Nesco Ltd: Value Buy?

Nesco Ltd is a diversified commercial services company. It provides space to companies as work space and for exhibitions, trade shows, business displays, events as well as entertainment.

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• About the founder of Nesco
• Executive Management of Nesco
• Shareholding Pattern
• Business Segments of Nesco
• Segment wise revenue contribution
• Growth of segments
• Impact of COVID-19 pandemic on Nesco Ltd
• Investments & Investment income of Nesco
• Cost Structure of Nesco
• Nesco Ltd Free Cash Flow
• Significant Ratios
• Expansion Activities & further Plans of Nesco
• Key Risks and Concerns for Nesco
• Valuation of Nesco

(A) About the Founder

• Shri. J. V. Patel found Standard Engineering Company in 1939. By 1957, the company became the first manufacturer in India for forging hammers & presses.
• The company is a listed company since 1958.
• Also, in 1960, Mr. Sumant Patel found the Gujarat Machinery Manufacturers Ltd which later became GMM Pfaudler Ltd.
• Then in 1986, the company diversified into realty.
• In 1992, the 200,000 square feet Bombay Exhibition Center develops into the largest center for exhibitions in the private sector in India.
• In 2001, the Company re-branded itself as Nesco Limited in light of further diversification & business verticals.
• Now the company is diversified into 4 business segments - Nesco IT Park, Bombay Exhibition Centre, Food Division, Indabrator division.

Mr. Sumant J Patel, son of Shri J.V. Patel, is the current Executive Chairman of Nesco Ltd.

(B) Executive Management of Nesco Ltd

(i) Mr Sumant J Patel - Executive Chairman - Age 81 years

He is the son of the founder of the group, Shri J.V. Patel.

He is a mechanical engineer from the University of Pennsylvania, USA & also business graduate from the prestigious Wharton School. When he returned to India in 1960, he found the engineering heavyweights - GMM Pfaudler Ltd. & Indabrator (manufacturer of surface preparation equipment with facilities in Gujarat).

His remuneration for FY19 was Rs. 4.46 crore. It amounts to 2.47% of PAT.

(ii) Mr. Krishna S. Patel - Managing Director

Mr. Krishna S. Patel is the son of Mr Sumant J Patel. He studied from the Pennsylvania State University, USA as well as the Kingston University, UK. Mr Krishna began his career in Corporate Strategy with Fisher Hamilton in Pittsburgh, USA. He guided the corporate expansion of Bombay Exhibition Center & also introduced the service verticals of hospitality and events.

Mr Krishna joined Nesco in 2003 after working for a year in USA.

His remuneration for FY19 was Rs. 2.61 crore which is 1.45% of PAT.

Total managerial remuneration for FY19 amounted to Rs. 7.15 crore which is 3.96% of PAT of the company.

(C) Shareholding Pattern

The Promoters' shareholding as on 31 March 2020 is 68.32%. Promoters increased shareholding during this quarters from 68.19% as on 31 Dec 2019. Mr. Sumant J Patel holds 12.58% shares in individual capacity. His wife, Mrs. Sudha Sumant Patel holds 6.49%.

Mutual Funds hold 4.34% shares and foreign portfolio investors hold 2.85% shares.

(D) Nesco Ltd Business Segments:

Nesco Ltd Business classifies into 4 segments.

(i) Nesco IT Park

Nesco IT Park is located at Western Express Highway, Goregaon, Mumbai. The company provides work spaces to companies aided by support services, leisure & dining options. The major companies working at Nesco IT Park include HSBC, PWC, KPMG, BlackRock, WeWork, MSCI among other multinational companies.

The IT Park is divided into 4 towers. Tower 4 is recently commissioned with total capex of around Rs. 494.14 crore. The same started generating revenue during FY20. IT4 has total constructed area of over 1.7 million sq. ft. Also, as per management, 75% of the IT4 has been booked.

Moreover, IT buildings 2 & 3 are fully occupied by renowned Companies. Also, Hall 3 provides Incubation Centre; and a Child Care Centre for children of employees working in Nesco IT Park.

Also, the modern amenities in the building include air conditioning, food court, modern health centre, ample car parking, a golf putting green and other recreation areas.

(ii) Bombay Exhibition Centre

The Bombay Exhibition Centre (BEC) was found in 1991. It is located at the same location, Goregaon, Mumbai. BEC offers space for exhibitions, MICE (Meetings, Incentives, Conferences and Exhibitions), trade shows, business displays, events and entertainment. The space measures around 60,000 sq. m. divided into 6 halls for diverse events hosted. Moreover, Hall 4 of BEC is Mumbai's largest pillar less hall, with uninterrupted wide space for hosting any public event.

Nesco Exhibitions is a new division of the segment. From FY20 onwards, the company plans to organize exhibitions including India Auto Show; Machine Tools, Manufacturing and Technology Expo; Hobby & Lifestyle; Edutech India; etc.

(iii) Nesco Foods

Nesco Foods caters to the needs of visitors to exhibitions & convention as well as employees working in Nesco IT Park. Also, the segment includes Nesco Hospitality Pvt Ltd, its wholly owned subsidiary.

(iv) Indabrator

This is Nesco's manufacturing segment. The company has two plants:

• One is located in Vishnoli, Gujarat. The unit manufactures shot-blasting machines, painting and air pollution control equipment.
• Secondly, the other unit in Karamsad, Gujarat is an Indabrator foundry & abrasive plant. The plant manufactures highly wear-resistant shell-moulded alloy iron castings and spares.

(E) Segment wise Revenue Contributions

The major revenue generating segments are Nesco IT Park and Bombay Exhibition Centre. Together these contribute 87% of the total revenue & 96% of the profit of the company.

Revenue of Nesco IT Park amounted to Rs. 214.17 crore for FY20 against Rs. 136.97 crore for FY19. On the other hand, revenue of Bombay Exhibition Centre amounted to Rs. 158.60 crore for FY20 as against 157.30 crore for FY19.

(F) Growth of Segment Revenue

For FY20, revenue growth for Bombay Exhibition Centre declined relatively. On the other hand Nesco IT Park achieved 56% growth YoY for FY20.

The 2 major revenue segments' growth:

(G) Impact of COVID19 pandemic

• Nesco Ltd faced intense impact of COVID-19 pandemic. This is because from mid March 2020 the company gave Bombay Exhibition Centre to Maharashtra Government to be used as quarantine centre.
• The management is still in talks with Government for charging for the same. But there is no confirmation whether any amount be recovered for the facility.
• Thus, BEC expects no revenue for first half year of FY21.
• The exhibitions planned for the year have been postponed.
• Also, lockdown resulted in companies going for work from home for their employees. Many clients of Nesco IT park also stated to continue working from home for most of the staff till further few months. There is also no clarity on when the companies shall be able to resume offices completely.
• Still, the management is confident that the clients of Nesco IT Park shall abide the rental agreements completely. As Nesco's clients include multinationals like KPMG, HSBC, PWC, Blackrock. The company may consider deferment in rentals for further few weeks.
• Also, tenants of IT Tower 4 which highly impacted from COVID-19 pandemic include WeWork and Priceline.com.

(H) Investments & Investment Income

• The total Balance Sheet size of the company is Rs 1,609.73 crore as on 31 March 2020.
• Total investments held as financial assets on 31 March 2020 amount to Rs. 672.83.
• Investment property amounts to Rs. 682.74. It is the Nesco IT Park from which the company earns rental income included in revenue from operations.
• Bombay Exhibition Centre is included under Property, Plant and Equipment.
• Investment Income represents 8.97% of the total income for FY20. It includes dividends as well as net gains realized on financial assets value & other minor income.
• The investments include quoted investments in Fixed maturity plans, debt funds, short term debt funds, balanced funds, equity funds.

(I) Cost Structure

• Nesco Ltd is a debt free company.
• Thus, finance cost only includes interest expenses on other financial liabilities.
• Further, Other expenses include property/building maintenance expenses, catering, advertisement, housekeeping expenses, events related cost & managerial remuneration.
• Nesco's permanent employee count stood at 159 as on 31 March 2019. In addition, 203 contractual employees.

(J) Cash Flows

• Nesco is cash rich company with more than Rs 650 crore of liquid resources as on 31 March 2020.
• The company does all capital expansions from internal accruals for addition in IT park as well as for Exhibition Centre.
• Moreover, Company's cash flow from operating activities expanded over the years along with its revenue expansion.
• In addition, company's free cash flow increased to Rs 152 crore in FY20 from Rs 21 crore from FY19. This is because company's IT4 building is completed & started generating revenue. The gap between cash flow from operations and free cash flow is on account of expansion activities by the company. Thus, expanding capital expenditure each year.

(K) Significant Ratios

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• Margins of Nesco Ltd have remained stable over the years. Operating profit margin of 74-75% denotes very good margin generating company.
• Further PAT margin is also above 50% from past many years.
• In addition, Nesco holds strong returns ratios. Return on total assets remains above 15%.
• Also, return on capital employed (ROCE) above 15% denotes strong financial characteristics of the company.
• The company also has declining receivable days which is quite positive factor.

(L) Expansion Activities

FY11:

Construction of IT Building 3 completed for Nesco IT Park with total amount spent on project Rs. 78.89 crore. The building measures around 8,00,000 sq.

FY12:

The Company initiated steps to secure required approvals for starting construction of IT building 4, measuring about 17,20,000 sq ft. Also, Nesco started laying plans for expanding Bombay Exhibition Centre.

The company also started constructing a new research & development center at Indabrator.

FY13:

Further, the company started considering to build new halls & expand BEC from 450,000 sq. ft. to 10,00,000 sq. ft. Company also started finalizing licensing arrangements with well known Indian and multinational companies for IT Buidling 3.

FY14:

Nesco launched its 330 seater Nesco Incubation Centre at Nesco IT Park. This facility allows a licensee to opt for stop gap arrangement of a plug & play infrastructure. Thus, it helps to move their business in the IT building 3 with minimum outage in operations.

FY16:

The company started construction of IT building 4.

FY17:

For BEC, company decided to build a new exhibition & convention center with integrated facilities. Thus, plans for construction of first phase measuring 15,00,000 sq. ft. started finalizing.

Also, the company started setting up a large kitchen facility in area admeasuring approx. 24,000
sq. ft. with capacity to produce about 15,000 meals per day. Investment expected Rs. 15 crore.

FY18:

BEC had total capacity of 59,000 sq. mtrs. of exhibition & convention center spread over 6 air conditioned halls. Further the company laid plans for expansion.

Also, Nesco Foods added during the year as distinguished revenue segment.

FY19:

The IT building 4 completed during the year with total estimated expenditure of Rs. 494.14 crore.

Further added new division under Bombay Exhibition Centre 'Nesco Exhibitions'. Nesco’s own exhibitions and events will increase the hall occupancy.

FY20 & ahead:

• Despite the impact of COVID-19 pandemic, Nesco is preparing plans for constructing new halls and upgrading the existing halls for Exhibition Centre. Around Rs. 100 crore is planned capex for the same.
• As per management, 75% of IT4 is booked.
• In addition, management is planning IT Building 5 as well.
• The capex plans for IT Building 2 are still in place. But the same may be delayed. The period of completion is expected to be over next 5-6 years. The capex planned is approx Rs. 200 crore.

(M) Key Risks & Concerns

(i) Another large player in competing space:

Bombay Exhibition Centre is the only private exhibition & convention center of such scale available in Mumbai. Now, in its competing space, Reliance Jio Convention Centre is inaugurated in Bandra-Kurla Complex.

This is a major threat for Nesco Ltd. It may impact the occupancy level as well as can also impact the margins of Nesco. Nesco holds monopoly in charging rentals. But a strong competitive player can challenge the client retention for Nesco.

Thus, revenues of exhibition centre may get effected adversely.

(ii) Government Norms

Although Nesco's business is at prime location of Mumbai. The company faced operational difficulties at certain times from state authorities. For instance,

(a) In Dec 2017, Mumbai police directed Nesco Ltd to limit its bookings only up to 50% of capacity on weekdays in order to avoid traffic congestion at Western Expressway.

(b) In August 2018, municipal corporation (BMC) directed Nesco Ltd not to hold any exhibition until the completion of construction work of the Andheri-Dahisar Metro line. Thus, Nesco is subject to such operational hurdles from orders of Government authorities.

(N) Valuation

• Nesco is currently trading at PE of 13.73 which is at its lowest in last 7 years.
• Its current EV/EBITDA is 10 approx, at its March 2016 levels.
• Its current cash & cash equivalents & non-current investments amounts to Rs.681 crores approx and the market cap is Rs.3100 crores.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry's Publications. 

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