Why should it interest a value investor?
By IE&M Research
Highlights
- The land holding of 70 acres on the National Highway at Goregaon suburb which is conservatively valued on un-developed basis ~ 5500crore. EV (~3100crore) is 40% discount to the undeveloped land value.
- 5 year EBIDTA margin range of 67-73%
- 5 year Net PAT margin range of 46-57%
- 5 year ROE range of 20-26%
- NIL debt
- EPS growth of 17-38%, except FY14 with Nil growth
- Reserves have risen from Rs323 crore to Rs830 crore in five years
- Cash and equivalent in BS of Rs487 crore or Rs.69/share or 13% of CMP
The company solely on internal accruals has embarked on a fastracked Rs1500 crore capex plan for FY15-22 opening a runway of revenue/profit growth over the next five years. This after barely Rs200 crore of the 20 years (mid-90s till 2014). The company has been an unparalleled value creator out of a quaint piece of real estate which measures in excess of 70 acres in the erstwhile outskirt of Mumbai. Shifting an industrial unit prudently to low cost zone and converting the piece of land to a unique asset. The property currently showcases world class avenues of:-
Bombay Exhibition Centre (BEC)
Notably the centerpiece of the development has 450k sq.ft. of air conditioned exhibition space and overall 700k sq.ft. of development area. The exhibition center had occupancy of 280 days (109 exhibitions) in FY17 growing from 260 days of FY16. This business generated Rs132.7 crore of revenue compared to Rs111.8 crore year ahead – 37.1% of the overall revenue. Generates PBT of Rs102.8 crore or 77.4% conversion rate compared to Rs95.3 crore previously at 85.2%. Contributed to 42% of the PBT.
Mumbai is the country’s commercial, financial, trade, fashion and entertainment capital. MMR contributed about $400 billion to GVA. It contributes to 10% of factory output, 35% of income tax receipts, 25% of excise, 55% of customs duty, 40% of international trade and the largest chunk of corporate taxes. With population touching 20 million and ever expanding, it is the most vibrant city of the country.
BEC is uniquely positioned to leverage this dynamism. The facility has been associated with marquee exhibitors of world like Koln Messe, Hannover Messe, Gems & Jewellery EPC, CII, FICCI, IEEMA etc. Management has embarked on a massive expansion of the facility and expanding the usage too. This would entail expanding from current 700k sq.ft. of developed area to over 3.5million sq.ft. by FY22. The immediate plan is to expand by 800k sq.ft. by FY19.This would double the developed area and more than double the usable area of 450k sq.ft. to 1.1-1.2million by FY20-21. By FY22 the same would be 3.5million of developed area and 2.3-2.4million of usable area. Usable (billable) area expands 2.4x by FY19 and 5x by FY22. Capex (Rs40 crore) has begun to modify an existing facility to unlock utilisable area. Utilisation levels are at 78% for FY17 and 85% for FY18 of 450k sq.ft. This is slated to go up to 75% of 600k sq.ft. in FY19 and 65% of 900k sq.ft. by FY 20. Slowly ramping up on capacity utilization as available area goes up. Revenues are slated to grow 20-25% annually from a mix of increasing developed area, incremental exhibition fee and improving operating leverage. With the PBT conversion rate around 80% and improving operating leverage, the PBT growth can see higher trajectory.
NESCO IT Park
Three world class towers with leasable area of 900k sq.ft. is occupied by the reputed global firms. The buildings are almost fully occupied since past few years. This business generated Rs141.9 crore of revenue compared to Rs124.4 crore previously. Contributes to 39.7% of the overall revenue. Generated PBT of Rs125.3 crore or 88.3% compared to Rs105.9 crore at 85.1%. This business makes up for 51.3% of the PBT. Since past two years company embarked on construction of the 4th tower with gross area of 1.7million sq.ft. and a leasable area of 1.2million sq.ft. This is LEED Platinum rated building. The company has received firm inquiries from current customers looking at expansion and is confident of leasing almost all of the space within one year of completion. Despite longish nature and large lease size, the rates will be in Rs 135-145 p/sq.ft. This will add Rs200-210 crore on full lease starting FY20. In FY19 expected to generate Rs50-60 crore. With the tremendous conversion rate (85%) the PBT could be helped by Rs40 crore in FY19 and up to Rs160-170 crore by FY20. With the current lease on Tower 1-3 growing at average 5% annually FY19 could see incremental Rs60-70 crore of PBT going up to Rs170-180 crore by 20-21.
INDABRATOR
This is the legacy business which supplies machines and complete process for heavy industries like Auto, Chemicals, Railways, Shipyards. This vertical contributed to Rs33.8 crore of overall revenue making 13.8% compared to Rs27.9 crore of the previous period. The PBT contribution is meager Rs0.34 crore or about 1% compared to Rs0.23 crore.
Hospitality
This is a relatively new vertical encompassing food court and other plans. With revenue of Rs5.68 crore or 1.7% of the overall revenue it is a small vertical. The PBT of Rs0.71 crore, though good at 12.5% of vertical revenue and showing tremendous turnaround. The company has drawn huge plans for the vertical – Enhancing the meals per day capacity of kitchen from current 4k meals per day to 25k meals per day by FY19; Start delivering to the IT park enterprises; Start managing outside kitchens using current kitchen; and looking at setting a 5-star hotel in collaboration with a marquee name.
Investment
This is a large portfolio of short and long term strategies and has paid decent returns. The PBT after netting unallocable items comes to Rs15.1 crore or 6.2% of the overall.
Valuations
On valuation level the business is not expensive. Consolidated FY17 had revenue/PBT/PAT of Rs357 crore /Rs244 crore /Rs169 crore giving an EPS of Rs24. PEx ~22 and 19 on ex-cash basis. The Rev/PBT/PAT are slated to grow in FY18 to 388/256/179 crore with EPS of 25.3. FY19 Rev/PBT/PAT estimated at 475/285/201 crore, giving EPS of Rs28.5, FY20 Rev/PBT/PAT estimated at 645/441/305 crore giving EPS of 43.2.
IE&M Take
This is a good solid business with excellent management who understands the industry very well. Capital allocation discipline is good and so is cost consciousness. FY18 and FY19 will be relatively sedate waiting for the big launch pad starting Fy20. Better to lock in dips and not to worry about for the next 10 years as the value unlocking has just begun.
(A disclaimer: The views expressed herein as of December, 2017 are based on publicly available information and other sources believed to be reliable. The information contained in this document does not have regard to specific investment objectives. Neither IE&M nor any person connected with them, accepts any liability arising from the use of this document.)
