For this kind of business I always struggle to find operating leverage. To expand growth the company needs to be building new facilities with long gestation cycles.
In the short run, to increase topline, best they can do is increase the prices but with increasing competition not sure if it will be viable. Plus don’t see any differentiation in their offerings. With such high margins, it’s a matter of time new players will start coming up with the same solutions driving down margins.
So on the surface, NESCO’s seems to be a business, that doesn’t have any operating leverage or competitive differentiation and yet they continue to generate 40-50% PAT (quite uncommon in asset-intensive businesses).
Could this be the reason that valuations (18 p/e) are subdued and no rerating has happened ever since company was listed (multiples are still trading at long term averages)?
Would like to get some more views that explain low multiples despite such high profits and cash flows.
little radical and opposite to what current mgmt think and work is to go and leverage and aim to complete all building by 2028-29 . the profit would go down in first 3 years because of interest but then new earning would kick in early . from there it would remain cash flow based company and mgmt can plan to invest free cash into newer business.
however i also see the merit in current approach and continue to hold it.
problem is return on equity (ROE) is continuously decreasing, suggesting that the company’s ability to generate profits is diminishing. On the other hand, other income are consistently growing each year, making overall results and ratios looks better
RoE is not decreasing. In this quarter, RoE is 17% which is also the 10 yr average. Other income is growing due to cash on book but it will be reinvested for construction/expansion as done in the past.
I think ideally the way forward should be to use the catering business experience to foray into QSR space , create your brand restaurant , no lease costs invloved for those restaurants . Once they have been able to establish the brand , expand with few outlets elsewhere also and than demerge Nesco foods so that gets PE valuation of a QSR
Hello,
Could you please provide your strategy for acquiring this stock? Do you continuously buy in a sip fashion or buy whenever some metric crosses a threshold (pe less than 14 etc)
