So we decided that without discussing our individual thought processes, all three will write about Nesco on our individual blogs and post it at the same time. We thought that it would be an interesting exercise for the three of us as well as the many readers of Ninad's and Rohit's blogs and the few readers of my blog to see how three different investors, though value-based, will look at the same company from different angles. (I hope the angles will be different!) The idea is not to see who is right or who is wrong. All three of us know that even if we reach a consensus, all three of us could be very wrong and even if all of us have different conclusions, all three could be very right! Well thats the best thing about investing, there is no one way of doing things!
You can check out Ninad Kunder's post on Nesco here.
You can check out Rohit Chauhan's post on Nesco here.
After reading the two posts, if you are still left with some patience, here goes mine!
- Exhibition centre (BEC): The Company owns and lends out the Bombay Exhibition Centre. Its a 4.5 lakh sq ft centre at Goregaon on Western Express Highway.
- IT buildings: The company has constructed and leases out buildings to IT, ITES companies in the same complex at Goregaon (65 acre complex). Currently, there are 3 buildings with a combined area of 10.4 lakh sq ft. 4th IT building has also been announced. This will be a 9 lakh sq ft building entailing a cost of Rs.200 cr. About half of the total land asset has been used up till now.
- Engineering business: Indabrator supplies surface preparation treatment plants to various industries. The business is quite lumpy, to say the least.
- The company’s strategy would appeal to any conservative person. Construct a building, lease it out, milk it for a coupla years and with the cash accumulated, build one more! Quite averse to debt. (This may be taken as a negative, but they never stretched themselves because of this policy.)
- New buildings are built only after proper feasibility study to ascertain whether the supply can be absorbed. This ensures that buildings don’t remain empty. Also, time intervals between buildings means that the company can generate enough cash for constructing new buildings.
- Fantastic payback period on incremental assets created, because of absence of land cost. (IT Building 3 was constructed at a cost of Rs.150 cr. Yearly rentals, at full capacity, should be at least Rs.70 cr. About 2 years payback!!)
- Decent management: The conservative actions of the management have helped it negotiate the twists and turns of the sector. On the flip side, one may argue that they haven’t been aggressive enough. I am in the former camp. I did not find anything blatant in the ARs of the company to raise doubts about their integrity. Here, I should clarify that I have never interacted with the management or attended the AGM. The management does not even take the full remuneration they are entitled to, even though there is approval for the same. Also, their whole professional approach while going in for a new building appeals to me.
- I read about a lot of corporate offices moving from South Mumbai to Goregaon-Andheri area. (One can counter this argument by talking about healthy supply in Nesco’s area. I believe Nirlon also has land there)
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- The company’s business is very susceptible to macro slowdown. BEC revenues will be especially hit and IT building rentals will come under pressure. This is more of a systematic risk and will affect equities as an asset class on the whole, not just Nesco. Also, slowdown fears in Mumbai real estate market are being talked about. This can affect the IT buildings part of the business.
- The company pays pathetic dividend of Rs.2.5 per share. Payout is about 7%. If one wants to hold on to this stock for extended periods of time (8-10 years or so), absence of meaningful dividend payout will be a deterrent for any investor. However, in my view, it is criminal to ask this company for dividend! The cash is better left in the company’s hands! Payback period in incremental IT buildings is 2-3 years! How much will a shareholder earn out of the money he receives as dividend? Surely not as high! However, I think that absence of large dividend payout has been depressing the valuations of the stock (irrationality of Mr.Market?) Over a period of time, the sheer quantum of earnings and cashflow should be so large, that Rs.750 cr market cap would appear just too less. (upon completion of IT building 4, PAT, which is effectively cash earnings could be as high as Rs.150 cr)
- I think that the biggest risk against investing in this company is capital misallocation. Until now, the management has not done any hanky-panky in the business. They do not even take remuneration which they are legally entitled to! However, risk of capital misallocation exists in following cases:
- During real-estate-craze-times, the stock gets bundled up with all the other land bank stories and runs pretty wild. (Some may not take this as a negative point!)
Cheers and happy investing!!
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