat outside, by checking new products in this air conditioned hall. We completed checking out all stalls by early evening. While, returning I was amazed to see the crowd of enthusiast people flocking at exhibition hall. The boundless area that was reserved for parking was almost full with cars and bikes.


Returning to home, I decided to study company ‘Nesco’ that owns land of Bombay exhibition and convention center from investment point of view.


Investment Rationale


- Consistent and secured cash flow: Revenue is in the form of rental income from leased property of Nesco IT park& Bombay Exhibition Convention Centre (BCEC).


- Expansion Plan: It has plans to expand exhibition area to 1mn sq. ft from current 450,000 sq. ft and start construction of IT building 4. Once both this projects are operational, large proportion of revenue will flow in.


- Debt free: All construction cost are financed from internal accrual. High liquid investment, it is estimated that future construction cost would be met from internal accruals only and the Company would not rely on external financing.


- Land: Almost 70 acres of land in prime location of western express highway with close proximity to airport is available for development.



Nesco is high growth company. Its revenue has consistently increased in last 5 years. High growth over past 5 years is attributable to increase in number of exhibition in BCEC area and leasing out space of IT building. Particularly, for FY15, revenue growth of 20.7% is result of leasing out space of IT building 3. Detailed below is segment wise analysis of revenue.


Bombay Convention & Exhibition center (BCEC):


Bombay Convention & Exhibition center has 4 halls of different sizes and additional area for restaurants, seminars & parking. The halls are rented for trade fairs & exhibition for approx 3 days on an average in a week. Currently, the center has 450,000 sq. ft. for renting. It has initiated process to secure approval to expand halls areato 1,000,000 sq.ft.


BCEC and Nesco IT Park Operating Profit margin


Financial Year

Nos. of Exhibition

Revenue

Nesco IT Park &BCEC

(Rs. In Million)

PBIT

Nesco IT Park &BCEC

(Rs. In Million)

PBIT Margin

FY12

116

1,030

958

93.0%

FY13

95

1,184

1,100

92.9%

FY14

114

1,427

1,176

82.4%

FY15

130

1,765

1,603

90.8%


BCEC and Nesco IT Park are high operating profit margin segment. As both this segment earn revenue in form of lease rentals and have low operating expenses, they enjoys PBIT margin of as high as 90%.


Nesco IT Park


Nesco IT Park is located in Goregaon (E) near western express highway. It has constructed 3 commercial buildings for leased out space to MNCs. The construction for building 4 has started.


Particulars

Leased to

Area (Sq. ft.)

Remark

IT Building 1

Tata Consultancy Services

165,000

Lease term of 3 years, thereafter option to renew lease for another 3 years.

IT Building 2

Serco

115,000

IT Building 3

Multiple tenants

660,000

Construction completed in 2013. Around 400,000 sq. ft. of space is leased out

IT Building 4

Under construction

1,720,000

Built up area

Incubation center

 

330 work station

Located in Hall 3. It caters to immediate needs of companies in Nesco IT park


Revenue from Bombay Convention & Exhibition center has consistently increased till 2014. In FY2015, inspite of higher number of exhibitions, the revenue generated form segment has fallen. With commission of IT building 3, Revenue from NESCO IT park has increased sharply.


Comparison of Rentals per month per sq. ft.


Year

Nesco IT Park

BCEC

Comparable commercial office lease rentals (per magicbricks.com)

 

Revenue (Rs. In Crores)

Rentals per month per sq. ft.

Revenue (Rs. In Crores)

Rentals per month per sq. ft.

FY11

33.7

           42.6

     1,458.3

        121.5

80.5

FY12

26.7

           33.7

     1,695.5

        141.3

85.3

FY13

27.9

           35.2

     2,011.6

        167.6

86.0

FY14

47.8

           60.4

     2,108.6

        175.7

82.8

FY15

90.7

         114.5

     1,908.1

        159.0

85.3


BCEC is able to command premium rentals in comparison to commercial office lease rentals. Nesco enjoys pricing power for its leased out properties. Rentals of Nesco IT park have increased in FY14 and FY15 with leasing out space of IT building 3.


Industrial Capital Goods


This division caters to surface preparation equipment. It provides equipments to foundries, forging plants and other capital goods and heavy engineering industries. Manufacturing operations are conducted at its 3 factories in Gujarat.


Revenue from Industrial Capital goods has fallen in FY14 and FY15, on account of lower capex activities in various industries.This segment is still struggling to make profits, but management is not willing to hive off this division.


Investment Income


Investment Income is generated from surplus funds (after meeting capex requirement)invested in Mutual funds. Income from investment has increased with high investment in mutual funds. Overall, return from Mutual funds has remained in range of 6.0 - 8.0%


Particular

FY11

FY12

FY13

FY14

FY15

Income from Mutual funds (in Crs)

10.6

11.5

19.3

20.3

28.6

Mutual Fund Investment (in Crs)

158.5

210.1

258.4

368.4

383.8

Return on Mutual Funds

6.7%

6.2%

8.2%

6.5%

7.6%


Capital Expenditure


Going forward, asset in form of mutual fund investment is likely to reduce. As these funds would be utilized for construction IT building 4.


Particular

IT Building 3

IT Building 4

Area (sq. ft.)

660,000

1,720,000

Cost of Construction (Rs. In Crs)

112.8 (Actual incurred)

 

Cost / sq. ft.

1,710 (derived)

2,000 (estimated)

Total cost of IT building 4 (Rs. In Crs)

 

344.0

Amount Spent till Mar 2015 (Rs. In Crs)

 

99.8

Additional Capex required (Rs. In Crs)

 

244.2


Current investment in mutual fund is sufficient to meet its capex requirement of IT building 4. So, Nesco would not rely on external funds. Thereby, continue to remain debt free.


Hospitality Solutions


Hospitality Solutions - This division is started in 2015. It is in business of managing food court and provide other related services to exhibitors, participants and companies in IT park. The activities are conducted by Nesco Hospitality private ltd - a wholly owned subsidiary of Nesco. The division generated revenue in FY15.


Demand Drivers


- With improvement in economic activities, the revenue growth for Bombay Convention & Exhibition center and Nesco IT park would come for expanding exhibition area, conduction more exhibitions, exhibitions of larger size and longer durations or from increased rentals.


- In FY2015, it has started hospitality solutions.  As the footfalls in exhibition center increases and more tenants occupy space in IT park, the demand for food & beverages along with allied activities would increase. This will generate additional revenue to Nesco from its hospitality solution segment.


- Nesco has almost 70 acres of vacant land. It plans to develop this land for commercial purpose. Development plan also includes building luxury hotel, club house and wellness center. With completion of planned development, it would generate revenue from additional sources.



Analyzing Business


Pros


- High barrier to entry for new player - Nesco enjoys 70 acres of free land to its credit. This land was purchased many years ago and was bought at much lower rate compare to prevailing land prices in vicinity. Also, for competitor to acquire large space would not only be costly but the land title clearance process also takes long time.


- Cash reserves - Nesco has around Rs. 380 crores of investment in mutual funds. This investment can be utilized to fund construction activities. So, Nesco will not be dependent only on external funds for undertaking its future construction activities.


- Office space in Nesco IT park is leased to TCS, Serco and other MNCs. These tenants has good financial position which reduces the probability of default in payment of rent.


- Major clients of BCEC includes overseas organizer like Messe, Reeds, IIR and National organizer like FICCI, CII, Asian Business Exhibitions & Conferences. Such trade fair are conducted at large scale and attracts people from local, national and international locations.


- Air conditioned Nesco IT buildings are also equipped with amenities like futsal, Gymnasium, golf putting, food court, open sky lounge, health centre, child day care center, ample car parking and other recreation areas. This would enable Nesco to command premium monthly rentals from its tenants


- Strategic Location of Bombay Convention & Exhibition center &Nesco IT park would continue to enable it to command premium prices for its exhibition center and leased property


- Low operating cost: The exhibition halls structure is not make-shift type. Its permanent constructed structure with air conditioned facility. So, operating cost are mainly in form of repairs & maintenance are also low.


Particular

FY11

FY12

FY13

FY14

FY15

Repairs & Maintenance -Buildings & Property (in Crs)

4.9

4.0

6.3

3.7

3.1

Repairs % of Revenue from operations

4.2%

3.1%

4.4%

2.3%

1.6%


Cons


- Slowdown in economic activities would lower participation and also postpone scheduling of exhibition. Further, exhibition business is seasonal.


- If many new constructions comes up in vicinity that provides amenities similar to those provided inNesco IT park, then its ability to command premium lease rentals would be adversely impacted.


- Almost 79% of its total revenue for FY15 is generated from Nesco IT Park & BEEC. Any natural calamities like flood, earthquakes or man-made events like terrorist attack would adversely impact its revenue.


- Manufacturing business is struggling to even generate operating profits. This acts as dent on overall profitability of the company.


Debt / Equity


Nesco is zero debt company. All capex for IT building are meet from cash flow generated from exhibition business. Further, leasing out space of IT park building is also generating strong cash flows. Further, company has sufficient cash equivalents & liquid assets to meet capex requirement of IT building 4.


Working capital


Nesco has higher current liabilities than its current asset (excluding current investment), thereby equating to negative working capital. Current liabilities are higher as it receives advances from its exhibition organizer. This advances acts as interest free loan to Nesco and is utilized to meet its operating expenses.


Particulars (Rs. In Crores)

FY11

FY12

FY13

FY14

FY15

Current Assets

39.8

22.0

24.9

25.2

31.7

Current Liabilities

17.8

19.1

21.3

25.0

27.3

Advances from Exhibitors & others

26.9

34.9

20.3

20.2

20.2

 

 

 

 

 

 

Working Capital

(4.9)

(32.0)

(16.7)

(20.0)

(15.8)

Advances as % of WC

18.1%

91.5%

82.3%

98.9%

78.1%


Earnings and Performance:



The company has consistently generated high EBITDA margin and PAT margin. High profitability is reflected in high return on equity and return on asset.


Proportion of current investment (mutual funds) to total asset has increased from 50.6% in FY11 to almost 65.7% in FY14. This ratio has fallen to 56.8% in FY15 as Nesco started construction work for its IT building 4.


Particular

FY11

FY12

FY13

FY14

FY15

Current Investment  - Mutual Fund (in Crs)

158.5

210.1

258.4

368.4

383.8

MF Investment to Total Assets

50.6%

55.1%

57.8%

65.7%

56.8%


High proportion of investment in mutual funds has lowered its overall return on asset. Since return on mutual fund investment is in single digit (discussed above) is lower compare to return from business operation.



Over period of past 5 years, EPS has increased from Rs. 48.7 per share in FY 11 to Rs. 79.1 per share in FY15. For H1/FY16, it generated EPS of 42.5 per share, annualizing it amounts to Rs. 84.9 per share. During the same period, P/E ratio has 9.6 times in FY11 to 14 times in FY14 and 19.5 times in FY15.


With expansion of exhibition area and commissioning of IT building 4 – revenue would increase and thereby EPS would increase going forward.


Dividend per share has increased from Rs. 2.5 per share in FY11 (Payout ratio – 5.1%) to Rs. 6.5 per share (Payout ratio – 8.2%). As of Nov 20, 2015 the stock is quoting at Rs.1,640 per share and trading at P/E of 19.3


Valuation


Asset Based Approach


As per this approach, we have valued only core assets of the company


- Land of 70 acres on western express highway in Goregaon (E)


- Building 1,2 & 3 in IT park


Particulars

Area

Rate

Value (in lakhs)

Remark

Land (in acres)

70

249,286,576

174,501

Rate per acre based on Ready Reckoner

Building (in Sq. ft.)

940,000

12,000

112,800

Average sale price per sq. ft. Rs.14,500

Value of Asset

287,301

 

Equity Shares outstanding

14,091,992

 

Value per share

2,039

 

Market Price as of Nov 20, 2015

1,636

 

Premium over current price

24.6%

 


Income approach


Value of Earnings (as per H-model)


The H model assumes that the earnings gradually falls form high growth phase to long term average growth rate. The model assumes during first stage, company is in extraordinary growth phase while during second, the Company would grow at constant rate.


Particular

Value (in Rs. Lakhs)

Remark

Free Cash Flow (FCF)

3,207

average of FCF 2011 -2015

 

 

 

Long term growth rate (%)

3.0%

 

Short term growth rate (%)

10.0%

 

Years of High growth

5.00

As IT building 4 and BCEC expansion would be commissioned with next 5 years

Required Return (discount factor)

12.0%

5 year rolling return on Sensex as on Nov is approx 7%. So, conservatively high discount factor is considered

 

 

 

Value of NescoEarning

15,777

 

Equity Shares outstanding (nos)

         14,091,992

 

 

 

 

Value of Earnings (per share)

111

 

Market Value of Asset (per share)

2,039

As computed above

Intrinsic Value (per share)

2,150

 


Above, valuation does not consider additional revenue that company would earn from Hospitality Segment. Current value per share is much lower because the losses of industrial capital goods segment are regarded as deterrent to its growth prospects and could impact its profitability. 


Conclusion


Nesco is operating in easy to understand business. It has efficiently managed its cash flows and it continues to be debt free. Its major operating segment -BCEC and Nesco IT Park enjoys operating profit margin of as high as 90%. Both this division would generate additional revenue on completion of its expansion activities. Further, this would increase revenue of ancillary segment like Hospitality segment.  Its industrial capital goods segment is making losses but the losses are nominal at EBIT level. Overall, Nesco appears to be good investment company with high cash reserves.




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About Namrata Shah

Namrata Shah is a Chartered Accountant and an independent finance blogger. She loves analyzing companies financials, business models, corporate governance and other aspects of the companies. She has rich experience in research, valuation and audit, assurance & advisory function in reputed organisations. She blogs at http://finance-nams.blogspot.in/ .

 

For more information please write in to [email protected]

Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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