(Vivek Mashrani, CFA) #222

The size is too big, so ideally will cater to different client segment.
However, some overlapping might be there.

They charge deposit from customers in advance (generally 6-8 months is
pre-booking period), so they can still earn investment income from this
(bit less than current though).

(Gary) #223

Hello Vivek,
Slighted dated response on your model. First of all -thank you for taking the trouble for pulling this together.

A few things may be worth considering (no order of priority) -
1. The new BEC is supposed to be 15L sq ft as per annual report. Was there an upward revision later?
2. You should not assume occupancy at 100% - even in best case, the net occupancy tends to be in 90-95% range (due to churn etc.)
3. On the other hand, the ramp of building 4 can be much faster. Need no take 5 yrs ; Starting year may be 2018 given 5 -6 months for fitouts et al
4. Others have already mentioned about new BEC to be overlapping with existing to some extent.
5. Number of meals as per AR in new segment is 15k currently. And within that we shouldn't assume 100% capacity yet. On the other hand, the price increase yearly can be at least 10% per yr
6. For modeling purpose, we should assume some increase in cost ratio for BEC due to competition

In your model, the biggest uplift comes from new BEC which may have slower ramp up.

I've done some of these edits in attached draft .. please review.

Net net - I think the business provides for a margin of safety for someone willing to stay put. The gestation may probably be longer if execution delays or competitive intensity plays out.

NESCO_model_v3.xlsx (23.4 KB)

(Vivek Mashrani, CFA) #224

Thanks for the inputs. Quite useful.

Why have you taken share price as 3500? Also, we can't assume blanket cost income ratio as 45%, currently its below 30% (see the operating profit margins of last few years).

If inflation rate is >4% then rate hike of IT should be accordingly there.

Rate of New BEC can't be around 120 per sq mt/day. Already, old BEC have started charging 254 per sq mt/day from Apr'17.

(Tarun) #225

@Gary24 and @vivek_mashrani - Thanks for putting up a decent prototype by which one can evaluate future prospect under multiple assumptions. In my understanding, those assumptions are on conservative side in some cases, which in a way is better approach.

One quick clarification though:

I have noticed that the projection sheet is considering IT building with 12 lac Sq.ft. whereas, I have noticed on the AR'17 that its 17 Lac Sq.ft built up area?

Is it due to the fact that NESCO rental are on the basis of carpet area not on the basis of built up area and a 30% loading has been considered between built-up area and carpet area?

(Vivek Mashrani, CFA) #226

One interesting update I have got is that Hall-2 is now not being given for exhibition due to high demand from marriage and corporate events. So, this gives another indication that threat of Reliance for old BEC is not as much as people think.

(Shiv Kumar) #227

revenue should be calculated on carpet area basis. we should take 12 lakh sq ft for calculations as indicated by management during last AGM.

(Shiv Kumar) #228

they are also holding concerts and social events in this hall nowadays. it could open up a very lucrative revenue stream going forward since connectivity of NESCO complex is improving. Took a good look at the Metro line coming up outside NESCO complex. The Mahananda station will come up at NESCO complex for which some land will be acquired. Let us see how the management makes use of this opportunity.

(sarojpatni2) #229

Hi, building no. 1 and 2 will be dismantled from this year onwards as the management is planning to take advantage of additional FSI rules. TCS is who are the tenets of building no 1 are shifting to new location most probably from April 2017. Due consideration must be given for the temporary loss of revenue due to this factor.
As the management is planning to use internal accruals for the capex they have to utilise the invested money which will cause dip in other income.
Hope knowledgeable investors will keep this in their mind before calculating future earnings.
Sincere regards

(Gary) #230

Hi Vivek,
I just wanted to create a conservative model that indicates the upside with margin of safety.

Cost ratio may worsen as supply may outstrip demand in mid future. Ideally we should model a yty cost income ratio.

I wasn't aware of the new BEC charges - if these are already 250+ then I agree we should model at least 10-15% premium (being new building).

(Gary) #231

Arun - the total build up area is 17 Lakh while usable area is 12 lakh .. Pls refer the annual report for more.

(sarojpatni2) #232

Hi, regarding exhibition centre we should keep in mind the the destructive policy implemented by JIO to take away the market share from the existing telcos. The same policy if implemented by REC may also cause huge loss of earnings for BEC.

(Vivek Mashrani, CFA) #233

When you get implied forward multiple very low, it will show the margin of safety. So, ideally instead of changing the price you can just look at future multiples to decide if business has margin of safety.

(Finrahul9) #234

@vivek_mashrani Can you please help with the approx value of its land bank ( exhibition + it buildings). Also if the it buildings are dismantled , how will they cope with the revenue loss.

(Vivek Mashrani, CFA) #235

They have total 70 acre of land.

(Krishnendu) #236

Hi what I have been concerned of with the Asset Player companies like NESCO is that the will there be enough Value Unlocking opportunity available for them in the future otherwise it could well have been a value trap.
The biggest risk that I perceive is that the entire business model is constructed around a piece of land in a single location in Mumbai. Mumbai is currently the most expensive city in this country with respect to real estate prices. There is a situation of oversupply of commercial property in Mumbai. The company stands exposed to not just a generic correction in real estate prices ( hence associated rent income ) but more importantly derating of the Mumbai real estate market. There is a increasing trend of companies shifting their IT / ITES operations out of Mumbai to other locations like Bangalore/ Pune/ Gurgaon etc. Case in point is that Intelenet which occupies one of the building did shift a significantly large process of over 2000 ppl to Aurangabad. TCS Eserve which occupies one of the other buildings is expanding its operations in Ahmedabad and other Tier II cities. Considering the 4- 5 year window when shareholders could possibly look at actual cashflow, this is a large risk that the business carries.
I am not sure how much this new FSI rules will play a trump card for them? More over TCS moving out will have a definite impact on their revenue also re-construction of Building I & II will put a extra burden on their revenue (nearly 20 Cr) alongside the capex cost.

These are my views if any one can resolve my concern it will be of great help.

(Gary) #237

Shifting to low cost centers and tier two cities is probably viable in bpo operations. Folks like EY are in other areas.. Moreover, in my experience this happens for net new business only. And then it's about rates, where we modeled low growth

(Mridul) #238

Point worth considering!

  1. I think we need to check which all companies have Nesco buildings on lease? Where can we get this information? Are these all IT companies or consulting companies, bpo?

  2. Is TCS moving out? Why? Cost cutting exercise? Does Nesco has anything lined up as to who would occupy this vacated space? Is this usual...i mean is the churn usual?

  3. Is the Mumbai lease market oversupplied with good office space? Or is there dearth of the same?

  4. Is it right to question the future of Mumbai for next 5-10 years in terms of realty valuations and office space requirements (at a time when India growth story is gaining momentum)? imho it is going to keep booming as being the financial capital of India (realty price may remain stagnant, but with economy booming, Mumbai would be leading the way).

(Yogesh Sane) #239

Hi vivek,

Nice work. Thanks for taking the efforts to join the dots and giving us a picture of the future income statement. I took your numbers and used them to project future dividends, retained earnings, book value (all per share values) and ROE. What I noticed that the ROE from year 2020 to 2023 will average around 40% which sounds little on the higher side.

Any idea if I am missing something here?

(Vivek Mashrani, CFA) #240

Its basically because your land remains at book value. So, RoE and RoCE will generally look high.

(Vivek Mashrani, CFA) #241

NESCO at all time high now. Looks like rub-off effect of many mumbai based real estate stocks zooming.