Notes from AGM
The venue was Building No. 3, 4th Floor, in a hall overlooking the western express highway. The AGM was short and to the point. Total time 1 hrs 15 minutes. Initially after some formalities, audience starting voicing questions, one by one, some went on with a long list; in fact, a good long 25 minutes of posing questions. At first, I thought the management was indifferent to questions, especially looking at their seeming indifferent faces; but it’s only later I realized that Mr. Sumant Patel had scribbled all questions and went to answer each of then one by one. He replied for a good 35 minutes!! It was very reassuring to see him so forthcoming and responding to all questions in a reasonable level of detail. He was aware of all nuances of his business, occasionally turning to his associates for some data points. Overall it went very well. My fellow attendees too felt the same. I was in the company of esteemed fellow investors @ayushmit , @nooreshtech @amangoklani and @Shivkumar
This was my first ever attending an AGM. And I came back content (in the sense that the information was aplenty. Analysis to each his own).
Disclaimer: Not invested, but considering!
. . . various questions and answers, mostly in chronological order.
PS: I have tried to be as verbatim as possible, adding context where necessary. And ‘GS’ represents my personal perspectives.
1. On why the company is conservative in is strategies for deploying cash in its books. Why only debt funds? Why not equity funds or even direct equity investments for better returns?
We want to be very careful. At the end of day shareholders money. we don’t want to play with it. Equity funds prone to volatility. And even if we want to do then its entirely a diff business of managing equity investments. It’s a diff skill and is prone to risks. Even now we have a very big team to manage only debt investments. The investment management team sits out of Mahalakshmi office. We have done a good job in selecting debt funds. We have maintained 7-8% return. FMP have given good results, Up to 10-11%. Now returns are slightly lesser even in FMP, also as they have changed in tax benefits. Further under new accounting norms of INDAS requires them to record debt fund values at market prices which may be lower, even though actual cash flows are higher (GS: I guess it is something to do with Mark to market. Experts can explain better). Having considered all, we will continue to stay in Debt Funds only.
2. On why NESCO complex doesn’t have Helipad, considering so many dignitaries arrive (GS: it seemed a really amusing question, especially the querist went on and on about needing a Helipad)?
Mr. Sumant recognized it as a genuine issue (GS: to my surprise) and stated how CM too had echoed it. NESCO has decided to have a helipad in its next development; be it atop of building 5 or Building 1 (GS: implying it will be brought down and the new one will be constructed at some time in near future). They will let us know when the decision is made.
3. On capacity utilization of BEC?
Nowhere in the world exhibition centers operate on full capacity. They usually operate on 40-50% occupancy at best. We are satisfied with our performance. Our business is of hosting exhibitions that come from outside (GS: meaning organizers come to our venue). Last year, we haven’t lost even a single exhibition last year. (GS: meaning all events were repeated again this year OR not that any event went to any other venue). Anyhow to increase occupancy, we are preparing some strategies. We don’t know how high efficiency we can increase; may not be 70-80%, but better than now. We are preparing two new proposition and We will let you know about it next time when we meet. (GS: damp squib!! It appeared they have some surface level thoughts, but nothing concrete. my guess is he meant some new properties/events that they would curate on their own, which would increase the occupancy levels of BEC. Anyhow, Mr. Sumant is not so expressive/excited personality. Thus, one can’t say how deep is the so-called strategy. Did we guys expect Food Business coming out from nowhere and that too in such big numbers so quickly?? They are already doing 10000 meals a day and aiming 40 Cr from this biz this year; more about it later. . . So, let’s not under-estimate their prowess). On asking if any area reduced in BEC, he replied if anything we have only added the new area and have added 1 new hall of more than 1 lac sq ft. Exhibitions are booked on the advance basis with cancellation fee component.
4. On starting of revenue from IT Building no. 4?
Built space is 17 lakh sq ft. The Licensable space is 11 Lacs sq ft (GS: at another instance, he mentioned 11.5 lacs sq ft). The license fee rates are not yet decided. The overall revenue could be in the range of 150-200 Crores or maybe even more. We will let you know when we meet the next time (GS: did he mean next AGM. Was he in a way telling it is not getting leased until next AGM!! Lol. . . no no, I think he just said it casually.)
5. On why doesn’t the company take debt to fund growth?
Many years ago, we took debt and burnt our fingers. So, we want to be very careful. We are not completely close either. But as far as possible we want to be debt free. And neither its that our growth is hampered by lack of funds. We have enough cash on hand and keep generating more cas on an on ongoing basis. We always keep looking for next project development with own source of fund. So we are good here.
6. On the type of rental agreements?
Typically, are 5-year contracts with a renewal option at the hand of the tenant for another 5 years. Usually at 5% or 7% escalation (GS: meant on every year) or 10-15% if escalation is due every 3 years. There’s never any contract without any escalation. (GS: Later on, on the side-lines, I had additionally asked if they every invest in office interiors on demand of tenants, as I know it happens a lot in NCR market; to this, the MD replied as No, never. Which is good as investments of those nature are not healthy and depreciative.)
7. On issues of traffic caused by exhibitions and ongoing metro and other construction works?
A railway station (Mumbai local train) has come up just behind us. Our tenants are so very happy. Its become so convenient for them. It barely takes them 5 minutes to get off and be in their offices. The exhibitors too can easily reach. Earlier they used to get off a station before or after and them struggle their way to the office. (GS: he meant to highlight that we should take note of the other positive developments too, which would also reduce traffic issues, and also overall appeal for leasing. I think the new station bears well for tenancy preference of new clients for Building 4). Traffic is not just at front of us. Its everywhere, further down and much before too. its due to the ongoing construction of Metro, along with the Western Express highway. (GS: to be noted is that there’s a Metro Station under development, right at the gate of the NESCO. I could see it through the window. Which again bears very well for long term preference for this as a destination for exhibition and offices). Constantly the Traffic police and the Municipal authorities are I touch with us. We keep engaging on a daily basis and sort issues. We have 1500 c ar park arranged in the complex. !000 in in the Lodha building next door. Another 2000 in adjacent CRPF grounds (GS: not sure if he said CRPF). We are doing everything, but authorities too have to play their part. Its one-way road width and they are running two-way traffic. Allowing wrong parking to happen here and there. (GS: pls note that it was a big exhibition day – Gem & Jewellery – and one could notice many cops managing the traffic). I then asked, if there is any directive, past or current, that restricts them from holding events or curtailing them in any way – to this Mr. Sumant clearly replied a clear NO, not at all. There is no formal instruction or restriction of any kind, weekday or weekend. Whatever if any are mere ‘suggestions’ from police to if possible do it on weekends or such and such times etc, but no strictures at all. He also said Exhibitors are directly involved in such discussions and sometimes they agree for certain times, at other times they convince police. Anyhow, soon as an when Metro is completed all issues will come to rest (GS: essentially it was clear that its more of cooperation and handholding with authorities, and there no bounds. And to me, it appeared Metro could be up and running in 6-9 months. Mumbaities can tell better)
8. On Maintenance and upkeep of buildings and infrastructure?
A separate team takes care of all maintenance, security, repair, client servicing and operates by contracts with the third parties. There’s a big cost and details of it, if requested from the management shall be made available. (GS: basically, it seemed they have third part facility managers on cost plus basis. And all such expenses are anyways reflected in statements of accounts and are as per industry standards.)
9. Expanding business in other areas (geographically and other sectors)?
Yes, we are thinking actively about diversifications. We have constituted a new team called Group 2 to explore possibilities. (when asked which business) we will look at expanding in other geographies, may be, in construction segment, but not exhibition, likely be commercial or IT or residential. (when asked by not exhibition) exhibition business is almost always state funded. Large investments, low occupancies. Govt do it for creating trade and commerce. Every state does it on their own. We cannot replicate that in a private funded way. (GS: meaning they cannot get same advantage of having historical low-priced land as they have in Mumbai. Going out and buying land for exhibition sector is not viable). So we will stay in the business we have created, and expand non exhibition business. How much will we expand is matter of planning, time will tell.
10. On additional FSI under new development norm?
For building no. 4 they have used the new increased FSI that was available then. They have used 1:2 FSI that is for 1 FSI they bought an additional 2 FSI from transferable/tradable rights, thus they used the opportunity to their advantage. Although, the FSI additional was very expensive. And any latest higher FSI available, as per latest norms, cannot now be added to building 4. It will only be considered in the next new building, as and when it comes. Going forward, they have spoken to CM and have already got approval for 4 FSI for exhibition business i.e. 1: 3 i.e. 3 FSI for every 1 available can be purchased. The policy is already approved, and the final draft is awaited. When I asked that 4 FSI will mean they will have to go vertical, multi-floor, in future exhibition buildings, Mr. Sumant said YES. Their next building sill be multi-floor (GS: I think this is good news. As per me it will combat the future threat of Reliance exhibition center, as I learned that its multi-floor in BKC. This way NESCO too could do such conferences that can be on any floor, like in a hotel conference hall, and not requiring ‘high-celling-ground-floor-only’ halls, which are typically required by exhibitors.)
11. On building 1?
Building 1 is empty as of now. Its parking is still used though. When I asked about last revenues from it, Mr. Sumant confirmed that lasts recorded earnings from it were in Dec 2017. For last 2 quarters, the revenue from it’s has been 0. When I later asked the MD about the value of revenue, he answered it to be 20 Cr for last calendar year it completed, before being discontinued and tenants made to vacate and relocated to Building 3. It eventually has to be broken down and the alternate plan to be developed, as per master plan that they have for entire development. The decision will be taken within the next few months. When asked about dripping revenue in IT, he confirmed its on account of only this building being discontinued. (GS: implying that the revenue from the new building are higher). He spoke about the quality of relationship with all tenants and how they all cooperated in migration to the new building.
12. On Building 2?
As of now is giving full revenue (unlike building 1 which is now 0 revenue). Approx 30 croes per annum.
13. On future of building 4?
Have appointed JLL (Jones Lang Lassalle) as a consultant for leasing out the building. He maintained that leasing will happen soon. And that building is complete. L&T who has down structural works is already unpacking. (GS: based on my experience, as I understand construction and projects, and after looking at current status of building no. 4 (pics posted below), I can confidently say that from completing the structure > to services > to finishes > to commissioning > to fit-outs by tenants > to OC > to start of rental inflow, even if all happens at best pace, we will only see first numbers coming in from new building in Q1 FY 2020 i.e. same time next year i.e. 12 months; irrespective of whatever management says). On being asked what’s the basis of rental, they answered its on ‘chargeable area’ i.e. covered area plus some %age to compensate for additional areas.
14. What next project?
In 2 - 3 months we will decide what to do? Either Exhibition or IT building no. 5. Next building will be bigger than what we had done so far (IT 3 was 8 lacs. UT 4 is 4 lacs). Or even commercial building. New norms allow commercial now. In totality long-term vision to have a total of 5 buildings (GS: now they have only two Buildings i.e no. 3 and 4) Building 1 is already defunct and will be demolished, say, after building 4 is totally leased. . Also, building 2 shall too be vacated in the future and demolished).
15. Future of capital goods division?
We will make this division also profitable (GS: didn’t sound convincing, seemed more of a passing thought). Its our focus area. We are a great brand in the segment we operate. Our original JV partner is over (GS: wasn’t clear when it was over). And we will focus on this business too. it will also be one of our profitable and growing business.
16. On increase in manpower cost?
It will soon start paying back. We have started to higher more senior and better calibre people across functions. Our log term goal is to see that increase in manpower cost should match with commensurate in generating additional returns and is fully justifiable. (GS: although not said explicitly, it seems the these could be higher cost on account of F&B business, the new Group 2 etc etc)
17. On the abrupt resigning of the CEO?
It’s part of everyday life. He decided to move on. No big issue. Just today in our board meeting we decided on management structure and we have good leaders for all business segments.
18. On the effect of GST?
We have had no effect on our business.
19. On Exhibition center coming up in BKC (Reliance)?
It’s a different type of project. Its integrated with commercial establishments, service apartments, and also exhibition space of of 25000 sq mtrs (i.e. 2.65 lacs sq ft). Some exhibitions may go there, some more will come where. We will wait and see. Ensure new entrants in our BEC and maintain our turnover.
20. Share buyback?
(GS: shareholders in audience explained that rather than distributing the Dividend, which is tax inefficient, instead management should buy back shares equivalent to the dividend declared value. Thus, better use of reserves and tax efficient). Mr. Sumant said it’s a good idea and that they would consider.
21. On contribution in turnover of proprietary events such as Paddy fields, dandiya nights etc?
Its small, about 5 crores of BEC turnover. But they will watch and observe. After learning they would add 3rd property soon. Also, said we are diversifying by adding lots of marriages etc
22. On food Business?
50% of the business comes from exhibition business. 10000 meals a day. 50% focus on visitors to the exhibition. Supplying food to IT park employees is not of much focus; it’s a small ticket item. Now we are focusing of the food business to outside, and have already started. This year’s target is 40 crores turnover from the F&B business. Mr. Sumant accepted the suggestion of employing differently abled people in F&B business
23. On Hotel?
Its part of our plan. we know it will work immediately. We don’t want to do on our own and engage 500+ staff to run (its not our core competence). Instead, we will do a tie-up with some international brand (Marriot or Hyatt etc). we will build hotel under the suitable agreement (profit sharing or revenue sharing etc). but it’s not an immediate priority. when we build this is a matter of decision we shall take in due course.
thanks for patient reading!