Nesco - Diwali Picks - IndiaNivesh

Negative working capital/ Cash cow: Company's prime asset Bombay Exhibition Centre (BEC, with ~0.4 mn sq. ft.), is one of the biggest exhibition centres in India. BEC's premium facilities (inc. of well-designed ventilation rooms, wi-fi services & centralized air conditioning) when coupled with its closer proximity to residential areas, hotels & airport, let them command premium pricing (vs. domestic peers). Given that licensee pays entire 100% fees in advance (with at least 25% fees as cancellation fees), BEC is a cash cow with negative working capital for Nesco.

Near term gro th to be dri en b IT Park Nesco has growth driven by IT-Park: 2 IT buildings with total leasable area of 0.5 mn sq ft leased at Rs 60/sq ft/month. Barring FY12, Nesco witnessed steady revenue growth from these 2 buildings. Nesco recently developed IT Building-3 with leasable area of 0.8 mn sq ft, which is in final stages of completion. Already 40% of the area has been leased at Rs 75/sq ft/month. We expect this building to start contributing to the revenues from Q4FY13 and hence, we expect the profitability to see jump in FY14E.

Nil debt company: Nesco has ~70 acres of land bank, with total developable area of ~3.0 mn sq ft(developed in stages). It has pursued a cautious approach of developing the land bank with almost nil debt. Post stabilization of business from IT Building-2 (0.5 mn sq ft), it started developing IT Building-3. Currently, plans are drawn for IT Building-4. This steady execution has supported Nesco to meet its funding requirements through internal accruals (avoiding raising debt in a challenging macro environment). With revenues likely to flow-in from IT Building-3, Nesco shall start construction works at IT Building-4 and hence, continue to be a debt free company. This insulates the company from challenging macro environment (reducing the business risk), as Commercial inventory in Mumbai is in over-supply state.

Higher rental income translates to assured cash inflows: Revenues from rental income as % of total revenues would increase from 73.9% in FY12 to 85.1% in FY14. As a result company's dependency on lowmargin tools business would reduce, thereby assuring stabilization in future growth of the business.

Increased contribution of fixed lease rentals to revenues: With IT Building 3 likely to start contribution to FY14E revenues (full year basis), contribution of fixed lease rentals to total revenues would increase, indicating revenue stickiness. Revenue contribution from IT building would increase from 19 2% in FY12 to 45 3% in FY14E With revenue stickiness 19.2% 45.3% FY14E. to increase, we are assured of stable cash inflows, thereby reducing the business risk.

Valuation

We have used NAV method in arriving value for the Realty division (IT Park) & Bombay Exhibition Centre (BEC) and used relative valuation to value their tools business. Assuming 12% discount rate, for all cash inflows (BEC and IT Building 1 & 2) we have arrived at a NAV of Rs 526 and Rs 197, respectively. For their recently completed project, IT Building-3, the NAV stands at Rs 317 (assumed 13% discount rate). We have excluded IT Building-4 from our target price derivation as it is in initial stages. Given the commoditised nature of tools business, we assign a P/E multiple of 1.0x to arrive at value of Rs 2.

At consolidated level, based on our SoTP methodology, we have arrived at fair price of Rs 1,046. We recommend a BUY on the stock (indicating 49.6% upside potential).

Source : Equity Bulls

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