Nesco

I agree with you Vikas.

But no more a great business, I would say. Commercial real estate will face huge headwinds in next decade with new technology, virtual realty, cost pressures, and particularly trend accelerating with WFH culture. The more it extends, the more probability of it being sticky.

Though stock can bounce back in near term, but surely it looks like great business facing impairment.

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or they try to come up with some innovative solutions of utilizing the spaces (in future) they created. until then, long term it will be risky. my opinion.

please definitely guide me, but don’t flag it.

covid’s impact could drag down the exhibition business in FY22 as well. Full occupancy of the new IT building too would be delayed due to the pandemic. This could impact cash flows and delay construction of the new buildings.

disclosure: holding. may add if funds permit

Shiv Kumar

It’s difficult to predict the future regards WFH but from what I’ve read and the business owners I’ve spoken to there seems to be a clear pattern emerging regards Employees loving it for obvious reasons and many quotes and articles on the interweb are from their perspective and social media is overwhelmed with these posts AND Big tech companies like Facebook, Google, microsoft, salesforce etc are promoting it ie companies with skin in the game ie Online platforms, virtual reality, Google meets etc in their portfolio. These huge parties make it almost impossible to overlook everybody working from home even post covid… however,
The reality of it is that the employer’s don’t look too happy regards productivity and lack of control and barriers to entry regards training new staff and collaborative meetings etc
Goldman Sachs has outright said WFH isn’t the future for eg. And I’d expect finance companies to always need offices since they are at risk of theft with their data online and they need some sort of offices to meet clients

While tech companies in the USA may work at home that doesn’t mean the IT companies in India will. IT companies would love this since they wouldn’t need to send their teams to the USA and hence saving costs but most employers ive spoken to would want their teams working together here in India and not from home where HR can’t control them. They also are on hiring sprees so with headcount increasing while some percentage may definitely work from home, the overall numbers may not be so significant.

We always go through a “trend” which turns out to not workout as planned. This trend leads to exuberance in some areas(Salesforce, virtual reality etc) which druves stock prices up and panic in other areas(commercial offices) which drives stock prices down. The key is to buy the panic stricken companies during this time and wait for the Trend to reverse. Imo there could be a blended model in the future where some percent of the workforce work from home(India isn’t the USA though… most people just have an extra desk and not an extra room) and majority work in offices/maybe the work week gets shortened a bit.

Either way I can’t see commercial offices going away. At max many offices may need to change their layouts and make smaller offices with larger meeting rooms etc but overall the need for offices I don’t see going anywhere even in all this exuberance right now since a blended model maybe the best compromise to keep both employee and employer happy.
In the short term there may be pain and the rentals may drop a bit etc but as with any trend when it reverses everything will be alright again. The costs of rent aren’t that huge for most MNCs/Blue chip companies either vs the benefits of control and collaboration. I personally can’t see WFH sustaining post covid and Nesco available at cheaper than its land value, with 700 crores cash + it’s businesses thrown in for free does look like a bargain.

Disc: not invested in nesco but I am invested in Embassy office so I am keeping a trAck of this space.

Note: via googling you can find an equal amount of articles for “Work from home will continue post covid”:
and “work from home cannot continue post covid”. This was the latest report I found based on the ground reality in UK with actual stats/polls for eg: Working at Home Won’t Last Long After Covid, BOE’s Haskal Says - BNN Bloomberg
It’s all about which side you pick. Personally, I’m picking the side that’s been beaten down valuation wise since the downside looks priced in on the commercial office side and hence higher chance of upward surprises.

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You seem to be tracking this space closely.

Have you read or done any work on sensitivities of occupancy rate to WFH?

Thinking about post-pandemic, to me it seems unrealistic to take an extreme view on either side - 100% WFH or 0% WFH.

I wonder what would happen to demand for commercial space if for e.g. people are allowed to WFH for 2 days every week.

A Stanford study suggests this could be the post-pandemic norm - https://www.washingtonexaminer.com/news/pandemic-legacy-two-days-work-home-norm

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If it’s a blended model and employees need to come in even once a week companies will need offices though they may need smaller spaces. Companies like nesco and Embassy can adapt by changing layouts of existing and future offices to smaller offices to facilitate this hence bringing costs down for the individual company but maintaining overall profitability for nesco/Embassy since they would then lease out 2 offices instead of one. We are only shareholders… imagine the discussions and creativity planned by the actual owners to navigate this. If we trust the skill of the owners then this just becomes a buying opportunity. That’s the worst case scenario I see in India. Personally, the costs of Protecting data, opportunity cost of losing out on efficiency and collaboration, the fact that not all employees are the same ie some may really not be able to adjust to home work, and not all job positions are able to be WFH and the fact that employers don’t usually trust their employees makes it a very far likelihood that things won’t just go back to normal post covid just so that companies can save pennies on their dollars in rent.
Note that Nesco has its exhibition business at risk for a few more quarters too due to covid and the Jio center looming over future quarters too along with an agin indrabator business that I don’t track so there is additional patience and pain investing here at present apart from WFH in the short to medium term and I’ve only spoken about The office space business above

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In nearby future, Covid has definitely suppressed the earning power even though current market cap seems lower than company’s assets. As a minority shareholder, my focus is on earning power.

Ongoing Covid situation will extend hibernation period on both the exhibition and food business. Hence, the contribution to net profit from these segments will be NIL or slightly negative at least for next 6~12 months. With the above narrative, rental business will be the only cash cow with an EPS of ~ Rs. 18 (expected) in FY21. The EPS of FY22 likely to be lesser due to lack of new leasing opportunity and probability of lease termination due to prevalent Covid situation.

However, company has the key ingredients- land and cash - to embark on the journey of residential RE (Just an opinion) in case WFH becomes the norm and company decides to do so but gestation period will be longer.

Disclosure – Holding and actively tracking but not adding since I see overvaluation at CMP w.r.t earning potential in near term.

I totally agree with all the comments above suggesting that post-covid world will not be like full WFH or full work from office.

Even if blended scenario plays out (which looks likely) and many small companies go majorly WFH, the point is that overall demand for commercial real estate will shrink, atleast in metro cities.

Another thought is, companies might form mini-offices in Tier-2 cities, to test if locally employees can work in small team instead of coming to metro cities.

Premium spaces will still be in demand, they might get occupied fully, they can change office layouts - but key here is if rental/sq ft of entire market is shrinking, and these businesses are high operating leverage businesses, what is EPS downside if say rentals go down by 30% in new normal? And giving slightly lower PE multiple, is it still a bargain IMHO?

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The term bargain is relative to what price is being paid for the asset.
At less than its land value+ cash in hand yes it is a bargain since the business is basically free. If I were buying nesco outright as a business outside of the stock market it would be like buying a running business for under the price of land and cash in the vault and I wouldn’t hesitate. Even if the core business takes a hit and rentals fall the value here still makes it a good long term buy since the price has fallen from pre covid levels of 700+ to sub 500 to account for the lowered rental yields etc.
However, this is the stock market… and the market loves growth. So I’m fully expecting stagnation here for a few years along with opportunity cost and hence why I’ve not invested yet. I do want to play the commercial office space cycle at depressed valuations though since the upside possibilities look higher than downside possibilities and it’s very rare to be able to play a reverse trend in this manner when you know it will work out long term.
I’ve gone with REITs over Nesco for now so I can play it and recover some cash via yield during what will be a stagnant period and the additional headwinds of Exhibition business and the JIO center requires monitoring for me.
For someone considering building a position in nesco the next 2 to 3 years offers a time where they can build a big position at a bargain price via sip(something I am considering) though since in the long run things will stabilize even if starting from a lower base. It’s no longer the stalwart safe great business of a few years ago though(covid, WFH, Jio)… that I agree with you…and extra care needs to be taken now via info from management regards their plans for navigating this crisis etc during the next few quarter commentary before building more conviction here.

Disc: Not invested yet. Not too biased as of now. Though I am tracking it closely over the next few quarters.

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Won’t the yield also drop if structurally rental amount corrects by 20-30% if demand for commercial real estate goes down?

I agree. I’m working as a designer in automotive industry in Sweden. In all our management calls this is the normal topic of discussion. Management also agrees to WFH most of the time in future, but also creating awareness about ‘‘sometime’’ office working for example team communication, team relationship, individual mental health which is difficult to track at home. So in Sweden I think even after Covid WFH is totally voluntary.

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My 2 cents:

  1. Firstly on the global trend of moving to remote and WFH: India will not/cannot. Simply because our general working population is a lot less tech-savvy than then west - eg. People still prefer printing documents and reviewing them. At the same time, the other benefits of office - like conducting client meetings in person, relations with employees and colleagues and ofcourse, the sense of purpose of “going to work”. Sitting around at home at working 4-5hrs a day is a very Gen-Y thing. Most people might not want to do this.

  2. Update from Business Deployment Teams of 8 MNCs I have spoken to: Most companies are putting together a new Flexi-Leave policy. So far, companies offered 20 paid leaves, 7-10 sick leaves. These companies are looking to additionally provide upto 30 days of remote leave. Which means, every year, employees can take upto 30 days of WFH. While certain people might use this to attend to family/kids etc., we are expecting the concepts of workations will be a lot more mainstream.

TLDR - Concepts of office and office space is here to stay. Blended models are in the pipeline and are the future

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Some good discussion here on the future of WFH. We are talking about essentially two scenarios.

  1. V shaped recovery in behavior and people and companies go back to offices as before. This is supported by some trends in travel etc. where people are really missing their normal life and want to get back to it asap. Before the deadly second wave most office goers i knew were eager to start back. Companies are facing lot of challenges. WFH is ok to maintain business but growing businesses, meeting people, mentoring the new batches of people, ideating with your team etc. requires people to get together. Employees are also facing challenges working from home due to lack of space, constant distractions etc.
  2. There is a permanent dent in Office space business due to a drastic change in corporate and employee behavior. They have seen benefits of WFH and realize it is not an impossible task and many IT cos have delivered well throughout this period.

Reality will probably play out in between and you can choose how it will play out based on where you lean between these two scenarios. My personal preference is towards the first one but there is definitely going to be a wider acceptance of WFH and it is going to be a more integral part of our work life. How much the impact would be (10%,30%?) no one can tell.

Personally I feel ok with NESCO’s business model given its balance sheet strength. Damage will depend on Pandemic and how long and bad it will last. I do not fear a very big shift in way we work.

Companies in this space will fail and suffer but I feel bigger reason will be their unrealistic expectations built in their over leveraged economic model. IF you have been conservative and plan to ride out this time in a sustainable manner you can emerge stronger. So the question probably is of opportunity cost. As the recovery slows down it will be longer before they recover so you will have lower returns in short to even medium term.

Disc: Invested in NESCO

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Hi guys, can we calculate the “Land-Bank” value of NESCO.
It may turn out to be a kind of asset play.
Its obvious with WFH culture and less exhibitions, not only rental income but also their Food business will be severely impacted in future.
So now the point remains, what can be done with such huge land-bank.
I think promoters are smart enough to use it well.
I am wild guessing here - say how about using such huge land for say big Amazon fulfilment centre or say big Data centre for Google / microsoft.

So basic Q is whats the approximate land bank value at the current real-estate market prices.
I know we should give minimum 20% discount to the current market price being such huge land bank.

Thanks in advance
Dr. Vikas

NESCO has come up with yearly results.
Here is the link

Frankly better than expected results ( as per me). Means even in this lockdown, revenue from IT buildings is up. Both BEC and Nesco Foods has taken the beating as expected.

Please do share your views.

Regards,
Dr. Vikas

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The traditional office as we know it, is not going anywhere. While WFH has gained acceptance, it is already started showing its ugly face in terms of employee fatigue, lack of employee engagement etc. A recent Microsoft study showed that while bosses are happy with the remote work setup, average employees are not so much, primarily due to stress.
Also, one key reason for productivity gain while working from home is, employees have nothing else to do during Covid times and bosses know that. Once people start going to movies, malls, visit friends, relatives, WFH will not remain as productive as it is currently.

Will we be back to where we were before Covid ? No, There will be more flexibility for people to chose where do they work from. But at least some days of the week people will report to office.

Another point to note is, while the pandemic was raging, Indian IT industry hired record number of people.

Disclosure : Hold Nesco and some REIT

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That’s right. Hybrid model would be the future. At the same time I am expecting lot of innovation in terms of Virtual realty and lot of tools that will help employee engagement while working from home as well as lot of productivity measurement tools will emerge.

Ofcourse, premium properties will still be in demand, but overall if say there is 40% WFH scenario (many companies outside India have started going this way), overall demand of commercial real estate will go down as companies will reduce space requirement by rotation etc.

Even if properties like NESCO may have full occupancy, how the pricing power remains and % increase they can command needs to be seen.

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Hello All - For the benefit of those who want to understand the basics of NESCO’s business, I have written below long post :

What do you do if you have a ~70 acre parcel of land in the heart of Mumbai where land is scarce and expensive? Sumant Patel, promoter of NESCO Ltd., decided to start an exhibition business by building the Bombay Exhibition Centre (BEC) in 1991 on that parcel of land.

As India opened its gates to globalisation, companies rushed in to exhibit their products at BEC’s trade fairs and exhibition events. The business took off.

Today, from the steady, recurring cash flows of the BEC, NESCO has :

  • built IT parks - 2 buildings are currently operational & generating ~₹20 crores in rent per month from MNCs & banks

  • built a hospitality business - NESCO Foods - to cater to office goers, &
  • planning to build another 2.9m sq ft of leasable area which will have 2.6m office space and 0.3m 300 room 4-star hotel for a capex of ₹2,000 crores

NESCO’s moat :

Traditionally, real estate players need to :

  • invest a lot upfront in acquiring a piece of land
  • then spend years & (mostly) borrow money building it
  • then wait for their payday till the entire building is sold or leased out

However, since NESCO has captive land purchased decades back, it doesn’t need to pay exorbitant sums to acquire it at today’s prices - and it has steady cash flows from the BEC & IT Parks with which it builds additional buildings on the land - so it doesn’t need to borrow to build. And NESCO is able to lease out soon after building because demand for office space in Mumbai is evergreen.

NESCO’s cash generating engine is growing at a steady rate of ~15% with an RoE of 19-20% and no debt on the Balance Sheet - which is unique for a commercial real estate player.

Revenue break up

Margins Profile

RoE break up

Risks :

However, there are some obvious risks which might derail NESCO’s growth plans :

  • COVID-19 has made physical contact almost prohibitory - NESCO’s businesses - both IT parks & Exhibition - earn when people come together in big groups.
  • IT companies are planning to allow people to work from home at least some of the time - this will reduce demand for premium office space & might also eliminate it completely over a long period.
  • Additional threat from co-working spaces like WeWork (although the flip side to this is that even co-working companies need office space - NESCO itself leased out roughly 10% of leasable area to WeWork)
  • Reliance Jio Convention Centre which might compete with BEC exhibition business
  • NESCO enters into low RoE businesses like Hotels

Management :

I like managements which are conservative & are cautious of excessive leverage - this is what Mr. Sumant Patel has said about the upcoming capex program

The cash flows of about ₹2,000-2,200 crore will be staggered over a period of 5-7 years. As a policy, we will not be going in for any external debt and all our outflows will be funded by our internal accruals in its entirety.

Management salaries has been an area of concern : in FY20, Patels’ total take home from NESCO jumped almost 4x!

Cash Flow :

CFO/PAT ratio is almost 1 : 1 which indicates all earnings are in cash - a favourable feature of NESCO. Also, NESCO’s business doesn’t need net working capital investments which is another plus.

However, NESCO doesn’t generate a lot of free cash - which is a pitfall of avoiding debt. NESCO’s Operating cash flow gets spent on new buildings & very little is available for dividends or buybacks. For eg. out of cumulative ₹803 crores in Operating cash in last 5 years, free cash was ~₹284 crores. Dividend Payout ratio is only 9-10% & Dividend yield at today’s prices is 0.5% which is meagre. The ability to not take out cash from the business is a drawback for potential minority investors.

Almost₹670 crores of cash (as of FY20) is invested in short & long term MFs/debt funds presumably because mgt doesn’t want to borrow to meet future capex needs.

References :

  1. Urge you to read this piece by Professor Sanjay Bakshi which beautifully explains NESCO’s moat like characteristics : https://www.nooreshtech.co.in/wp-content/uploads/2011/10/NescoSanjayBakshi.pdf
  2. NESCO last 5 years Annual reports
  3. The Hindu article on Capex program : Nesco to invest ₹325 cr. to expand expo centre - The Hindu

I would love to have your feedback/comments on the above post here

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Krishna S. Patel appointed as Chairman and MD

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Chairman’s speech from the AGM on Aug 11th.
aabda380-2bc1-4d7b-99d2-5da02e9cee4f.pdf (928.5 KB)

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