Nesco Ltd has a Exhibition and Convention centre by the name Bombay Exhibition Centre located at Goregaon, Western Express Highway in Mumbai.
In 9m FY11 Nesco has posted a PAT of Rs. 48 crores and since its business is a build and lease model, most of the earnings results in cash. Also its IT Bldg no.3 admeasuring 5 lac sq ft is nearing completion. The rentals from this addition will result in additional cash (net of expense ) of approx Rs.40 crores in FY 12.
Nesco holds 70 acres of land in Goregoan which is prime location. Out of this, on 11 acres stands the Bombay exhibition centre and IT park which will generate an annual cash flow of Rs. 90 crores. Borosil Plot in Andheri measuring 18 acres was sold last year at a price of Rs. 830 crores.
If one discounts this even by 50%, Nesco’s vacant land of 59 acres will be valued around Rs. 1360 crores. Plus cash and cash equivalents on balance sheet as on 30/09/2010 is Rs. 158 crores. I understand the company may have spent around Rs. 35 crores for construction of IT bldg no.3. Still on a conservative basis the company will have cash on balance sheet of around Rs. 150 crs FY 11 Y.E. Present market cap of the company Rs. 750 crs
I think this is a good value buy for below reasons: -
Monopoly business
High entry barrier
More than 70% OPM
Market value of assets Rs. 1400 crs + Cash of Rs. 150 crs
Annual cash flow of Rs. 90 crs expected from FY 11 onwards
Due to availability of huge tracts of free hold and free cash, company can scale up operations easily
Risk Factors
In case of slow down in economy, the company’s earnings can fluctuate as advertising and marketing budgets of clients gets cut down. However, the huge gap between market value of asset and market cap presents good margin of safety.
This is one company that i have been tracking for a while. However, my only concern is the usage of cash. Already the balance sheet is loaded with cash and almost all future capex programs can be very well funded with future cash generation and a judicial mix of debt. So the current dividend policy seems extremely frugal. Though i agree that so far the promoters have not done anything harmful to the minority shareholders
No doubt the company has moat, and there is no land available in such a prime location in mumbai, if anyone else for that matter wants to start this exhibition business, he will have to look at new mumbai,by now even there the land is scarce now,and also it will be very much highly capex model, So this business has no competiton going ahead, i had the same views as that of Madyam, the payout ratio is very low, may be we could meet the management for further details, mean while u can go thru the report and analysis prepared by Prof. Bakshi, Here is the link :
Pat Dorsay mentions about Value in use and value in exchange. Most of the analysis done on Nesco revolves around the fact that it has huge land bank which is virtually free. Hence, it has great value in exchange. But for stock performance what we need is value in use. So unless there is clear indication about the future use of the vacant land bank, the stock may not perform as per expectations. Also, the company may have to spend more to earn more in case it decides to develop the land.
The above are the bearish points with Nesco. But i am still bullish for the below reasons: -
The pay back period for amount spent on construction is around 2 years. So huge free cash flow for perpetuity. For ex: on IT bldg 3 the company has spent around 125 crs to build 6,60,000 leasable space. Assuming a modest lease rent of Rs. 100 psfpm, it will give a revenue of 80 crs each year. At a margin of 75%, the company will the cost of construction within 2 years.
Hence, if somebody is willing to hold this stock for 7-10 years and serve them during their post retirement years, it is a great bet with no uncertainty as far as business or cash flow is concerned.
I think the management is slowly and steadily making use of the vacant land. While they are doing it on a very conservative (zero debt) and slow basis; i think there is enough land available for atleast a decade of growth.
Current Exhibition centres is on approx 11 acres…to be expanded to 20 acres (based on 1 FSI); From Bakshi’s report it says IT Park has an FSI of 5 which means the 3 buildings (including the recently constructed one) would be in about 5-6 acres at the most.
Therefore right now only about 16-18 acres are developed leaving about 50+ acres for future development. Given the Company’s mode of development i am sure this would be done over a 10 yr-20 yr period using internally generated cash flow. what this means is that you really have good growth available for the next 10-20 years before it kind of becomes an REIT. They have discussed plans for a 5 star hotel and i am sure at some point they will consider a mall as well alongside additional office buildings (i read some where that they want to reach 2.5 mn sq ft of office space which is 3x the current one!)
Land area - 70 acres (CMD said in a CNBC interview that it is 60 acres…needs to be verified).
I am trying to arrange a meeting with the management through a friend in the industry and currently compiling questions. Would be happy to take any questions from other members.
It seems apart from IT park and exhibition center business, NESCO is also into industrial capital goods. In Q1,highest revenue (8.2cr) came from the industrial capital goods group. Q1 2010, this capital goods group was loss making.This capital good group may suck out cash from highly margin IT park and exhibition center business and leading into poor return ratios.
I wonder why Prof Bakshi does not talk about it in his article.
Also, in the AR, there is a mention about buying an “erstwhile” Sree Vrajesh textile mill. I could not find out when this was bought and why they bought a loss making textile mill.
Prof Bakshi’s article also mention about promoters getting into catering business.
It would have been good if they continue to focus on IT park and exhibition business and not indulge in un-necesary di-worse-fication.
The capital goods business was their original business; Hence i guess they are continuing it…may be for sentimental reasons!!! but i am sure if that business continues to make losses…sooner or later they will shut it down!
Regarding Vrajesh textile mill…it looks like the transaction was done several years ago and they keep mentioning it in the AR as shares were issued during the merger. Dont think it is recent event
Certain points taken from kukkujis presentation on the stock.
Undeveloped land to be around 30 acres after building 4.
Cash and cash equivalents of 169 crores as of last quarter.
Also they plan to start building 4 in dec 11. At the same time they would be complete with their negotiations of Building 3. The capex required is 200 crores which will be funded through internal accruals.
Also when they mention 6.6 lakh sq ft its exclusive of parking area otherwise it could be 8 lakh sq ft.
Expectation of 250 crs sales in fy 13 and profit of around 100 crores. That gives an eps of 70 +.
A debt free company at a forward p-e of less then 10 + by fy 14 one more building to add revenues. The business will keep scaling up. So the downside is limited but any strong steps from management or investor interest the stock may just run away.
Interesting to see further improvement in an already fantastic balance sheet. Cash is now 203 cr vs. 168 cr in Mar 11 and accounts for 25% of market cap.
Working capital has also further improved as i guess part of the w.c in earlier periods were related to the construction of Tower 3 (loans and advances and provisions) and have now gone out following the completion.
No where in the report there is mention of who received the donations. A donation of that magnitude nearly 50-60% of management`s salary MUST be mentioned.
First of all, comparing management remuneration to donation is not the right way. Both are independent transactions unrelated to each other. The details of manageent remuneration is given in notes to accounts.
in the CSR statement, the copany states that they have establisheda school in some rural area and continues to provide funds to it for upradation and expansion. So that probably accounts for some part of the donation.
Thanks for the clarification and excuse me for my ignorance.
I have read about their CSR initiatives, but not sure whether we can map this donationentirelyto CSR.
My point here is,
Is there any way we can confidently that the donation has not been siphoned off?
Is the practice of not mentioning the details of donation a common practice in Indian firms? I checked ARs of few other companies. For example PI Industries has mentioned the details exactly.
Ifsomeonecan getthe donation thingclarified from management and ifmanagement haverational reason for donation, i think Nesco is a no brainer…pls help…
Will try to do that. Am trying to set up a meeting with the Company. Though on first cut, it doesnt look that much of a risk. Its about 1.5-1.8 cr right? If it was 15-20 cr then i would have been worried.
Thanks Madyam.You are right it is 1.5 crores and is not signficant amount when compare to AR profits ~ 68 CR, but it is 36% of Dividendpaid to share holders. dividend for 2011including tax is 4.1 Crores. just skeptical.
Also Auditors total fees including consultation is 1.5 crores. This looks high. I compared to Empire industries which also gives IT buildings on rent in mumbai.There auditor fees is ~ 4.7 lacs. Not sure why Nesco auditors are paid comparatively high.
