ValuePickr Forum

Nesco

Hi Sagar,

Audit fee is only 6.2 lakhs each in the past 2 years, comparable with that of Empire or other similar sized companies. You must have mistaken the legal and professional charges which was 1.5 cr in FY 11 and about 90 lakhs in the previous 2 years each. While that may look a bit on the higher side, i think the major chunk of it went for the payment to the US architect firm which is designing the IT parks and the expansion of the exhibition complex.

The CMD’s total comp came to 2.6 cr which i believe is quite reasonable. The CMD and his wife together also did not take about 6 cr in commission which they could have under terms of employment. Again a good indication.

I dont know whether comparing these no’s to dividend payouts is a correct measure. Obviously Nesco’s dividend pay-out is abysmal and can improve much further. In defense, the promoters are saying that all the money is being used to invest in ventures which have such high RoE that it doesnt make sense to increase pay-out now. Sure, a bit more of capital structuring by using debt funding would be ideal (reduce taxes and free up more money for dividends) but the company and promoters seems to be so financially conservative (may be from past experience!) that they will not even consider debt!!!. That said given how precarious the state at which leveraged companies are today, i guess i am ok with the structure.

I am just wondering why a company which consistently growing and producing high ROE (Avg ROE 50)trade below at 10 PE.Everyone knows asset value,investments,debt free status,growth ETC…But why it’s trading at such cheap valuation’s.Everyone answering themselves this attributes to low dividend payouts.But lot of companies with abysmal dividend pay outs are trading at astronomical valuations ( EX. Infoedge ).With land and asset valuations of more than 4000 cr and generating 100 cr profits per year trading at 800 cr market cap.If we consider EV/EBITA then story is looking very attractive.But Why ?

1.Single location status and no diversification plans.

2.Corporate governance should improve.Auditors mentioned in their remarks that Internal audit systems need to strengthen.

3.No institutions (FII Or DII) entered this stock.Why?

4.May be there are some loopholes in buildings rental structures(Some percentage to company and some to promoters) Pl:No evidence to prove.Gen practices in real estate companies.

5.Last but not least sharing wealth with shareholders.Although promoter per is high distribution will imparts confidence in company.

6.Huge speculative interest in stock.Wild swings are very normal.

So until the corporate governance improve and sharing wealth with investors valuations are like this only.

Disc: Invested in previous year.But lot of my queries reg Tax provisioning,cash flow related queries remained unanswered.Although they promised me to answer my queries i did notreceivedany one.

further.

Thanks Madyam for making me straight on Auditor fees. you’re right i mixed up the technical consultation fees with Auditor fees, because they’re mentioned under bold category of Auditors Remuneration.

I hope you’ll also get thedonation thing clarified from management.Will wait for answer.Thanks for your help !

**

I am just wondering why a company which consistently growing and producing high ROE (Avg ROE 50)trade below at 10 PE.Everyone knows asset value,investments,debt free status,growth ETC…But why it’s trading at such cheap valuation’s.Everyone answering themselves this attributes to low dividend payouts.But lot of companies with abysmal dividend pay outs are trading at astronomical valuations ( EX. Infoedge ).With land and asset valuations of more than 4000 cr and generating 100 cr profits per year trading at 800 cr market cap.If we consider EV/EBITA then story is looking very attractive.But Why ?

1.Single location status and no diversification plans.

2.Corporate governance should improve.Auditors mentioned in their remarks that Internal audit systems need to strengthen.

3.No institutions (FII Or DII) entered this stock.Why?

4.May be there are some loopholes in buildings rental structures(Some percentage to company and some to promoters) Pl:No evidence to prove.Gen practices in real estate companies.

5.Last but not least sharing wealth with shareholders.Although promoter per is high distribution will imparts confidence in company.

6.Huge speculative interest in stock.Wild swings are very normal.

So until the corporate governance improve and sharing wealth with investors valuations are like this only.

Disc: Invested in previous year.But lot of my queries reg Tax provisioning,cash flow related queries remained unanswered.Although they promised me to answer my queries i did notreceivedany one.

Obviously Nesco’s further. **** promoters conservative(may

Hello OM

I would like to add my 2 cents

i guessNesco is beaten down along with all the real estate stocks.Market ispainting all real estate stocks with same brush.It didtouched priceRs1352 in 2007 , andgives feeling Market did realised the value in good times.

**

I am not much concerned about the lack of dividends as long as the company is using the money for very high RoE capex.

Yes the single location is a big risk…but they can be diversified away in a portfolio

The bigger risk in my perception is how long can they grow in this parcel of land? If it is 10 years i am happy…if it is 20 i am ecstastic but if it is 5 years then am concerned!

Hi Madyam

Happy New year…did you got chance to meet with management ? anything you want to share.

donation clarification is pending.

Hi Sagar,

Nopes…i havent yet been able to arrange a meeting as i am busy on some other stuff. Also, i wont be asking the donation question in the meeting. I am personally comfortable with the amount (relative to the profits) and such questions can create the impression that you are doubting the integrity of the promoter (especially in a one-on-one meeting that too first time!!).

If that is a big concern of yours, i suggest you ask in the AGM (or arrange for someone to ask) where it could considered less offensive.

Cheers

Nesco results for FY 2012 are out.

  • Net Sales have increased from 116 cr to 128 cr (10.4 % increase)
  • PAT is almost the same (67.4 cr) because there was an extra-ordinary income of 17.7 cr in FY 2011 (strangely this extra-ordinary income was clubbed as ordinary income in FY 11 results!).
  • Investments + Cash is now 214 cr - enough to take care of building 4 capex.

It seems that the Building 3 hasn’t been rented out so far, nil or negligible revenues from building 3 :frowning:

Finally, got to work here.NESCO Stock storyupdated.

We will surely like to probe more and understand this business properly. Will try and set up a meeting with Management during visit to Mumbai July 10-13th.Anybody with senior management contact, please facilitate. Thanks.

Can’t understand why this quality of a business should go cheap. And if it’s really that good, like Ompraksh had asked earlier, why is there no Institutional participation in this stock? With FY12 degrowth in Net Profits, it may not appear that cheap at ~13x, but when you consider the Cash of 210 Cr vs Market Cap of ~850 Cr, is still looks cheap!

Apart from the lack of growth in FY12 (which should get offset in FY13) what are the overhangs on the stock??

Please go through the stock story, highlight errors of commission or omission (this is a 1-day job), and let’s discuss the bear case with greater vigour, so we can quiz Management properly and get you the answers!

Hi Donald,

Good update. My sense is that mgmt is a bit laid back and very conservative. (Not necessarily a bad thing).

I remember during Nov-Dec’11 in a couple of interviews on CNBC mgmt told they’ve just started leasing out Bldg#3 and expect major contribution to start from Q4FY12 and Q1FY13. However as we see, that’s not the case. Infact in FY11 they promised Bldg#3 revenues to reflect fully in FY12.So that’s quite a delay!Moreover there is no significant dividend distribution.This is certainly acting as a dampener on stk price.Also we need to factor the recent slowdown in commercial rentals. I remember reading some other BigName commercial space cropping up in Nesco’s vicinity. Hence there might be a sudden glut of supply and mgmt being over-conservative may not want to lease out at depressed rates. (An eg:Lower Parel-Phoenix Mills area rentals have dropped from 220-240 down to ~120ish/sqft).So they might be trying to hold till property mkt turns (which in Bbay everyone believes is not too far away for any given value of time T).

I hope you must’ve come across the troika of value investors who recently did a simultaneous analysis. That certainly explored various bullish/bearish viewpoints. There was a feeling that this might turn into a diworsification story, or remain a value trap due to lack of any imminent trigger.

Has Bldg#4 construction started yet? If not, I won’t be surprised if it stretches till FY15.

I am pretty much invested in this story. Thanks to some members here, I also did PPB at 700-730 levels, and re-entered again in past few days.

No matter how depressed, I love the story because of HUGE moat (you just can’t get that much prime land in Bbay now at any price), no RM, no forex, no vendors or other jhikjhik.Just consistent cash-flows. So unless there is significantevidence of any harakiri by mgmt (their son entered into catering, we need to see how significant is that) I am not too bothered.

Regarding mgmt meet:

)- Is it possible for me to tag along with you in this meet? Being in Bbay, Nesco being in my top 5 allocation, this would be a good opportunity for me to experience how these type of meetings go and learn from gurus like you. Let me know if it’s feasible.

Thanks Kamikazi for your detailed views.

1). Please provide links to the recent analysis you mentioned. It helps to see different perspectives

2). My sense is BEC will continue to grow at 15-20% - thats the real mainstay of the business

3). The IT Park/Realty segment - is subject to market conditions. You are right, there must be a glut of similar office space available nearby. The reason there are no revenues to show from IT Building III is simply nothing got leased out. Seeing the degrowth, I suspect they might have lost 1 or 2 clients too. Especially as there was talk of renegotiated contracts with major clients like TCS in FY11.

4). No reason to believe FY13 will be any different for the IT park/Realty segment

5). Management Meet: Would love to have you join in. Let’s wait for a confirmation, will keep you posted.

Meanwhile, you can help us start compiling a structured set of questions - that helps us probe the vulnerabilities in the business, the steps they are taking to meet these challenges, and the real strengths

Following are the trade show details to be held in MUMBAI for FY 2012-2013 period

http://www.eventseye.com/fairs/cy1_trade-shows-mumbai.html#ap1335

Me and a couple of friends had studied Nesco a bit some time ago…we have all written about it…this is the link to my post, which contains the links to others’ posts…

http://neerajmarathe.blogspot.in/2012/01/nesco-ltd-good-exhibit.html

Mod, if posting of blog link etc is not allowed, plz delete this comment…my intention behind sharing this is not to advertise my or anybody else’s blog, its just to share info and views…

cheers!

Neeraj

  1. Was talking about the same link that Neeraj posted. He has the other two analysts’ blog linked in his post. Do you have breakup of revenues for Bldg1,2, 3 in Fy11-12?Here’s the CMD’s interview frm Nov’11 Link: http://www.moneycontrol.com/news/business/should-rent-out-new-building-completely-by-dec-end-nesco_608796.html saying they have leased out 1.5lac sqft + signed up two other MOUs for Bldg3.

A: We have three IT buildings. IT building I is now occupied and IT building II is occupied as well. In IT building III we have about 6,60,000 sq feet space out of which we expect to complete the marketing by the end of December. The rental income will start from Q4 of this year.

Q: What is the rental income roughly to understand for the IT Building I & II for which you already signed the agreements?

A: The rental income for IT Building I & II is about Rs 20 crore and IT Building III in the financial year FY11-12 should bring in about Rs 60-70 crore.

If as you said Bldg3 revenues=0, then that’s a huge gap in what was projected and current reality.I’m not sure how to interpret mgmt statements. Was it just over-projections or they seriously didn’t expect that much downturn?

Good article Link: http://www.firstpost.com/economy/absorption-the-most-dreaded-word-in-mumbai-realty-324685.html abt Bombay’s commercial property scenario.

  1. Commercial property there is certainly glut. Recently DLF sold a large chunk (can’t recall where) at throwaway prices. So mkt is rationalising, which is good in long run*

  2. Yes, let me know when you get confirm’n. Read on some other forum that mgmt doesn’t talk much with (m)any analysts, and apparently don’t speak much even in AGMs. Someone who has attended in person can chip in with their observations.

  3. Here’s the first three queries I have off top of my head. Let’s add and refine them:

Q. One of the risks I see is that mgmt has sentimotional attachmt with cap.goods division. Though it’s minor in the grand scheme of things but either they should shape it up or ship it out. We haven’t heard much frm mgmt on that front. What are their plans for it?

Q. Secondly, Bombay’s RE mkt is very notorious, and if we have a depressed mkt for next 1~3 yrs, which is quite plausible considering current scenario, and if mgmt is not aggressive in reaching out to get clients, they might just keep on waiting at their lemonade stand while others like IndiaBulls, Unitech etc notch up sales/leases with innovative schemes like no EMI until possession, guaranteed returns (haha!) etc. I think there might be quite a bit of distressed sales coming up. And just like malls, if a commercial RE space remains unoccupied for long, it becomes exponentially difficult to fill it later. (atleast at lower/mid-end. Not sure what type is NESCO’s)

Q. We need to ask them on their low-dividend payouts. What is their LT view on it? With such slow speed of execution, they can very much afford to increase dividends a bit more without needing to tap debt for Bldg4 capex.

*Happy side effect of this depressed mkt is that: Piramal’s IndiaReIT division got in with a nice PE deal with Omkar realtors Link: http://forbesindia.com/article/big-bet/how-omkar-cracked-the-messy-business-of-slum-redevelopment/32730/0 in Bbay (one of the best out there in SRA redevelopment). So if you are also invested in PEL, hopefully potential downside from staidback NESCO is recouped in a few years with PEC’s timely pounce in this mkt.

Thanks Neeraj for the links.

Would have like you to comment in brief if you still think its a decent long term opportunity, at current levels. Since you wrote in your blog…the performance and outlook on the IT Park/Realty segment has tanked.

Please provide a small brief…for the benefit of our readers.

-Donald

PS: We encourage people to post links. If there is something of merit ValuePickr readers will gain from it, else they will simply ignore:)

http://neerajmarathe.blogspot.in/2012/01/nesco-ltd-good-exhibit.html Link: http://neerajmarathe.blogspot.in/2012/01/nesco-ltd-good-exhibit.html

Went through the above links. Interesting angles brought out:)

I do give credit to Management for having the foresight to shift focus to the value generating Exhibition business. And executing that well. Establishing the long standing relationships with Majors is a big plus! Ability to enforce advance terms is a big plus. I am not sure if NEC or Hyd Expo or other exhibitors can claim that good a record. Not all of that can be credited to fortuitous, some should go to to foresight:), too!

I think its all boiling down to visibility on the growth prospects. The puzzle is clear if we have the right answers

1). BEC growth prospects - think 15-20% is a certainty there, given the exhibition schedule for FY12-13

2). IT Park segment - This is the missing link at the moment. Not sure of the 150,000 sq ft IT Building III lease going forward for FY13. If it is there on the ground, this itself will mean 15-18 Cr additional for FY13 -which is a good 60% jump for the segment.

3). Investment segment - should see similar to FY11

4). CG - is not significant at the EBIT level

All in all I would think the Management will surely try and ensure some additional revenues for the IT Park segment in FY13 (unless the immediate local market faces a total glut situation)

Let’s focus then on dissecting the Andheri-Goregaon commerical space market. Any Realtors here:) friends? relatives?

Kamikazi - thanks - your Mumbai commercial space article is what I read next!

In one of the earlier interviews the management had stated that the the IT Buildings will be accorded STPI status which in effect results into some tax benefits for companies operating out of there. In such a case, the IT buildings will to a large extent remain immune to ups and downs in Mumbai commercial RE market.

Questions for Nesco Management:

The main concern for Nesco is about the future visibility, what is the Management going to do next? How do they see the business in 5 or 10 years down the line?

More specifically:

1). On BEC: They had mentioned in the Annual Report of 2009 that they are considering to increase the area from 450,000 sq ft to 1 million sq ft. In the last AR also they mentioned about the expansion plans. How much expansion is planned now? Do they have plans to modernize/ upgrade any facilities?

2). On Realty Division: When is building 4 expected to be completed? What next after building 4 is done. They would still have some 30 acres of land available. What do they plan to do with this land bank? I remember reading somewhere on plans for a hotel. How far is this true?

3). On Capital Goods: Would the Management expand this line of business? Do they have any plans to deploy more capital in this division?

Request all seasoned investors to revert on this.

For companies like Nesco which generate huge cash flow, do we really need to look at growth % of turnover. Even if there is no growth or even slight de-growth in sales or profits, it still results in substantial growth in cash balances due to the nature of business.

I may be wrong but this is what I think…

What you said is true if one is a control investor like Buffet who can then easily deploy excess cash from business some where else. But as a minority investor there are only two ways we can benefit 1) Dividends 2) re-rating of the stock. Now going by history dividends are hard to come by and for any re-rating in stock (in absence of high dividends) growth is must…Else why not invest in a company like Noida toll bridge which is trading around its book value, current dividend yield is 4% and is expected to grow a lot as being a SPV I do not think company can re-invest the excess cash in the business itself and current capacity utilisation on bridge is only 50% providing decent growth opportunity.

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