NESCO Ltd Fundamental Analysis

March 18, 2018 6 Ankit Shrivastav

Introduction:

NESCO is a holding company engaged in diversified businesses. The company was established in 1939 as a leading engineering tools and equipment provider for various engineering companies.

Company provides forging hammers, blow room lines and high production cards for textile industry. The company continues to be frontrunners in supplying engineering products and has also found its niche overseas.

In the year 1986, company diversified its business into realty business by developing and providing customized built up space for corporates. NESCO set up an exhibition centre called Bombay Exhibition Centre on Western Express Highway Mumbai, which was initially established at 2,00,000 sq ft, and has now expanded to 5,00,000 sq ft. This exhibition centre holds the distinction of being the largest privately held exhibition centre in India.

The Exhibition centre has held 109 exhibitions in 2016-17, bringing more visitors to Mumbai than any other avenue.

Financial highlights:

NESCO generates revenue from three different streams. It owns and manages IT parks, which is provided to corporates on license basis, it also has a an exhibition and convention center which provides space for trade fairs, exhibitions, and many other business related activities.

The engineering group of the company provides equipments to railways, ordnance factories, and forging plants.

Company enjoys high profit margins as all its IT parks are fully occupied and generate recurring revenue every year.

Clients booking Bombay Exhibition Centre have to pay a percentage of total amount in advance, that gives company sufficient capital to meet its operation needs.

Revenue Breakup:

Majority of Companys revenue comes from licensing of IT park space, and rental income from Bombay Exhibition Centre. Both the revenue stream together form about 90% of the total revenue of the company. Rest of the 10% is contributed by its engineering business. As per the Annual report of the company, the IT park business generated Rs. 142 crores of revenue(which is 45% of the total revenue), while Bombay Exhibition Centre contributed Rs. 132 Crores of revenue(which is 42% of the total revenue).The Engineering division of the company contributed Rs. 33.88 Crores to the top-line of the company. A screenshot from Company’s annual report is given below:

NESCO Annual report

Net Revenue from Operations:

Net Operating Revenue is the Net revenue generated by the business solely from its core operations, after deducting the cost of sales and other expenses.

NESCO has posted strong growth in Net operating Revenue in the last 5 years. In the year 2013, company posted Net Operating Revenue of Rs. 141 crores, while in 2017 it went up to Rs. 301.93 crores, a CAGR growth of 16.4%. As per the latest annual Report the total turnover of the company increased by 19.35% over previous year.

Net Profit:

Net profit is also referred to as bottom line, net income and net earnings. Net profit is the part of company’s total revenue left after paying for operating expenses, taxes, interests, preferred stock dividends.

NESCO has posted good growth in Net Profit as well, while in 2013 the Net Profit of the company was Rs. 81.69 crores, in 2017 it went up to Rs. 169.42 Crores, a CAGR growth of 15.71%. Company is also a generous in terms of dividend payout. In the recent annual report, company paid 110% dividend to shareholders that amounts to Rs. 11 per share, higher than previous year which was Rs. 8.5 per share.

Basic Earnings Per Share(BEPS):

Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.

NESCO has doubled its EPS in the past 5 years, in 2013 the EPS of NESCO was 57.97 per share, which went up to 120.23 per share in 2017, a CAGR growth of 15.71%.Increasing EPS is a better indicator of profitability as it gives real profit on per share basis. In case the company floats more shares in the market to raise money, the EPS will change.

Net Profit Margins:

Net Profit margin is the key ratio which is used to compare profitability of two or more companies working in the same sector. Net profit margin is a measure of how much percentage of total sales remains with the company as profit after all the expenses are paid.

NESCO enjoys high Net Profit Margins, of around 55% to 56%. The reason why NESCO has such high profit margin is because of its business model that allows it to collect payments upfront. If a client want to rent Bombay Exhibition Centre, it has to pay a percentage of total money up front in advance. An upfront payment covers major part of NESCOs Operating Expenses, and company does not have to spend its own capital to service its clients.

Return on Capital Employed(ROCE):

ROCE or Return on Capital Employed, is a measure of how efficiently the capital of a company is being used to generate profit. ROCE is expressed in percentage terms. A company with ROCE of 20% means out of every 100 rupees employed as capital, company is able to make a return of rupees 20.

NESCO has posted stable ROCE numbers in the past 5 years.In 2013 the ROCE of NESCO was 20.14% while in 2017 it was 17%. The numbers have seen slight decline in the recent years as company is investing its capital in construction of fourth IT park.

Debt to Equity:

Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that majority of company is financed by loans and other debt (such as debentures and bonds).

NESCO has been a zero debt company for the last 5 years or more. It is a strong positive sign as all the profits earned by NESCO remain with the company and can be used in either future expansions or for distribution of dividends.

NESCO future Expansion Plans

Future Expansion Plans:

NESCO has started construction of its fourth IT park in Mumbai. The IT park is 1.7 million square feet in size with 16 storeys. Almost 40% of the construction has already completed and company expects the project to be ready by the Q2FY19. The total cost of constructing the park is about Rs. 500 crores, and NESCO expects to generate a revenue of Rs. 200 crores per year from this project. Going by the numbers, company expects to break even with this project in the next 2.5 years.

NESCO is also building another exhibition centre which would cost around Rs. 600 crores. The construction of this exhibition centre will begin in Q3FY18-19 and the entire cost of construction will be financed by companys internal resources, which means company will not be accumulating any debt on its books and will remain debt free in the future as well. You can read the news regarding NESCOs future plans from the link given below:

SWOT Analysis NESCO Ltd

SWOT Analysis Of NESCO Ltd:

Just like any other business, NESCO also has some strengths, weaknesses, opportunities, and threats. Let us look into each of them in detail:

Strength:

One of the biggest strengths of NESCO is the location of exhibition centre. The Bombay Exhibition Centre, one of the largest privately held and managed exhibition centres in India, close to Western Express Highway, it is located in a prominent location, allowing better footfall. The amenities provided by the company such as food court, and other hospitality services within the venue not only add value to the business, but also provide another source of revenue for the company.

The company charges its clients a percentage of total rent upfront, which covers majority of operating expenses of the company. Due to this company does not have to spend its own capital to service their clients, because of which company has a high Net Profit Margin.

Weakness:

Majority of NESCOs revenue is generated from licensing and renting out of realty space in its IT parks and exhibition centres. Dependence on licensing of realty space as only source of income is s threat as slowdown in demand for premium realty space may hurt the revenue of the company.

Opportunities:

NESCO has started construction of the fourth IT park which costs about Rs. 500 crores. The construction of this park will be completed by Q2FY18-19. The company expects to generate a revenue of Rs. 200 crores annually form this park. Once the construction is finished, the new park will boost the revenue of the company.

As new startups are emerging in every city, the need for office space is rising. Also India is emerging as a favourite destination for foreign companies(such as automobiles, gadgets) that want to showcase their products and services, and require exhibition centres to display their latest offerings. Bombay Exhibition Centre provides these companies with all the amenities that a company may look for.

Threats:

Lack of demand for premium real estate due to sluggish economy is a big threat for the business of NESCO. Threat of new entrants in the exhibition sector with better amenities and competitive price may hurt the margins and profitability of the company. However, company enjoys location advantage over its competitors as the exhibition centre of NESCO is in a premium location.

Projections NESCO Ltd

Projections:

The projections about future price of the stock will be made on two different bases, the best case scenario where we assume that all the market condition macro as well as micor will be in favour of the companys business, helping in growth of companys business.

The second is the worst case scenario, where we assume the market conditions will remain against the company, posing challenges in companys growth.

Best Case:

Assuming the investment time horizon to be at least 3 to 5 years, by the end of the year 2020, we expect the price of the stock to reach Rs. 1,011 per share a return of 20% CAGR. If an investor is willing to invest in the stock for next 5 years, the price of the stock can reach Rs. 1,700 per share.

Worst case:

In the worst case scenario, Assuming the investment Horizon to be 3 to 5 years, by the end of the year 2020, we expect the price of the stock to reach Rs. 850 per share. If an investor is willing to invest in a stock for 5 years, we expect the price to reach Rs. 1,100 per share by the end of year 2023, a CAGR return of approximately 11%.

Total Comments ( 6 )

  1. DEEPAK GUSAIN says:

    very detailed work

  2. Vijay says:

    WONDERFUL ! and nothing less. Salute to you

  3. Rashid says:

    What are your thoughts on the management of the company ?

    • Ankit Shrivastav says:

      The management of the company is very good, they have expanded their business very well, using only internal accruals, a sign of conservative yet ambitious management. The coming quarters may be subdued and BMC has not given approvals to hold exhibitions at BECC, which contributes 40% of the revenue of the company.However, in the coming years, company is going to perform well.