thanks Vivek for the prompt help with info!
could you share how and where do you check this info?
tx
income from the exhibition would be lost. but rentals from the IT business would continue.
disclosure: holding
The current market mayhem might ingrain a relatively long living flight to safety attitude among the investor community. I believe companies with no/ relatively low debt and ability to generate reasonable and sustainable cash flows along with relatively good dividend will outperform(and possibly disproportionately) once this event is behind us.
Disclosure: Invested in Nesco from 2018.
You can either check from link above my post shared by @princevegeta or reach out to their scheduling team as a shareholder or potential customer and they generally give slots which are empty. Thanks.
You are right, businesses with capacity to suffer and strong balance sheet are likely to withstand the period in a better way. Having said that, Nesco’s business of exhibition could get significantly affected due to regulatory notifications on restricting big gatherings.
Disclaimer: This is my view. Not a recommendation to buy/sell. Kindly consult your advisor for the same.
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Revenue not coming from exhibition business should be temporary phenomena and not a structural change in business. Such situations in a debt free company provide good opportunities to accumulate.
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given the fortress balance sheet and a conservative management survivability isnt really the issue
however, in the short term my concern is around the 2 issues which are likely to affect the profitability.
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exhibition business : this is a cyclical business and is effected more than other businesses by recession. if this corona virus issue prolongs i have no doubt that the rev and profitability for this year and may be next year will suffer for the exhibition business. as of last year this was bigger than the IT park business. and if you include foods it would be quite big.
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it building 4: my back of env calc suggests that weworks component is about 15% of the building. there were some points raised on this thread re co-worker spaces and their undesirability due to the lack of stickiness, load on building, and other terms etc. and today there was news re softbank may not fund weworks. also, renting spaces during downturns is hard. i do hope it doesnt come to that.
this is def negative news for all people waiting to flip this over the next year while the it building 4 revenues came in. the wait just got longer.
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Wework India is run and funded by Embassy group. Only licensed Wework. In fact before bad news on Wework they were going to acquire the Indian business from Embassy at a billion dollar valuation apparently, which of course fell through.
Coworking has a market and it is not a bad idea to have a coworking operator as one of the tenants in a commercial park/building
good to know that the ownership/funding etc are independent of the parent. lets also hope the zero stickiness comment that singhigirish makes on this thread re co-working operators is not true in the nesco case.
thanks!
Co working as a business is a typical case of asset liability mismatch that can work perfectly in a bull market. Like banks, they lend long (long term leases with asset owners, 10 years and sometimes even 15 years) and borrow short (short leases with occupiers for months and sometimes even for days). They take the occupancy risks and the arbitrage opportunity works when they have have above threshold occupancy. The key question to think is if the occupancy drops, will they keep paying the rents ? Will VCs keep funding them or would they want the business to be sustainable on its own ? Embassy REIT is listed, how many of the leases from the listed REIT are co working ?
The only thing to consider when you lease a building is, can the tenant pay the rents on time ? Does it have the financial capacity to withstand tough times and still pay rents ? Building owners require 6 months deposit from tenants for the same reasons. Co working operators do not pay deposit. Will you prefer leasing to a an MNC/indian corporate or to a co working operator ?
In the case of Nesco, the risk may not be material since it could be a very small % of the overall portfolio.
Also co working are also of two types : a) ones which sub leases to corporates only (fully B2B)…here margins are less so is the risk. b) B2C - > ones where sub lease are shorter and tailored for retail. These have higher risk but may have bigger margin. It is easy to figure out which segment does Nesco lease cater to
Another point to consider is the impact of COVID ? During this crisis and even after the virus subsidizes, will people be comfortable to work in an alien environment where they are not sure if the person working next to them could be infected by virus ? This virus has the potential to disrupt the working of some of the industries and Co working falls into that category.
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As I had indicated, COVID could have structural impact on Co-working, please refer to the article below:
One can create register for free and access the article.
There seems to be some buying from promoter(promoter group) at this time.
https://www.screener.in/insiders/details/40161/
https://www.screener.in/insiders/details/40160/
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WeWork Asks Landlords to Help It Cut Its Rent Bill by Up to 30% https://www.bloomberg.com/news/articles/2020-04-01/wework-asks-landlords-to-help-it-cut-its-rent-bill-by-up-to-30
I think if there is a force majuere clause in the contracts tenants might invoke it like pvr has done.
Other than Wework, all companies are in for long term. They wouldn’t want to leave such Prime property, for saving rent for 21 days plus more, if curfew is extended.
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So this is once in a lifetime kind of crisis.
And it will surely disrupt a lots of businesses.
With the recent craze of work from home & with so many tenets of NESCO being IT companies, I doubt how many of them will continue to pay the heavy rent to NESCO in future.
I personally think the commercial real estate market will surely come down to some realistic levels. And with only IT buildings and exhibition centre, the future earnings growth looks difficult for me.
Just before this COVID-2019 crises, I was looking at NESCO as a dull, boring but consistent growth business ( though in single digit). But now I may remove it altogether from my watch-list
again MY PERSONAL OPINION.
PLEASE SHARE YOUR VIEWS.
Thanks.
Vikas
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Yes. Force majeure can be invoked for most of the lease contract. My experience while auditing commercial real estate companies tells me that most of the large companies have a legal team which vets every important agreement and they would have definitely insisted on force majeure clause. However, force majeure can be invoked in the case of legal impossibility under Indian Contract Act, ie only during lockdown period (As of now April)
We work’s situation is worsening day by day and it looks likely that they could shut down operations, which would mean loss of a major tenant in IT building 4. Hopefully Nesco management is proactive in settling with them so that the space can be let out to someone else- Finding new tenants in current environment would also be tough.
A lot of Nescos existing tenants are financial services companies- KPMG, PWC, Insurance companies- for whom data confidentiality and integrity are extremely important issues. I don’t think such companies would give up office spaces only because some of their employees can work from home.
Commercial real estate market has to be looked at in two categories-
- Office space leasing and
- Retail stores (including malls, restaurants etc)
Category 1 is generally more stable as compared to category 2. My experience has been that it is category 2 customers who will react the first by asking for moving to revenue share from minimum guaranteed leases. Similar thing had happened between 2009-2013 when there were lot of supply of retail spaces in malls in Mumbai and Pune.
In Mumbai, for category 1 and considering the customers Nesco has got, currently there is increase in capacity in this space by the likes of Nesco, Nirlon and Oberois. There may be a delay in construction and near term impact in prices which will be offset by lower capacity additions in future. How much thay will affect the DCF value of Nesco is a matter of personal judgement.
My take is that at the current price, a lot of that has been priced in. The investment theme still remains that of 10-12 % steady growth with high degree of certainty in future cash flows. Such kind of stocks deserve some place in one’s portfolio which can add a great deal of stability.
Disc- Invested since 2016 and added some more recently
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i saw this on News last night! Nesco’s exhibition hall (or halls?) have been taken over by administration to quarantine Corona cases - specifically all those who have connection with Tablighi Jamaat trail from Delhi, would be brought here from all districts of Maharashtra - i heard this all myself!
A Hindustan Times news report confirming something similar
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Will govt pay rent for this? or it is service to society !!