4th July 2017

SECURITIES PVT. LTD

NESCO LTD
Stock Data

Listed on Industry CMP Recommendation 52 Week Avg. Time Market

High/Low Daily Horizon Cap in
Volume Crs.
NSE/BSE Diversified Rs. 2415 BUY 2722 /1540 5310 More than 3360 Cr
2 Years

About NESCO Ltd

Nesco is a diversified player across IT parks, Bombay Exhibition Centre (BEC), hospitality and Industrial capital
goods. It owns a 70 acre land bought in 1960s on the Western Express highway in Goregaon, Mumbai. There are 3 IT parks
constructed and fully occupied in this area. The BEC is also located in this plot. Still around 60% of the plot is vacant which
will be used to create more IT parks and also for the expansion of BEC. The IT Park and BEC form biggest components of
the revenue contributing 45% and 42% respectively. Let us explore these business segments in more detail.

Business Segments
1. Nesco IT Parks: The Company has built buildings and renting the same as commercial space. IT parks 1 & 2 have
combined space of 240,000 square feet. IT Park 3 has an area of 650,000 square feet and was completed 2013 has also
been fully rented. The clients who are renting space currently include Sodexo, TCS, KPMG, intelenet, HSBC, etc.
Currently the construction of IT Park 4 is ongoing which has built up area of 1,700,000 square feet and leasable area of
1,200,000. This is expected to complete by this yearend or next year mid. Once this building gets completed, the
revenues will get a massive boost. Considering 85% occupancy rate for new building at current rent/sq feet/month of
120Rs, would increase the revenues by 146Crs. Due to the relaxation of FSI rules by the government, NESCO has decided
to redevelop IT park 1 and 2. This would be started upon completion of park 4. Redevelopment would take 5/6 years
from now.

2. Bombay Exhibition Centre: BEC is a 45,000 sq. Feet area having 4 halls of different sizes. It is the largest exhibition
centre in Mumbai. It is located on Western express highway in Goregaon. It is less than 20 minutes away from Mumbai
International Airport. Due to availability of such large space and proximity to airport, BEC runs a business in which it has
virtual monopoly. Buying or leasing such a large piece of land to build an exhibition centre is an extremely expensive
affair and hence this acts as a strong entry barrier for new entrants. Hence NESCO has a moat here. The Company has
planned the expansion of BEC area to 15 lakh sq. feet. Since the land is virtually free, the capital expenditure required
would only be for setting up the infrastructure.

3. Hospitality: Nesco has established a new subsidiary and entered into hospitality space. It has started food court
services within their compound. It has tied up with various international and national brands which have food outlets.
This caters to demand for good food services from organisers, exhibitors, visitors and IT park staff. Earlier all these
people had to go all the way out of the campus to have food as no service was available. This segment now serves to the
ready demand for food. The company plans to build a large kitchen measuring 24,000 sq. feet. This new facility would
have capacity to serve 15,000 meals per day. This would serve large gatherings in a big exhibition.

4. Capital Goods Division: Named Indabrator, this segment is a leading manufacturer, supplier, and exporter of surface
preparation equipment. Indian railways, companies from heavy engineering industries, defense organisation, are the
clienteles for this division. It is a slow growing division, more of a legacy segment in which the company is involved since
its inception. It has plants in Gujarat where the manufacturing takes place.
 4th July 2017

The contribution to the

revenue by various
segments of the company is
shown. As we can see
revenue from IT and BEC
form almost 87% of the
revenue. Although BEC
takes only 5.49% of the
company assets, it
contributes 42% to the
revenue showing high ROA

Financials and Valuation

 Nesco has been able to grow its Sales at CAGR 21.5% over the last 3 years, whereas during the same time, its profit has
grown at 15.53%. With the new IT Park coming up, and the planned expansion of BEC, we expect the sales to grow at
higher rate in FY 19.

 It is a Debt free company and carries 0 long term debt on its balance sheet. Its return ratios are also impressive. Its
return on equity over the last 3 years has been 21.24%. Also its last 10 years average return on equity has been an
impressive 25% which means the company has consistently done well over the years. Major factor contributing to such
performance is its monopolistic position in exhibition space which has high entry barriers.
 Nesco has also been able to maintain impressive margins. Its last 5 years average operating margins is 70.4% whereas
its net profit margin over the same period is 54%. Since the land is owned and is virtually free, major cost is avoided and
thus it is able to maintain such high margins.
 4th July 2017

 Of the balance sheet size of 1033 Crores, Nesco has around 409 Crores in Investments. This means it has significant
room to spend the amount required for capital expenditure without worrying about raising debt.
 At current CMP, Nesco trades at 19.31 times its FY17 Earnings and 3.9 times its FY17 Book value. Although the valuation
is not cheap, it is reasonable given the potential of the company. The market cap of the company is 3340Cr but the value
of 70acre land in Goregaon is estimated to be around 6000Cr. This provides sufficient margin of safety to make the
investment.

Risk Factors to Consider:

 The earlier expansion of IT Park 3 was delayed by 12 month. Similar delay might happen for IT park 4 as well. In case it
does, it will delay the sales growth. This might also set a chain of delays as all the expansion plans are scheduled one
after another, and all will be internally funded which might again take time.
 Location concentration is also a risk factor. The Company depends on a single location (Goregaon) for most of its
earnings. 2008 terrorist attacks in Mumbai projected the city as unsafe place for investment. This perception led to
cancellation of many exhibitions in BEC and hence revenues of Nesco dropped in FY2009. Such risk still exists.
 This business is highly correlated with the economy it works in. Although the possibility is remote, but if Indian
economy goes through a recession or slowdown, the occupancy rate in IT Park might come down. Also BEC may see less
number of exhibitions.

Conclusion and Recommendation

The company has been growing consistently over the past few years and the future looks promising. Although
quick returns should not be expected from the stock as it is fairly valued. But for investment over the long term of more
than 3 years, the stock should deliver good returns for the investor. The company is also going for the stock split from Face
value of Rs. 10 to Face Value Rs. 2, which will increase its liquidity in the market. With around 60% of the total 70acre land
still vacant, there is a lot of scope for future expansion. Upon completion of IT Park 4, substantial revenue will be added
and upon the completion of BEC expansion, it will become one of the biggest exhibition centres in the world based in the
financial capital of India.

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