The Pitch

23 November 2017 For private circulation only

NESCO LTD INITIATING COVERAGE

RECOMMENDATION - BUY
CMP Target Price Investment 52 Week Market Cap 3 Months
(Rs) (Rs) Horizon High/Low (Rs) (Rs mn) Avg daily Vol. (Nos)
509 611 12 Months 591 / 370 35,864 30,390

We initiate our BUY recommendation NESCO Ltd

Established in 1939 as the New Standard Engineering Company Ltd (NSE), the company has been a pioneer in the tool
manufacturing segment, as it brought into the country, world class processes and designs for the manufacture of a
number of engineering products. Later, the name of the company was changed 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:
 In 1959, NESCO consolidated its operations and moved to a 70 acre estate (source: www.nesco.in) on the
Western Express Highway at Goregaon in Mumbai;
 In 1986, it diversified into the realty business by developing and providing customized built-up space for
multinational companies and leading corporate at Goregaon;
 In 1992, NESCO set up an exhibition centre – known as the Bombay Exhibition Centre at this Goregaon complex.
Starting with a hall area of 200,000 sq.ft., this has now been expanded to over 500,000 sq ft;
Through this transformation, 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;

Attractive Business Models offer Steady Growth Opportunity in the long term
i. The Bombay Exhibition Centre (BEC):
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, events since inception. What Sets this Venue apart
from the rest, is the presence of various permanently air conditioned halls ranging from an area of 2,000 Sq. Mts to
20,000 Sq. Mts. BEC 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. NESCO is planning to set up convention and
auditorium centre at Bombay Exhibition Centre with total development of 0.8 msf in phase-I entailing capex of Rs.7,000
million. The construction for the same is expected to start after a year.
ii. IT Parks:
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 clientels 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. The construction work is in full swing. The management expects to complete construction by December, 2018.
Post this expansion, total IT park leasable area would increase to 2.13 msf for which the pre-selling activity has already
started. IT park revenues have grown robustly at 43.7% CAGR in FY2014-FY2017 to Rs.1,419 million. The new IT Park
will significantly boost IT park revenues over the next few years.
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. In place like Mumbai, the rental incomes keep rising in the normal circumstances over a
period of time. Due to such nature of steadily growing business models, NESCO’s revenues as well as net profits have
The Pitch 23 November 2017

roughly doubled in the last 4 years. While total revenue has grown from Rs.1,611 million in FY2014 to Rs.3,086 million
in FY2017, its net profit has jumped from Rs.810 million to Rs.1,694 million in the same period.

Diversification into Food Courts to add value in future

NESCO has diversified into food court business through its wholly-owned subsidiary, Nesco Hospitality Private Ltd (NHPL).
NHPL earned revenue of Rs.56.8 million in FY2017 as compared to Rs.22.3 million in FY2016, more than 100% year-on-
year growth. The company has commissioned two food courts and started food services within NESCO Complex with
leading international and national food brands and is targeting to cater to the growing demand of quality food services
from the exhibition organizers, exhibitors, visitors and employees working in NESCO IT Park. It plans to set up a large
kitchen facility in area admeasuring approx. 24,000 sq. ft. The facility will have capacity to produce about 15,000 meals
per day. An investment of about Rs.150 million is being made in this new world class, hygienic, kitchen facility

Major expansion to drive profit growth in future

The management has indicated in its latest annual report that it has 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. This valuation gap between the EV and land bank value, in our view, represents about 100% in excess of
current market cap. 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. We firmly believe
that this company deserves substantially higher valuation multiple considering the intrinsic value of land bank, significant
cash position and growth outlook for its businesses.

Risk to View
Any possible severe deflationary trend in the Indian industrial economy could impact adversely its exhibition business.
Source for the information: Company Annual Report, Company Website, Quarterly Results and Company Presentation
and our estimates.

Financial Summary
FY Ended (Rs Mn) Net Sales Change PAT Change EPS Change P/E
(Rs Mn) (%) (Rs Mn) (%) (Rs) (%) (x)
FY2017 3,085.6 17.0 1,694.2 17.5 24.05 17.5 21.1
FY2018E 3,394.2 10.0 1,880.2 11.0 26.69 11.0 19.0
FY2019E 3,801.5 12.0 2,125.1 13.0 30.16 13.0 16.8
Source: Company Annual Report, Equinomics Research and Advisory Pvt Ltd.

Relative to sensex
170 Sensex NESCO
155
140
125
110
95

Source: Equinomics, NSE. On base of 100

The Pitch 23 November 2017

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ACCUMULATE- We expect this stock to deliver 5-10% returns over the next 12 months.
HOLD- We expect this stock to deliver 5% returns over the next 12 months.
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The Pitch 23 November 2017

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