The Pitch Report - Initiating Coverage: NESCO Ltd - BUY - TP Rs.611

Established in 1939 as the New Standard Engineering Company Ltd (NSE), the company changed the name from New Standard Engineering Company to NESC0 Limited. This reflected in the company's transformation from a pure play engineering company to that of a diversified one:

- Today NESCO, formerly an engineering company, has emerged as predominantly a service company. At present, about 78% of its total revenues and almost all of profits come from two service business units viz., IT Park and Exhibition Centre. The company is also debt free and cash rich with net cash of ~Rs.5,000 million, which is 14%of its current market cap;

- The Exhibition segment holds the distinction of being the largest exhibition center promoted by the private sector in India. It is located in the heart of Mumbai, just adjacent to the Western Express Highway, which serves as an important arterial road transporting goods to and from the City;

- Currently NESCO has three IT Parks at Goregaon complex with total leasable area of 0.93 msf. NESCO's IT parks are home to marquee clienteles like BlackRock, HSBC, KPMG, MSCI, PWC, TCS, etc. The company is doubling its leasable space by setting up IT park 4 with leasable area of 1.2 msf (developable area: 1.7 msf) at an estimated capex of Rs.6,000 million;

- Both IT Parks and Exhibition Centre are inflation sensitive and hence, these business models assure quite steady growth in the incomes in the long run. NESCO's revenues as well as net profits have roughly doubled in the last 4 years;

- NESCO has diversified into food court business through its wholly-owned subsidiary, Nesco Hospitality Private Ltd. The company has commissioned two food courts and started food services within NESCO Complex with leading international and national food brands;

Major expansion to drive profit growth in future

The management proposed to invest Rs.15 billion for the expansion of IT Parks, Bombay Exhibition Centre and Nesco Hospitality. It has expressed its commitment to finance these expansions from own resources, without any borrowings, and to remain debt free.

In our vision, its land bank holds substantial intrinsic value

NESCO's enterprise value (EV) stands at Rs.31 billion (Market cap of Rs.36 billion minus cash of Rs.5 billion). Its industrial and service units are located on a land bank of around 70 acres on western highway in Mumbai. Going by the trend, we estimate the value of land in this area to be around Rs.1,000 million per acre which gives an intrinsic value of around Rs.70 billion. However, we are sticking to PE method as it is not likely to unlock value from the land bank as it is opting to expand both IT Parks and Exhibition centre in this complex.

Outlook and Valuation

The stock has got corrected by around 14% from its 52W High and is trading at 19x its FY2018E EPS of Rs.26.69 and at 16.8x its FY2019E EPS of Rs.30.16. Despite such cash and land bank, NESCO trades at 19x its FY2018 expected EPS. We expect its revenue and profits to keep growing consistently in future due to the nature of its business models. Hence, we initiate a BUY on the stock with a conservative target price of Rs.611/- which is 20x its FY2019E EPS.

Risk to View

Any possible severe deflationary trend in the Indian industrial economy could impact adversely its exhibition business.

Shares of NESCO LTD. was last trading in BSE at Rs.537.15 as compared to the previous close of Rs. 541.5. The total number of shares traded during the day was 20331 in over 667 trades.

The stock hit an intraday high of Rs. 556 and intraday low of 535. The net turnover during the day was Rs. 11111873.

Source : Equity Bulls

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