I fully agree to the entire analysis on this thread. But my main concern is why there is such a disconnect between property prices and their stock prices. Is there really a bubble in Mumbai real estate market.
I donât categorize Nesco as a real estate developer. What real estate developers do is basically build and sell inventory. Nesco, on the other hand has a robust business of leasing space for exhibitions and conventions. Also, it develops properties with the sole intention of leasing. Being debt free doesnât put any pressure on it to cut selling prices. Also, the revenue generating assets which it builds, though depreciated in accounts, are actually properties which only appreciate with passage of time. Nesco is a favourite of mine because it enjoys deep and wide economic moat. Traditional models of valuations have always looked at topline,bottom line and FCF for valuations. Built in the importance of FCF is the presumption that the capex is towards depreciable assets. However, in case of Nesco, it is not so. Also, it is cash rich business model. Hence, even though the sales growth and PAT growth is not there, the fact that all the PAT gets converted to cash, gives a scenario where the growth rate in cash balance is phenomenal. Hence, in case of Nesco, the growth rate for me is growth in cash balance and not growth in earnings.
As far as stock performance is concerned, if one takes a 10 year view, it has already been a multibagger.
IT bldg no.3 of 8 lac sq.ft will be constructed at an approx cost of Rs. 160 crores. The same will be let out at atleast Rs. 50 psfpm. Hence, on a post tax basis, Rs. 30 crores will be added to cash. Hence, the pay back period is approx 5 years i.e the cost of building is recovered within 5 years. What you have at the end of 5 years is an asset which will keeping adding at least 30 crs for perpetuity and an asset whose market value will be significantly higher than the amount spent.
In all, Nesco is a company which on going concern basis is invaluable and even more invaluable if it discontinues operations.
Also, due to the nature of business, Nesco wont show an annual growth of 20-25% every year like a manufacturing company. Every 3rd or 4th year when a building gets completed it will show a growth of more than 100% over the previous year and then the topline will get settled at those levels for next 2 to 3 years. Hence, its growth path will usually appear like a flag shape with huge vertical rise in between followed by flatness.
The area is fixed and no of days in a year are fixed. Small increases may happen every year due to rise on rentals. So growth will be intermittent but phenomenal every 3 to 4 years once new area is added for leasing.
Just feel that in case of Nesco, we need to focus more on cash and FA growth each year rather than focusing on topline growth. This is one company where I am very happy every time it goes for CAPEX.
Infact, try calculating the additional income from IT Building 3 by considering the rentals per month at say Rs 80 psft. Iâm considering this figure as the co is already getting about Rs 90-100 psft from IT Building 1 & 2). They are getting almost Rs 140 psft fromexhibitioncenter, which they plan to double out over next 2-3 years.
I had a good look at Nesco some time back and have a small investment in the biz. The under valuation is obvious given the land value, and also the fact that the company is slowly sweating the assets to generate cash, which will likely be the catalyst.
The issue really is about how much to trust the promoters, and I had noticed some on the edge kind of moves from the past reports, which prevent me from making a more substantial move. Would be nice to hear comments from others.
)- The Engg business was merged with the BEC / Realty business during 2004-05. It has always been a low return business. But the ratio of merger increased promoter shareholding from 53% to 62%. The merger ratio valued the 2 companies at a value ratio of 2.5 (BEC/Realty) to 1 (Engg Biz). At that time, BEC/Realty biz made profit of 11cr and Engg biz lost 2cr. The Engg biz though did have 85,000 sft of premises in Mumbai. Most of the time post the merger, Engg biz returns have been nothing to write about.
)- In years 04-06, couple of strange transactions happened: approx 10cr of doubtful debts were written off (not mentioned if these were from Engg biz or Realty biz); repair & maint expenses jumped from 30lac to 5cr which could be due to some restructuring in accounting, but has been pretty high since in the range of 5cr or more.
)- In 0607, a provision was created and a contingent liability was mentioned about a 16cr claim. Again not clear to which division it belongs.
)- The whole concept of directors declaring a claim to higher salary and not taking it seems a little strange. It has been mentioned in a number of annual reports.
)- The state of Blg 3 is same over last one year. Mgmt has not bothered to mention whatâs holding back the renting out. In general, the management is fairly quiet on issues that really matter.
I have spoken to the IR and tried to get response to some of the above questions. She told me that Blg 3 si complete but is awaiting NOC from Municipality which is stuck due to some court order (not sure what). Was asked to write an email about others, but have not got a response.
My takeaways from the AGM: Management has not been able to get any extra FSI for redeveloping the Bombay Exhibition Centre. However work has begun to increase the capacity of the exhibition area from 450000 sq ft to 10,00,000 sq ft.
Management has indicated that the capacity would be further increased if the govt allows higher FSI for exhibition centres. Discussions are on but so far no approvals have come.
Work on IT Tower IV will begin after a few months and take around three years or so to be completed. BMC does not give approvals easily and all builders have to spend time chasing after officials.
The new tower will be built by Larsen and Toubro and will have 10,00,000 sq ft area. The company will then embark on redeveloping Towers I and II. All of this will take around six to seven years.
CMD Sumant Patel has told ET Now that all the old buildings in the premises will be dismantled and five big IT towers will be constructed over the next several years.
"ET Now: What is the plan with the balance 40 acres of land?
Sumant J Patel: We have no intention to sell any portion of this land, now or in the future. We have nine buildings which were build earlier and the IT building-III was built recently. We have finalised our master plan in discussion with American architects and we propose to dismantle one by one the existing nine buildings and build five IT buildings in our IT park, out of which one is already completed and that will occupy about 42 lakh sq ft. We will build about 11 lakh sq ft in our Bombay Exhibition Centre.
The American architects have completed the designs of IT building-IV and we have already submitted our request for approval. We expect to start construction of IT building-IV in the third quarter and designs for our new exhibitions halls are also under discussion. We hope to start construction of new halls around the last quarter of this year. So in all we will be building about 50 lakh sq ft between the Nesco IT park and the Bombay Exhibition Centre in the next few years. "
After all the development around 30 per cent of the land would still be free. Management does not want to clutter the entire property so there would be a lot of open spaces. But I sense that they will not hesitate to construct if the government policies are favourable.
The management has drawn up a master plan with the help of international consultants so that a number of new facilities are offered at the premises.
The company has also leased out almost 1/3rd of the IT Tower III to HSBC at the rate of Rs 95/ sq ft:
Thanks for attending the AGM and sharing the details. The co seems very interestingly placed with the IT building 3 complete. Any timelines as to when the income from IT Building 3 will start showing up?
This is my first post on ValuePickr and my first few months into investing directly in equities (been going the MF route before).
Posting on the NESCO thread as I have invested in the company.
Read an article on moneycontrol where this dude Bhavin Desai says 8 of the 11 floors of IT Bldng # 3 have been leased out. The Business Standard article said 1/3rd has been leased to HSBCâŚthat will be about 3-4 floors. Now this dude says 8. So that means 4 more floors have been leased out.
Does anyone know who these floors have been leased out to? I tried googling but in vain. Any update would be useful.
Thanks.
Disc: Invested @ 660 and the stock is the 3rd largest holding in my portfolio (as of now).
