NESCO

Background

Established in 1939 as the New Standard Engineering Co. Ltd. the company is now known as NESCO Ltd and is a diversified player across Industrial Capital Goods, IT Parks & Realty and Exhibition and Convention Centers.

In 1959 it moved to a 70 acre estate on the Western Express Highway at Goregaon in Mumbai.
In 1986, the company diversified into the realty business by developing and providing customized built-up space for multinational companies and leading corporates at Goregaon.

In 1992, the company setup an exhibition centre – known as the Bombay Exhibition Centre – at its complex on the Western Express Highway at Goregaon, Mumbai. Starting with a hall area of 200,000 sq feet, this has now been expanded to over 500,000 sq feet. This venue holds the distinction of being the largest exhibition center promoted by the private sector in India and has hosted over 500 national and international exhibitions,trade fairs, and events since inception.


Main Products/Segments

  • Exhibitions, Trade fairs & Events – The Bombay Exhibition Center (BEC) has over 500,000 sq feet of exhibition space. Since it was established, BEC has hosted over 500 national and international trade fairs, exhibitions and events. This is the mainstay segment for NESCO and generated over 54% of Sales in FY12.
  • Commercial Towers/Realty – NESCO has leased two IT buildings for premium office space to companies like TCS, Schlumberger and others. Total leased space is 300,000 sq feet. It has also other Realty projects. Together this segment accounted for 19% of Sales in FY12. The share of this segment is slated to go up as IT Building III is now ready with 660,000 sq feet leasable space which could start generating revenues in FY13.
  • Industrial Capital Goods – This division generated 25.44 Cr in net Sales for FY12 and constituted ~18% of FY12 Sales. It contributed negligibly to EBIT in FY12 (2.5%) and has also incurred loss in FY11.
  • Investments & Other Income – With a cash chest of 210 Cr parked in Current Investments, this is a sizeable source of revenue for NESCO. In FY12 this segment contributed 8% of overall revenues

Main Markets/Customers

Exhibitors at Trade Fairs and Events

IT Building Leasers


Bullish Viewpoints

  • Great Margins and Profitability – NESCO has a stellar record on the margins and profitability front. EBITDA margins touched 79% and Net Margins touched 52% in FY12. These have seen a consistent upward curve for the last many years. FY08 EBITDA margins were at ~56% levels while Net Margin was at ~37%. RoE and RoCE have been consistently over 35% and 50% for the last 5 years and more.
  • Monopolistic Exhibition Business – The exhibition business segment enjoys a virtual monopoly because of its large size and locational proximity to airport and highways. Over the years BEC has been able to steadily increase utilisation and lease rates. Currently holds exhibitions on ~180 days for the year with partial occupancy on most days. Extrapolating FY12 Sales implies ~127  per sq feet per month lease rate in FY12 (~109 in FY11) which is much ahead of comparable office lease rentals at ~100 per sq feet per month.  The clientele is also pretty diversified with no client contributing more than 5% of the business. This is testimoney to the quality and durability of this business (sans force-majeure kind of scenarios).
  • IT Park/Realty Business – The IT Park project is planned for a total construction area of 35 lakh square feet. IT Building III recently completed had total constructed area of 8 lakh sq feet. With 660,000 sq feet lesable area, this can bring in additional 50-60 Cr in annual revenues from FY13. IT Building IV is reportedly in planning/design phase with Larsen & Toubro.
  • Exhibition Center Expansions – NESCO has plans of expanding BEC exhibition space from 500,000 sq feet to a Million sq feet. It is also trying and hopeful of getting approvals for FSI=2, which will enable it to build additional exhibition space over a second floor.
  • Vacant unused land – Apart from BEC and the IT Park, NESCO has upwards of 40 Acres of unused land. The healthy cash flows generated from the business can be used to gradually develop the remaining land parcels. The company has been very conservative in its approach. All above factors may ensure steady growth for NESCO for the next 10 years.

Bearish Viewpoints

  • Inordinate delay in Leasing out IT Building III – The Management had indicated in FY11 AR that construction is over and internal finishing was going on, and that they expected some revenues in FY12. The company has not been able to book any revenues from IT Building III.
  • Slackening Growth – NESCO registered a sales growth of only 9.83% in FY12 and degrowth in Operating and Net Profits levels. While the Exhibition Center BEC registered a Sales growth of ~16%, the IT Park/Realty segment suffered a degrowth of over 20% in FY12. The Industrial capital goods section registered a ~49% growth in FY12, but this should be seen in light of the poor base in FY11 where it had suffered a degrowth and incurred losses. At the EBIT level BEC and IT Park/Reality segments together registered a growth of less than 9%
  • Low dividend Payout – Though the company has improved its dividend paying record over the last 5 years, the payout is abysmally low at ~6% of Earnings. In absolute terms though dividends have increased at a CAGR of 49% over last 5 years. (4.23 Cr in FY12 vs 0.85 Cr in FY08)
  • Concentration of business in one location – BEC and IT Park/realty business is conducted from its 70 Acre premises in Goregaon and constitutes ~74% of its total revenues in FY12. This high concentration exposes it to risks like major terrorist attacks and other acts of nature, which does affect its business. The 2008 terrorist attacks in Mumbai dented the BEC segment business significantly.

Barriers to entry

  • Largest Exhibition space – Bombay Exhibition Centre (BEC) is the largest exhibition centre in Mumbai, spread over 450,000 sq feet  on Western Express Highway at Goregaon, near Mumbai airport and has become a permanent venue for conventions, exhibitions and trade fairs in India. Bombay Exhibition Centre (BEC) is the only place in Mumbai where large scale exhibitions can be held. The nearest competitor has only 25,000 square feet space
  • Expansions awaited – NESCO is awaiting approvals to expand this to 1 million square feet of exhibition space
  • Prohibitive cost of Land – While the cost of Land (part of 70 acre land back acquired in 1959 at throwaway prices) is low for NESCO, any new Entrant in Exhibition business will find it very difficult to acquire such a large land bank with similar logistics (on the highway and near the airport). And if it does manage, the cost will be prohibitive and strain the economics of the business – to be anywhere as competitive.
  • Strong Client Relationships – Decades of strong relationships with Global exhibition majors like United Business Media (UBM), Reed Exhibitions, and Messe Frankfurt, and Messe Dusseldorf who prefer holding their India exhibitions at BEC. It will be very difficult for a new player to get these majors to switch and gain market share at the cost of BEC

Interesting Viewpoints

  • Market Value of Land – NESCO has 70 acres of land in Goregaon, on the Western Express Highway and in close proximity to the Airport. At 40 Cr per acre, this translates to 2800 Cr, or Rs 1987, a share
  • Market Value of IT Buildings – with IT Building III (660,000 sq feet leasable space) completed, the total leasable space for the 3 buildings come to 960,000 sq feet. At 12000/- per sq feet rates for Goregaon office complexes, this works out to 1152 Cr, or ~ Rs 817, a share
  • IT Building III – IT Building III has 660,000 sq feet space ready that could be leased out in FY13. At Rs 80 per sq feet per month, this might bring in additional revenues of ~63 Cr on an annual basis. Most of it would add straight to the bottomline
  • Oshiwara Railway Station – This new railway station was proposed to come up between Jogeshwari and Goregaon railway stations, right behind the NESCO complex. This project cancelled in 2010 due to delays seems to have been revived again in May 2011. When completed this would allow easy accessibility to NESCO’s BEC and IT Park projects complex may provide a big boost.

Disclosure(s)

Donald Francis: No Holdings in the Company;


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