Analyst Report : NESCO Ltd. (BUY; Estimated Price: Rs. 1842)

Introduction:

NESCO was established in 1939 as a manufacturer of tools and surface preparation machines which are supplied to various industries in India. It started as an engineering firm but slowly diversified into two other segments, namely incubator (exhibition hall) and real estate (renting and leasing of offices). As its core operation was engineering products, the company had plants at multiple locations in Mumbai but soon it consolidated all the plants in a single 70 acre land brought in Goregaon on the Mumbai-Goregaon Express Highway.

Figure 1: The sectors in which NESCO operates

Shareholding Pattern:

Category	Number of Share Held	% of Share Held
Promoter(s) holding
Indian	8711931	61.82
Foreign	750000	5.32
Sub-total	9461931	67.14
Non-promoters holding
Institutional investors
Mutual funds	405818	2.88
Banks, FI’s, Insurance companies, Central / State Govt. Inst, Non-government Inst	138989	0.99
Venture capital	4050	0.03
FII (s)	856270	6.08
Sub-total	1405127	9.97
Non-Institutions
Private corporate bodies	332648	2.36
Indian public	2849467	20.22
NRIs / OCBs	39967	0.28
Government	0	0.00
Any other - Clearing members	2852	0.02
Sub-total	3224934	22.88
Grand total	14091992	100.00

Business Description:

Since the inception of the company, it was operating as an engineering firm but today’s scenario has changed a lot and the company’s revenue has decline in recent years though the CAGR is 10.85% for last 5 years in the engineering segment. The industry is dominated by few major players like Blastrac India, MEC and NESCO being one of them but NESCO lost its hold in the market thus declining its revenue from the engineering segment. The revenue break up for the last 5 years is:

Operations	(In Crores)
	2010-11	2011-12	2012-13	2013-14	2014-15
Convention & Exhibition Centre	67.37	78.63	93.13	96.53	81.29
Information technology park	33.74	26.72	27.86	47.83	90.67
Industrial Capital Goods	15.81	23.66	22.89	16.83	16.90
Engineering Fees, Services & Other chargers	1.03	1.31	2.19	1.56	1.01
Hospitality Division					6.10
Total	117.95	130.31	146.07	162.75	195.97

Figure 2: The revenue Break up

Details of Products/Services:

Information Technology Park:

The CAGR for the last five years in Information Technology Park is almost 21.86% and the hike in the revenue from IT Park of almost 100% is due to the new IT Building 3 coming into operation by 2013. The new building has a total floor area of 650000 sq. ft and 400000 have already been leased giving a utility factor of 61.54% in the first year itself.

The company owns 3 IT building, building 1 and 2 is fully occupied by TATA and Serco respectively and the building 3 is 62% occupied by corporate. The contracts renew every three years and in 2012 the contract for both the building 1 & 2 were renewed.

Exhibition Hall:

This sector is also generating high revenue for NESCO over a decade and it accounts for almost 55% of the total revenue for the last five years. This exhibition hall is the largest privately owned hall and the most promising exhibition hall in India. The hall is mainly rented for seminars, trade fairs and exhibitions. The exhibition hall is rented for approx 3 days on an average for an exhibition or trade fairs or expos. 

The huge floor area allows it cater to almost 110 to 115 events (including exhibitions, expos, fairs and etc.) on a Y-o-Y average. The monthly average is 10 events.

Financial Year	No of Exhibitions
2011-2012	116
2012-2013	95
2013-2014	114
2014-2015	130

The revenue in 2013-14 compared to 2012-13 increased by only 3 crores and in 2014-2105 it declined by almost 15 crores. This sudden decrease is due the international slowdown and is not a company specific problem. Thus we can neglect this but the y-o-y increase in the revenue from this account is due to the price difference.

This gives a clear view of the revenue break up from various operations by NESCO.

Indabrator – Industrial Capital Goods:

NESCO started with this sector as one of the big players in supplying tools and surface preparation machineries but with players like Blastrac India, MEC and others, the market became saturated. One of the reasons for the market to reach saturation is due the base of purchasers or the customers. As these are huge machine used in large manufacturing industries such as automobile, marble and other surface related industries. These industries as also limited to few players having manufacturing plant in India thus demand being limited. In later years, NESCO also started with giving services in the engineering field which also contributed on an average 1% of the total sales for 5 years.

 

Capacity of the company to provide services:

One of the biggest advantages in terms of capacity is that they brought a 70 acre land on Mumbai-Goregaon highway long back. This has reduced the expenditure and investments which would have required buying huge lands today.

IT Park:

	Floor Area (Sq. ft)	Utilized (Sq. ft)
IT Building 1	165000	Full Tata
IT Building 2	115000	Serco Full
IT Building 3	650000	400000
IT Building 4	800000	NA (Yet to Completed)

The IT building with total floor area of 6.5 lakh sq. ft has a cost around INR 185 crores. Thus providing helping us in understanding the cost per sq. ft and revenue per sq. ft., i.e.:

Particulars	Numbers	Particular	Numbers
Total Floor Area (In Sq. ft)	650000	Total Floor Area Utilized (In Sq. ft)	400000
Total Cost of IT building 3 (In Crores)	180.76	Revenue from IT building 3 for 2014-15 (In Crores)	42.84
Cost per Sq. ft (In INR)	27.81	Revenue Per Sq. ft (In INR) for 2014-2015	10.71

Exhibition halls:

Halls	Floor Area (Sq. M)
Exhibition Hall 1	19143
Exhibition Hall 2	2361
Exhibition Hall 4	7378
Exhibition Hall 5	11799

Indabator:

This sector is widely affected by the economic conditions. In FY 2012-13, they came up with 20000 sq ft Research and Development space to develop new products. In spite the efforts of management, the revenue contribution from sector have not seen a growth and in fact the sales ahs decreased by 27%. The revenue also consists of about 20% export sales. They have the required capacity and manpower but the market has saturated which is the concern. However, as the ‘Make in India’ campaign is boosting the foreign confidence to set up plants in India, which will require heavy surface preparing machines, we can expect NESCO to capture this opportunity.

Industry Analysis:

NESCO’s Convention and Exhibition Centre is one of the top three venues for exhibition in India and it is also one of the largest in terms of floor area. This gives NESCO an added benefit and considerable share of market.

Though there are lot of IT park in India but still there is a considerable demand for IT space and NESCO having huge land at almost free gives them advantage to compete in prices and space. This advantages is rare with others players in the industry. This makes NESCO as one of the prominent player and provider of IT space at very competitive prices while earning a high margin.

Ratio and Market Analysis:

Ratio Analysis:

	2010-11	2011-12	2012-13	2013-14	2014-15
Days Inventory Outstanding (Days)	139.804	143.7411	145.5002	182.5104	259.9873
Days Receivables Outstanding (Days)	29.84409	23.16668	24.566	25.33195	20.14595
Days Payables (Days)	234.4974	257.6218	233.0073	308.7399	171.9154
Cash Conversion Cycle (Days)	-64.8493	-90.714	-62.941	-100.898	108.2179
Profit for the year (INR)	68.62	67.34	81.69	81.02	111.63
Book Value (INR)	161.63	205.88	259.74	311.37	382.98
ROC (%)	0.424577	0.327059	0.314496	0.260223	0.291489
COC (%)	0.07	0.07	0.07	0.07	0.07
Capex (INR)	79.10	103.73	4.03	4.75	99.79
Change in WC (INR)		-1.46	0.78	0.50	0.50
Depreciation (INR)		3.21	5.37	11.29	6.70
RR (%)		1.47	-0.01	-0.07	0.84

Market Analysis:

NESCO enjoys the highest share of revenue from the IT parks and thus an analysis of the growth of the IT industry in India will directly impact the revenue. India is able to emerge as the most stable nation in last few months with positive sentiments in the market and India’s IT industry has also been able to achieve the expectations while keeping its revenue growing. Thus the expansion and building of the new IT buildings can be justified with the growing IT industry. The IT building I and II are leased out to TATA and Serco, moreover the IT building III is also leased out almost 67%. And with the IT industry again showing positive sentiments and increase intake in terms of man power, the market is has potential.

The price of land at Mumbai-Goregaon highway is around INR 5000-6000 per sq ft which requires a huge investment to build IT Park in the location thus creating a barrier for other organizations. As NESCO do not require this investment and so they are very competitive in the market with high profits. Thus giving NESCO enough potential to generate revenue through this account.

NESCO core business is the engineering division which has not seen much growth in terms of revenue and market share. But with the Make in India campaign, many foreign players in industries like automobile and metals have announced investments and are looking forward to start their plants in India which will surely give NESCO an opportunity to increase its market share.

Financial Analysis:

Consolidated Balance Sheet of Last Five Years:

(In crores)

EQUITY AND LIABILITIES	2010-11	2011-12	2012-13	2013-14	2014-15
Share Capital	14.09	14.09	14.09	14.09	14.09
Total Reserves	213.68	276.04	351.93	424.68	525.60
Shareholder's Funds	227.77	290.13	366.02	438.78	539.69
Deferred Tax Assets / Liabilities	0.86	0.85	2.24	2.11	2.20
Other Long Term Liabilities	26.44	22.27	23.26	60.83	73.23
Long Term Provisions	13.81	13.85	13.97	13.58	13.76
Total Non-Current Liabilities	41.10	36.97	39.47	76.51	89.19
Current Liabilities
Trade Payables	7.76	7.91	7.75	7.45	5.09
Other Current Liabilities	31.54	39.72	28.03	29.00	31.29
Short Term Borrowings
Short Term Provisions	5.37	6.34	5.85	8.78	10.98
Total Current Liabilities	44.68	53.97	41.63	45.23	47.37
Total Liabilities	313.55	381.07	447.12	560.52	676.25
Non-Current Assets
Gross Block	63.47	76.43	196.27	208.95	215.02
Less: Accumulated Depreciation	29.28	32.49	37.85	49.14	55.84
Net Block	34.19	43.94	158.42	159.81	159.18
Lease Adjustment A/c
Capital Work in Progress	79.10	103.73	4.03	4.75	99.79
Non Current Investments	0.03	0.03	0.03	0.03	0.28
Long Term Loans & Advances	1.85	1.21	1.33	2.32	1.73
Total Non-Current Assets	115.18	148.92	163.81	166.92	260.97
Current Assets  Loans & Advances
Currents Investments	158.55	210.13	258.40	368.39	383.80
Inventories	4.63	4.41	4.84	4.40	7.70
Sundry Debtors	9.51	8.12	9.66	11.18	10.73
Cash and Bank	10.16	4.25	2.14	4.35	4.76
Other Current Assets	0.26	0.04	0.27	0.48	0.04
Short Term Loans and Advances	15.26	5.20	8.01	4.79	8.24
Total Current Assets	198.37	232.15	283.31	393.60	415.28
Net Current Assets (Including Current Investments)	153.69	178.18	241.68	348.38	367.91
Total Current Assets Excluding Current Investments	39.82	22.02	24.91	25.21	31.48
Total Assets	313.55	381.07	447.12	560.52	676.25

 

The balance sheet clear states that the company is free of debt and have enough cash surplus to manage its Capital Expenditure and working capital. The capital work in progress is for the IT building IV and further they will have to invest INR 111 crores in the subsequent year which is taken care of in the projected balance sheet. They have huge amount accounted to current investments, these are investments in bonds, papers and equity market. The returns through these investments counts to almost 8% of company total revenue.

Consolidated Profit & Loss Account

(In crores)

	2010-11	2011-12	2012-13	2013-14	2014-15
No of Months	12.00	12.00	12.00	12.00	12.00
INCOME :
Gross Sales	117.95	130.30	146.07	162.75	195.98
Less: Excise Duty	1.60	2.32	2.61	1.64	1.53
Net Sales	116.35	127.98	143.46	161.11	194.45
EXPENDITURE :
Increase/Decrease in Stock	-0.72	1.09	-0.95	-0.08	-1.76
Raw Material Consumed	12.08	11.20	12.14	8.80	10.82
Power & Fuel Cost	1.95	1.21	1.93	3.61	2.98
Employee Cost	4.85	6.17	6.59	6.81	7.11
Other Manufacturing Expenses	7.71	7.29	10.15	8.87	6.27
General and Administration Expenses	12.76	8.14	10.08	20.44	26.18
Selling and Distribution Expenses	0.41	0.28	0.32	0.18	0.36
Miscellaneous Expenses	2.84	2.45	2.28	4.77	4.52
Total Expenditure	41.88	37.84	42.55	53.39	56.46
Operating Profit (Excl OI)	74.48	90.14	100.91	107.72	137.99
Other Income	10.63	11.49	19.31	20.31	28.62
Operating Profit	85.11	101.64	120.22	128.03	166.61
Interest	0.62	1.37	0.72	0.11	0.13
PBDT	84.49	100.26	119.50	127.92	166.48
Depreciation	2.26	3.42	5.83	11.03	6.70
Profit Before Taxation & Exceptional Items	82.24	96.85	113.67	116.90	159.77
Exceptional Income / Expenses	17.77	-0.02
Profit Before Tax	100.01	96.82	113.67	116.90	159.77
Provision for Tax	31.39	29.49	31.99	35.87	48.14
Profit After Tax	68.62	67.34	81.69	81.02	111.63

There is a sharp increase in PAT in 2012-13 and this is due to the Income from Exhibition Centre. This year they revised the rates per sq ft to INR 125 per sq ft per day and INR 100 per sq ft per day for the setup days and INR 75 per sq ft per day for Air conditioner. This revised rate helped them generate more revenue from.

 

The operating profit (NOPAT) is increasing on an average of 17% for last 5 years. But the operating revenue increased by 37% in FY 2014-15 which came from the IT building III.

Consolidate Cash Flow

(In crores)

	2010-11	2011-12	2012-13	2013-14	2014-15
Profit Before Tax	82.24	96.85	113.67	116.90	159.77
Adjustment	-3.33	-4.77	-11.30	-3.68	-17.50
Depreciation	2.26	3.42	5.83	11.03	6.70
Interest Expenses	0.31	0.80	0.72	0.11	0.13
Profit/Loss on sale of Fixed Assets		-0.10	-0.11		0.00
Profit/Loss on sale of investments	-1.41	-5.07	-17.62	-16.47	-25.29
Dividend Received	-5.68	-5.30
Interest Income			-0.18	-0.10	-0.08
Bad debts irrecoverable written off	1.20	1.49	0.07	1.77	1.04
Changes In working Capital	20.21	17.69	-16.35	41.69	9.45
Trade & Other receivables	10.59	12.32	-4.70	0.49	-1.98
Inventories	-1.22	0.21	-0.43	0.44	-3.30
Trade & Other payables	10.96	5.17	-11.22	40.76	14.73
Others	-0.11	-0.01
Cash Flow after changes in Working Capital	99.12	109.77	86.03	154.91	151.72
Interest Paid	-0.56	-1.29
Tax Paid	-31.39	-29.49	-30.60	-36.00	-48.05
Extra & Other Item	11.23	-6.44	-0.07	-1.77	-1.04
Cash From Operating Activities	78.41	72.56	55.36	117.14	102.63
Cash Flow from Investing Activities	-70.45	-78.47	-50.98	-106.58	-91.37
Purchase of Fixed Assets	-52.90	-38.15	-21.33	-13.17	-101.10
Sale of Fixed Assets		0.41	0.82		0.00
Profit/Loss on sale of Investments	1.41	5.07	17.62	16.47	25.29
Purchase of  Investment	-24.90	-51.58	-48.27	-109.99	-15.65
Dividend Income	5.68	5.30
Interest received	0.25	0.49	0.18	0.10	0.08
Cash from Financing Activities			-6.49	-8.35	-10.85
Equity Dividend Paid			-5.77	-7.05	-9.16
Interest Paid			-0.72	-0.11	-0.13
Net Cash Inflow / Outflow	7.96	-5.91	-2.11	2.21	0.41
Opening Cash & Cash Equivalents	2.20	10.16	4.25	2.14	4.35

 

 

Projected Consolidated Balance Sheet of Last Five Years:

(In crores)

EQUITY AND LIABILITIES	2015-16	2016-17	2017-18	2019-20	2020-21
Share Capital	14.09	14.09	14.09	14.09	14.09
Total Reserves	657.51	777.12	928.71	1095.43	1307.56
Shareholder's Funds	671.60	791.21	942.80	1109.52	1321.65
Deferred Tax Assets / Liabilities	2.2	2.2	2.2	2.2	2.2
Other Long Term Liabilities	95.71	86.78	109.98	120.96	126.99
Long Term Provisions	13.76	13.76	13.76	13.76	13.76
Total Non-Current Liabilities	111.67	102.74	125.94	136.92	142.95
Current Liabilities
Trade Payables	5.86	6.74	7.41	8.15	8.56
Other Current Liabilities	31.92	31.92	31.92	31.92	31.92
Short Term Provisions	14.59	13.23	16.76	18.44	19.36
Total Current Liabilities	52.36	51.89	56.10	58.51	59.84
Total Liabilities	835.63	945.84	1124.83	1304.96	1524.44
ASSETS
Non-Current Assets
Gross Block	197.20	351.79	352.84	354.16	355.83
Less: Accumulated Depreciation	36.88	65.78	65.98	66.23	66.54
Net Block	160.33	286.01	286.86	287.94	289.29
Capital Work in Progress	0	125	0	0	0
Non Current Investments	0.03	0.03	0.03	0.03	0.03
Long Term Loans & Advances	1.69	1.69	1.69	1.69	1.69
Total Non-Current Assets	162.05	412.72	288.58	289.65	291.01
Current Assets  Loans & Advances
Currents Investments	501.57	454.79	576.35	633.94	665.53
Inventories	8.86	10.19	11.21	12.33	12.94
Sundry Debtors	12.44	14.31	15.74	17.31	18.17
Cash and Bank	139.74	43.84	220.36	337.90	522.28
Other Current Assets	0.22	0.22	0.22	0.22	0.22
Short Term Loans and Advances	10.769	9.764	12.374	13.611	14.289
Total Current Assets	673.59	533.12	836.25	1015.31	1233.44
Net Current Assets (Including Current Investments)	621.22	481.23	780.16	956.80	1173.60
Total Current Assets Excluding Current Investments	172.02	78.32	259.90	381.36	567.91

The growth in revenue is accounted by the new buildings in the IT Park, which will be the major contributor in its revenue.

Projected Consolidated Profit & Loss Account:

(In crores)

	2015-16	2016-17	2017-18	2019-20	2020-21
INCOME
Gross Sales	225.37	259.18	285.09	313.60	329.28
Less: Excise Duty	1.76	2.02	2.23	2.45	2.57
Net Sales	223.61	257.15	282.87	311.16	326.71
EXPENDITURE :
Raw Material Consumed	12.44	14.30	15.73	17.31	18.17
Power & Fuel Cost	3.42	3.94	4.33	4.77	5.00
Employee Cost	8.17	9.40	10.34	11.37	11.94
Other Manufacturing Expenses	7.21	8.29	9.12	10.03	10.53
General and Administration Expenses	30.10	34.62	38.08	41.89	43.99
Selling and Distribution Expenses	0.41	0.47	0.52	0.57	0.60
Miscellaneous Expenses	5.20	5.97	6.57	7.23	7.59
Total Expenditure	66.95	76.99	84.69	93.16	97.82
Operating Profit (Excl OI)	156.66	180.16	198.18	218.00	228.89
Other Income	32.92	37.85	41.64	45.80	48.09
Operating Profit	189.58	218.02	239.82	263.80	276.99
Interest	0.13	0.13	0.13	0.13	0.13
PBDT	189.45	217.89	239.69	263.67	276.86
Depreciation	-18.97	28.91	0.20	0.25	0.31
Profit Before Taxation & Exceptional Items	208.42	188.98	239.49	263.42	276.55
Profit Before Tax	208.42	188.98	239.49	263.42	276.55
Provision for Tax	62.52	56.69	71.85	79.03	82.96
Profit After Tax	145.89	132.29	167.64	184.39	193.58

Projected Consolidate Cash Flow:

(In crores)

	2015-16	2016-17	2017-18	2019-20	2020-21
Profit Before Tax	208.42	188.98	239.49	263.42	276.55
Adjustment	18.84	-29.04	-0.33	-0.38	-0.44
Depreciation	-18.97	28.91	0.20	0.25	0.31
Interest Expenses	0.13	0.13	0.13	0.13	0.13
Changes In working Capital	3.63	4.07	3.12	3.44	1.89
Cash Flow after changes in Working Capital	230.88	164.02	242.29	266.48	277.99
Tax Paid	-62.52	-56.69	-71.85	-79.03	-82.96
Cash From Operating Activities	168.35	107.32	170.44	187.45	195.03
Cash Flow from Investing Activities	-19.40	-190.54	22.14	-52.25	7.90
Purchase of Fixed Assets	-20.00	-20.00	-100.00	-20.00	-20.00
Purchase of  Investment	0.60	-170.54	122.14	-32.25	27.90
Cash from Financing Activities	-13.98	-12.68	-16.06	-17.67	-18.55
Equity Dividend Paid	-11.95	-10.83	-13.73	-15.10	-15.85
Income tax on dividend paid	-2.03	-1.84	-2.33	-2.57	-2.69
Net Cash Inflow / Outflow	134.98	-95.89	176.52	117.53	184.38
Opening Cash & Cash Equivalents	4.76	139.74	43.84	220.36	337.90

Price Performance:

This year the share price of NESCO was almost constant and remained in the range of INR 1350 to 1650. The variation with the market price is:

Thus after all calculations, the value per share comes out to be INR 1842.12

About the Author

This report has been prepared by Piyush Agarwal. He is pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, India.

Disclaimer 

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only.

 
 

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