Update from the management as on Mar 24, 2020.
NESCO–Management-Meet-Update–24-March-2020.pdf (379.9 KB)
Source: Nirmal Bang
The evolving COVID-19 crisis is prompting companies to re-evaluate their commercial real estate strategies, with a focus on enhancing resilience measures, says a report by JLL
Tcs one of the client of nesco.
NESCO will get hit hard due to work from home concept by IT / BPO companies. Also, its food (kitchen) business will hit hard due to low occupancy of IT building and lower crowd in exhibition business.
NESCO valuation need to be recalibrated accordingly!
Price has significantly corrected. The land is still prime. With US copanies wanting to keep their data secure and protected not all clients will agree to WFH in post CoVID19 world.
As the company has unused land parcel of more than 30 acres, it is not possible to use conventional P/E or DCF for valuation due to above normal growth potential in the next 10 yrs. The appropriate conservative method is to use asset based SOTP.
Land value = 70 acre X 90 Cr per acre = 7700 Cr (i.e., Rs/sq.ft = 20700)
Net Cash = 600 Cr
Construction Value = 0.187 Cr sq.ft X 1300 per sq.ft = 243 Cr
NAV = 8543 Cr
Net NAV after discounting 25% = 0.75 X 8543
= 6430 Cr
Today’s market cap = 2955 Cr
It is available at half of its intrinsic value (conservatively).
While largely agreeing with the valuation done by you, I think one more factor should be considered i.e. the possibility of significant reduction in property prices including land value in post covid world, considering lower level of business/indutrial activities, significant loss of jobs and increased tendency to work from home…
A possible contagion risk?
Disc-
Tracking
From AR '19:
the words “Ultra Short Term Bonds” do raise eyebrows (the investment size had dropped though, from 72 Cr to 25 Cr. by Mar '19; and hopefully would have been further down by now)!
. . but i would give them a benefit of doubt; the have a very strong investment management team (i heard about it from them in AGM); they would have made good calls as they have had a big portfolio and would have in know of market movements!
Lots of folks are talking about WFH and considering it as new normal. But from what I understand from my conversations with my peers across companies, they all cannot wait to go to office as WFH has resulted in increased work hours, frustration with work due to slowness, connectivity issues etc. and importantly increased friction in relationships.
One more factor to consider is work has now become a place to meet people, primary source of friendship and fun. We need to consider these factors as well.
Many of the folks, who hailed from 2/3 tier cities make the most of these working population. They now have the option to work from their cities itself. I’m being one, I never wanted to switch to metro ever. We need to think in those lines as well
I agree with you. I think the companies which were reluctant to give work from home option will be more flexible now than making it mandatory. As you mentioned, WFH has its own share of problem like improper working environment causing chronic problems like back pain , stress due to overworking without taking proper breaks and psychological issues.
While you have considered the unused land and the cash on thee balance sheet to arrive at the NAV, you seem to have missed out to the value of the current IT buildings and the convention centre.
I am sure they would be adding a substantial value to the NAV. In fact IMO the current market value is only capturing the earnings and value of these assets and the cash on the books. The unutilised land doesn’t seem to be factored in the current / past valuations.
Disclosure: Invested since 10-12 years.
I think WFH aspect is being over hyped…
if wfh is so effective, why did it need a trigger like Covid to make the smart minds in IT realise that wfh can be effective.
Lets face it, the current wfh wasnt a choosen option, it was enforced.
there were two options only - wfh or close the operations, and the industry chose to wfh to keep things running.
I am sure the cost savings of the rentals that accrue to the company by wfh isnt something that wouldn’t have been thought over by the senior managements in IT.
For a employer, i think it matters a lot to have a proper working space and a official environment and have the employees in the line of sight.
i would be interested to know facts on productivity in work from home vs work from office though, because i feel this is the aspect that would carry the most weightage.
However on asking a acquaintance who holds a senior management position in a IT co, i am being told that even if wfh is being choosen, roughly 75% of the workforce would still be need to work from office and 25% could wfh… and wfh could rather be used as a incentive (remember the power of incentive?) rather than a full fledged normal in the post-covid world.
Very intuitive analysis of presenting the valuation.
But even if the company is available for less than Cash+Land, we need to understand that in markets valuation comes from earnings and not assets.
Assets will obviously provide cushion in terms of downside protection; but if earnings does not show up, Valuation can go to extreme level of discount to Asset Value and stay that way.
We need to see when will they be able to start earning again; coz till then the markets will not bid the stock up and realize the cheap valuations.
(Thoughts of a growth investor)
there is a second order positive here. Nesco has already tower4 ready for lease and other developers would rethink plans to take debt and build commercial real estate due to expected lower demand. so while it may take longer for 100% lease of IT park4, but lower supply shall result in 100% leasing in due time. additionally Mumbai being financial hub and india to grow 5% plus soon will result in increasing commercial space demand. ( if current demand is 100 which becomes 80 due to WFH getting popular) 80 will again go to 100 soon due to growth.
i think to value Nesco, its better to assume 2022-2030 and assume a world where one remembers the fear caused by covid but world has moved on :
- Exhibition business: can the companies manage without organising exhibitions? if the answer is no, this business will bounce back.
- catering biz: simply function of exhibition biz. if biz no 1 does well, this will automatically do well.
- IT park: first, do we think indian economy to do well and grow? second do we any competition to mumbai or reason for company to move out of mumbai? would all companies move to 100% WFH? if answers are yes, no and no, demand for commercial real estate will grow though may be slowly and this business will do well.
by Share Khan