NESCO Limited

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RC Capital Management NESCO Limited
Company Analysis: NESCO Limited

Posted on 3rd December 2012
About
NESCO is a real estate and capital goods company. The company has a parcel of land in Mumbai
on which it has developed an exhibition centre (BEC- Bombay exhibition centre) and an IT park.
In addition, the company has a capital goods business – Indabrator group which has plants in
Gujarat.
The company was originally a capital good company, but started incurring losses in the late 90s.
The company res-structured its operations and moved the plants to Gujarat. In addition, the
company has a large piece of land in Goregaon, Mumbai where it has developed one of the largest
convention centres in India and is now developing an IT park on the same land
Financials
The revenue of the company increased from 16 Crs in 2001 to around 145 Crs in 2011. This revenue
growth although good, does not highlight the change in the quality of the revenue.
The company had a net margin of around 3% in 2001 and was equal parts a capital goods and
Services Company (convention centre). Since then the capital good segment has more or less
stagnated and the service segment has expanded with expansion in the convention centre and
addition of buildings in the IT Park. The company earned a net margin of 48% in 2011.
The profits of the company, especially from the services business is entirely free cash and has
been used to pay off debt. The company now has almost 200 Crs cash which is around 20% of the
company’s market cap. The ROE of the company is now 35% and if one excludes the surplus cash,
it is in excess of 100%.
The company is able to earn such high margins as the services business (convention centre and
IT Park) involve upfront investment and very low operating expenses. In addition, the company’s
business is now working capital negative due to minimal inventory (only in capital goods
business) and low accounts receivables (due to customer advances for the services business).
Positives
The financial positives are listed in the previous section. The company is able to earn such high
margins and high ROE due to the competitive advantage of the business. The company has been
able to develop one of the largest convention centres in Mumbai which is not easy to develop
considering the cost of land. In addition, the company is developing additional buildings in the
IT Park with the surplus cash (without incurring any debt).
Page. 1 www.rccapitalmanagement.com Confidential

The company thus enjoys a form of local monopoly (large piece of land at negligible cost on the
books) and has used this advantage to develop an increasing stream of income. The company
plans to re-invest the surplus cash into new buildings in the IT Park (building IV) which are high
IRR projects.
The company has also re-structured its capital good business in the last 5-6 years and although
this business is not generating attractive returns, it is not a big drain on the company.
Risks
The company has a large number of advantages and a steady cash flow. The business risk comes
from a slowdown in the economy, which could impact the utilization of the convention centre
and lower tenancy in the IT parks.
I personally feel the above risks are low and would be temporary in nature (will not impact the
long term cash flow of the company).
The bigger risk is the re-investment risk. The company has developed 30-40% of the land and will
continue developing the rest using the cash flow from the existing properties. In a period of 4-5
years, the company will be done with the development and could be generating 150-200 Crs of
free cash flow with no clear avenues for re-investment in the business. At that point of time, the
risk is that the management may re-invest the cash in all kinds of poor businesses.
Management quality checklist
 Management compensation: The management compensation is around 3% of net profits

which seems reasonable.
 Capital allocation record: The management has allocated capital intelligently for the last
10 years and may do so for the next 3-4 years. It remains to be seen what will happen after
that.
 Shareholder communication: Management provides the mandated disclosure through its
annual reports and details of the business are available on the website. The
communication is adequate, though not extensive.
 Accounting practice: The company has followed a bit of aggressive accounting in the past
(look at biz stats page of the valuation template). During the period of 2000-2005, the
company was re-structuring the capital goods business and also had accumulated losses.
The company capitalized the VRS expenses and other costs and wrote them off till 2006
as it became profitable. The company has however followed conservative accounting
since then.
 Conflict of interest: None as yet

 Performance track record: Above average in the last 10 years. The company has re-
structured the capital goods business and expanded the real estate business which is a
very high IRR business.
Valuation
The company is currently valued at around 840 Crs and has around 200 Crs on its balance sheet
(which is likely to be used partly for IT Park IV). Net of cash the company sells for around 630
Crs which is around 7-8 times the expected earnings for 2012. This valuation is low for a company
which has an ROE in excess of 100% and can grow at 20%+ for the next 4-5 years with small
amounts of added capital.
The above valuation appears low from a cash flow standpoint and the company can be
conservatively valued at 1600-1700 Crs (twice the current market cap).
Another view point can be based on the assets of the company. The company has around 70 acres
which itself can be valued at a minimum of 2000 Crs (if not more). This does not include the value
of the BEC business or the IT Park, which enhance the value of the land bank.
Conclusion
The company possess close to a local monopoly due to a large piece of land in a prime location.
The management has re-structured its capital goods business and shifted focus to the real estate
(exhibition and IT Park) business which has high profitability. The company is developing new
projects (at high IRR) which should increase its profitability in the near future. In view the above
the company appears to be undervalued as of writing this note.

Q1-2013 Results Review

Posted on 11th August 2012
The company reported a 12% drop in the top line as the IT park/ convention centre business had
negligible growth and the capital goods business had a de-growth of around 30%. The operating
profits were almost flat and net profits grew by around 60% due to other income of around 6.6
crores. The IT Park 3 is completed and should add to the revenue and profits as it is leased out in
the coming quarters. In addition, the company is planning to expand the exhibition centre and
build IT park 4, funded by internal accruals. The company continues to perform well and should
give us decent returns


Posted on 20th November 2012
The company came out with a fairly decent set of results. The top line and profit grew by 12%
during the quarter. More important, though was the composition of the revenue. The Convention
centre/ IT park segment revenue grew from 26 Crs to 30.5 Cr on year to year basis (and from 14
Crs in last quarter).
The revenue from this segment should rise further as the IT park III is let out and the revenue
starts flowing in. In addition, due to the minimal operating expenses, we should see majority of
the revenue drop into the bottom line.
Finally, the company has around 240 Crs of cash (25% of market cap) and should be able to easily
fund the expansion of the convention centre and the next phase of the IT park.
The company continues to grow as expected and we will hold onto this stock for the time being.


Posted on 10th February 2013
The company came out with a fairly decent set of results. The top line grew by 26% and profit by
28% during the quarter. More important, though was the composition of the revenue. The
Convention centre/ IT park segment revenue grew from 28 Crs to 39.3 Cr on year to year basis
(and from 30.5 Crs in last quarter).
The revenue has gone up as the IT park III has been completed and the occupancy has been going
up. In addition, the company is working on expanding the exhibition centre and is adding to the
IT park too. The company has substantial cash on the balance sheet and should be able fund the
growth easily from the cash and internal accruals.
The company continues to grow as expected and we will hold onto this stock for the time being

2013 - Annual Results Review

Posted on 19th July 2013
Key risk (identified earlier) and their current status
The main risk we identified earlier for the short/ medium term was a slowdown in the economy
and an impact on the Exhibition / IT park rentals. The slowdown has happened, but in spite of
that the exhibition business grew by 20% in 2013. The IT park rentals and capital goods revenue
were essentially flat during the same period.
The IT park III is now ready and around 60% of the total area (650000 Sq. Ft) has already been
leased out. The company expects to lease out the rest soon and should be able to earn around 60
Crs rentals from 2014 onwards.
In addition to the above, the company will be starting construction on the IT park building IV by
the third quarter and probably new exhibition halls by the last quarter of the year. The risk of
retaining the excess cash unproductively on the balance is thus reduced in the medium term. The
long term however remains an open question (which we will face when the time comes)
New opportunities
The company has around 40 acres land and has no plans to sell it. The current exhibition centre
is around 4.5 Lac Sq. Ft, which the company plans to expand to around 11 Lac Sq. Ft.
In addition, the company has finalized a master plan recently to expand the IT park from around
9.8 Lacs Sq. Ft (spread across three buildings) to around 42 lac Sq. Ft in the next few years. So in
effect the company is planning to expand the total square footage to around 50 Lac Sq. Ft (from
current 13 Lac Sq. Ft)
Changes to fair value
I am going to do a simple extrapolation based on the future plans of the management. Let’s just
consider it as a thought experiment
The company earned around 162 Crs on an area of 7.3 Lac Sq. Ft in 2013. Once the IT park III is
rented out, we can expect the company to earn around 220 Crs. Let’s say the company takes 4-5
years to complete all the projects they have planned. So in year 2017-2018, the company will have
around 50 Lac Sq. Ft, which at the current occupancy rate and assuming a 6% inflation, should
translate to around 1000 Crs revenue (220*3.6*1.06^4).
The company had a net margin of 50% last year and with increasing scale should earn at least as
much. So we are talking of a 500 Cr net profit in the next 4-5 years. At the current PE of around

12, the company should sell around 6000 Crs by 2017, which is roughly 6 times in four years
(CAGR of 50%+)
Now before you go out and sell everything and put it in NESCO, please remember this a thought
experiment and real life does not operate in a straight line (except in broker reports). The above
analysis is to give an idea of the potential, which the management can realize if they remain
focused on the current plans (nothing fancy).
As the company is executing as per plans, we are raising the fair value of the stock to around 1500
per share. This number can of course go up or down based on new developments – it is an
estimate and not set in stone.


The company came out with a fairly decent set of results. The top line grew by 26% and profit by
30% during the quarter. The Convention centre/ IT park segment revenue grew from 13.5 Crs to
20.3 Cr on a year to year basis (and from 34.9 Crs in last quarter). The company continues to have
a return of 100%+ on invested capital.
The revenue has gone up as the IT park III has been completed and the occupancy has been going
up. The other clue to an increase in occupancy is from the reduction in capital employed in the
Convention centre/ IT park segment from 93 Crs in the previous quarter to 58.4 Crs in the current
quarter. We cannot be sure, but this reduction is likely from an increase in customer advances –
deposit given by customers before renting space in the IT park.
The industrial goods segment which contributes to around 20% of revenue, saw a drop of around
30% in the top line during the quarter. This segment also saw a negligible profit in the quarter.
This is expected in view of the slowdown in the capital goods sector.
The company now has close to 300 Crs of excess capital on the balance sheet (up from 250 Crs in
the previous quarter). The company is working on expanding the exhibition centre and is adding
to the IT park too and should be able fund the growth easily from this cash and internal accruals.
The company continues to grow as expected and we will hold onto this stock for the time being.


Posted on 1st November 2013
The company reported a top line growth of 3% during the quarter. The operating profit was flat
and the net profit dropped by 5% over last year.
At a segment level the IT park and exhibition centre business grew by 15% on the top line and
10% at the net profit level. The industrial capital goods segment which accounts for around 10%
of the top line, dropped by 40% and broke even at the net profit level.
The company has around 322 Crs of cash on the books (from 300 Crs in the last quarter) which it
plans to use to expand the convention centre and build additional buildings in the IT park.
A point could be made that the company should raise its dividend, considering the high cash
levels. I have a different view point on this. If the management has a clear opportunity to re-invest
the capital at high rates of return, then it should hold onto the cash. In case of NESCO, the
management can easily re-invest the capital at 30%+ rates and thus create far more value than
what they could by distributing it to shareholders (With additional tax implications).
The above will become a valid point once the company exhausts all the potential at its current
property in Mumbai. At that point if the management cannot expand into related high return
businesses, then good corporate governance would require them to raise the dividend.
We are still 3-4 years away from the above situation and hence I am not too concerned with the
high cash and low dividend pay-outs as of now.


The company reported a top line growth of 6% during the quarter. The operating profit was flat
and the net profit dropped by 15% over last year.
At a segment level the IT park and exhibition centre business grew by 8% on the top line and
dropped by 10% at the net profit level. The industrial capital goods segment which accounts for
around 10% of the top line, dropped by 40% and showed a small loss of 0.8 Crs.
The company has around 345 Crs of cash on the books (from 322 Crs in the last quarter) which it
plans to use to expand the convention centre and build additional buildings in the IT park.
The company has been slow in letting out the new space which has been built up in IT park III.
In addition, the exhibition business also seems to have slowed down in the current quarter.
The economic slowdown seems to have impacted the growth levels of the company. In addition,
the management is not very energetic in expanding the business at a high rate and hence we are
not likely to see multi-bagger results in the short term.
I am still optimistic that the company will do well in the long run.


Posted on 30th May 2014
The company delivered a mixed quarter in Q4. The company reported a top line growth of 18%
during the quarter led by a 28% growth in the exhibition and IT park business. The operating
profit was up by 10% and the net profit was roughly flat over last year.
The company reported a 12% growth in top line for the year, a 1% growth in operating profits
and roughly flat in terms of net profits.
At a segment level the IT park and exhibition centre business grew by 20% on the top line and by
7% at the net profit level. The industrial capital goods segment which accounts for around 10%
of the top line, dropped by 28% and showed a small loss of 0.6 Crs.
The company has around 368 Crs of cash on the books which it plans to use to expand the
convention centre and build additional buildings in the IT park.
The encouraging sign in the current quarter has been a further uptick in the exhibition and IT
park business. The operating profit and net margins have not kept pace due to higher
depreciation and other expenses. I need to review the annual report to understand the cause of
the drop in operating and net margins. The industrial capital goods business has shrunk further
and may have bottomed out. It should no longer be a drag on profits in the next year.
The company continues to accumulate capital at a rapid rate on the balance sheet and is unable
to deploy it in the business at the same pace. At the same time, the dividend pay-out is still the
same. This is a source of frustration, but not surprise as we know that the management is
conservative and very measured in their approach. The value is being built, but at a much slower
pace than what we would like.
I am still optimistic that the company will do well in the long run, though we need to watch the
exhibition business closely now due to some new exhibition centres being launched in Mumbai.
This could impact the profitability of the core business and hence we will have to keep a close
watch.

2014 – Annual Results Review

Key risk and their current status
Demand slowdown
The main risk we identified earlier was the short/ medium term slowdown in the economy and
the impact on Exhibition / IT park rentals. The slowdown has happened, and that impacted the
exhibition incomes which increased only from 90 to 94 Crs.
The IT park III is now ready and was partially leased out during the year. As a result, the IT park
income increased from 27.8 Crs to 47.8 Crs. The lease income should rise to around 60Crs once
the entire area is leased out.
Finally, the capital goods segment of the company faced continuing stress and saw the demand
drop from 25 Crs to 18.4 Crs (With minimal profits for the year)
Execution risk
The management has shared future plans via some interviews in the press (question is why not
do that through the annual report?).
See the report here and an earlier interview here. So in effect the management has ambitious
plans to invest close to 1700 Crs to develop around 50 Lac Sq. Ft of space over the next few years.
The key unknown is the time it will take to develop this space and how it will impact the
revenues/ profits during the period (with clearances and approvals being a key risk) – with short
term hits to the stock price.
New opportunities
The company has around 40 acres land and has no plans to sell it. The current exhibition centre
is around 4.5 Lac Sq. Ft, which the company plans to expand to around 11 Lac Sq. Ft.
In addition, the company has finalized a master plan recently to expand the IT park from around
9.8 Lacs Sq. Ft (spread across three buildings) to around 42 lac Sq. Ft in the next few years. So in
effect the company is planning to expand the total square footage to around 50 Lac Sq. Ft (from
current 13 Lac Sq. Ft)

I had done a thought experiment in 2013. The back of envelope calculations still holds true, with
key unknown being the time it will take to complete and lease out the new space. So I am
repeating the same exercise with updated information –
The company earned around 181 Crs in 2014. Once the IT park III is fully rented out, we can
expect the company to earn around 200-210 Crs. Let’s say the company takes 5-6 years to complete
all the projects they have planned. So in year 2019-2020, the company will have around 50 Lac Sq.
Ft, which at the current occupancy rate and assuming a 6% inflation, should translate to around
1100 Crs revenue (210*3.6*1.06^5).
The company has had an average net margin of 50% and with increasing scale should earn at
least as much. So we are talking of 550 Cr net profit in the next 5-6 years. At PE of around 15
(lower than current PE of 20) the company should sell around 8250 Crs by 2019-2020, which is
roughly 5 times in five to six years (CAGR of 30%+)
The key risk to this valuation exercise is the time it will take to complete and lease out all these
projects. Any delay beyond our assumption of 6 years would mean that we may get lower returns
on the stock
The stock has gone up by 70% in the last one year and that has reduced the future returns for us
(as it should). I would estimate the fair value at around 2000 per share, which will get revised
based on the progress of the various expansion projects


The company reported a top line growth of 54% during the quarter led by a 70% growth in the
exhibition and IT park business. The operating profit was up by 70% and the net profit is up by
around 56%.
Although the market has suddenly become very excited with the spurt in profits, we need to
temper our enthusiasm by the fact that the top line and profits are likely to spurt for a short period
as the company leases out the IT park 3.
NESCO is a different idea than some of the others such as a CERA or Atul auto. In these cases,
the growth is even within a band. As these companies expand their distribution and ramp up the
marketing we are seeing a comparatively steady growth and rise in earnings. Such steady growth
gets the analysts excited as they can very easily model the earnings of such companies and come
up with price targets.
On the other hand, companies like NESCO or Piramal enterprises are likely to show growth in
spurts. As NESCO leases out IT park 3, the revenue and profits are going to rise rapidly for some
time till the entire building is leased out. Once that happens, the growth will slow down, mainly
driven by the exhibition business. In the meantime, the IT park 4 and other phases are being
planned and will come up in time. Once these new locations are leased, we will see another spurt
and so on.
It is quite likely that the market will get enthused when the growth spurt happens (projecting the
growth into the future) and get overly depressed when the growth stagnates between the projects.
I have written about the future plans of the company in the annual report review (see here). We
will keep an eye on the long term and most likely hold through the ups and downs as long as the
long term prospects remain intact, execution by management is strong and the stock does not get
overvalued.
The cash levels of the company have risen to 397 Crs of cash which it plans to use to expand the


The company reported a top line growth of 17% during the quarter. The operating profit was up
by 35% and the net profit is up by around 36%. The top line growth for the first half is 32% and
profit growth is 47%.
We cannot extrapolate this growth into the future on a straight line basis.
NESCO is a different idea than some of the others such as a CERA or Atul auto. In these cases,
the growth is even within a band. As these companies expand their distribution and ramp up the
marketing we are seeing a comparatively steady growth and rise in earnings.
On the other hand, companies like NESCO or Piramal enterprises are likely to show growth in
spurts. As NESCO leases out IT park 3, the revenue and profits will keep rising rapidly for some
time till the entire building is leased out. Once that happens, the growth will slow down, and will
be driven by the exhibition business alone. In the meantime, the IT park 4 and other phases are
being planned and will come up in time. Once these new locations are leased, we will see another
spurt and so on.
overvalued.
The cash levels of the company have risen to 420 Crs which it plans to use to expand the


The company reported a top line growth of 28% during the quarter. The operating profit is up by
34% and the net profit is up by around 42%. The top line growth for year to date is 31% and profit
growth is 46%.
We cannot extrapolate this growth into the future on a straight line basis.
NESCO is a different idea than some of the others such as a CERA. In these cases, the growth is
even within a band. As these companies expand their distribution and ramp up the marketing
we are seeing a comparatively steady growth and rise in earnings.
On the other hand, companies like NESCO are likely to show growth in spurts. As NESCO leases
out IT park 3, the revenue and profits will keep rising rapidly for some time till the entire building
is leased out. Once that happens, the growth will slow down, and will be driven by the exhibition
business alone. In the meantime, the IT park 4 and other phases are being planned and will come
up in time. Once these new locations are leased, we will see another spurt and so on.
overvalued.


Posted on 30th May 2015
The company reported a flat top line during the quarter. The operating profit was flat and the net
profit is up by around 19% driven by other income. The top line growth for year is 23.3% and
profit growth is around 37%.
I had written in the previous update that we cannot extrapolate the growth into the future on a
straight line basis. NESCO is a different idea than the other positions. A company like NESCO is
likely to show growth in spurts. As the company leases out IT park 3, the revenue and profits will
keep rising rapidly for some time till the entire building is leased out. Once that happens, the
growth will slow down, and will be driven by the exhibition business alone. In the meantime, the
IT park 4 and other phases are being planned and will come up in time. Once these new locations
are leased, we will see another spurt and so on.
It seems that entire IT park 3 is leased out and we are likely to see small increments in growth
from the exhibition business, till the next IT park comes up. I do not have a confirmation on this
and will be have a better idea once the annual report/ management interview is published.
The company continues to be debt free and has close to 390 Crs of surplus cash on its books. The
company continues to operate with a negative working capital and is earning a 50%+ return on
invested capital (excluding cash).
The current quarter shows a capital work in progress of almost 99 Crs on the books. The
management has plans to expand the exhibition centre and start the next phase of the IT park.
We will hopefully get more clarity on this count from the annual report and a better idea if this
capital work in progress is related to it.
We will continue to hold the stock, unless we can find something more attractive to replace it.


Key risk and their current status
The performance of the company is driven by two main factors
 The company’s expansion plans for the exhibition Centre and the new buildings in the IT
park
 The occupancy/ utilization of the exhibition Centre and the buildings.
The new reliance convention Centre at BKC (Bandra Kurla complex) is a competitive threat for
the NESCO exhibition Centre. This threat is likely to materialize by 2017-2018. We need to see if
the overall market for convention will expand enough to accommodate two large players.
The presence of a large competitor will definitely reduce the pricing power for NESCO, especially
during times of slowdown.
The IT park is unlikely to face any new competitive threats (which do not exist already) and the
main risk is a severe slowdown in the economy (including the IT/ BPO space).
Execution risk
The management has shared future plans via some interviews in the press See the report here and
an earlier interview here. So in effect the management has ambitious plans to invest close to 1700
Crs to develop around 50 Lac Sq. Ft of space over the next few years.
The company has started work on IT Park building 4 and the 99 Crs work in progress is related
to that. The company expects to start construction from Q2 of the current fiscal. The management
has also started the process of approvals to expand the convention Centre from 4.5 Lac Sq. Ft to
11 lac Sq. Ft.
The main execution risk and hence risk to the increase in profits and cash flow is related to
clearance and approvals. It takes 1-2 years to get all kinds of clearances and any delay will hurt
the time it takes the company to execute the plans.
In the meantime, there is no risk to the existing cash flows from the assets which have been built
already. The company is likely to earn between 100-120 Crs of cash flow every year and with
around 380 Crs on the balance sheet should have no problem in funding the new capex.

I had done the valuation analysis in 2013 and 2014. The back of envelope calculations still holds
true, with key unknown being the time it will take to complete and lease out the new space.
We had expected around 210 Crs for 2015 and the actual revenue turned out to be 220 Crs in spite
of the drop in the exhibition Centre by around 10%. The company earned a profit of 110 Crs
during the year
If we assume it will take anywhere between 3-5 years for the building 4 and exhibition Centre to
complete, we can assume that the company will be earning around 500 Crs top line.
Exhibition Centre: 86 Crs (2015) * 1.05^5 (5-year inflation) * 2 (doubling of exhibition Centre) =
220 Crs
IT park: 90 * 1.05^5 (5-year inflation) * 3 (new building will have around 2 times current built up)
= 345 Crs
I am not counting any contribution from Indabrator or from the new hospitality subsidiary.
The company is generally able to earn around 40% margin and hence we can expect the company
to be earning close to 200 Crs in five years. We can expect roughly 20% CAGR in stock price based
on the above assumptions (including dividends)
The key risk to this valuation exercise is the time it will take to complete and lease out all these
projects. Any delay beyond our assumption of 5 years would mean that we may get lower returns
on the stock
I am changing the fair value in the portfolio creation notes (to be updated) to around 2300 per
share.
A few Additional points
As I have pointed out earlier, NESCO is different from other positions in that the cash flow and
profits have better visibility, but the increase is in spurts. The operating profit is likely to grow at
a 10-12% growth for the next few years (reported profit may remain flat as the excess cash is used
in the construction of new assets).
Once the building 4 is completed and exhibition centre expands, we will see a sudden rise in the
profits. The market may react to the change at that point. In the meantime, it is quite possible that
the stock will stagnate for a year or two. So this is a stock which requires a lot of patience to get
the returns which are likely to be lumpy.

One more point to note is that the management has raised its ownership from around 62% to 67%
in the last two years via open market purchase. It seems to have been done via a foreign company
called – Engineering Global PTE Limited. This looks like a good sign.


Posted on 23rd August 2015
The company reported a 30% growth on top line during the quarter. The operating profit grew
by 6% and the net profit dropped by 11% due to much lower other income. The top line growth
is due to a 20% growth in revenue from the convention centre business and from leasing out the
IT park 3. Profits for this segment are flat due to higher expenses (from taxes and other utility
expenses of the new IT park).
The top line for the capital goods segment has doubled and as a result this business was able to
deliver a small amount of profit.
We are likely to see a small top line and profit growth only if the convention business and the
capital goods segment picks up with an improvement in the economy. The growth in profits will
track the sales growth. It is however unlikely that the growth will be high till the new buildings
are completed and leased out.
The medium term risk (2017) of the new convention centre in BKC (from reliance) remains and
hence although the fundamentals look attractive, I am cautious about this position


by 54% and the net profit grew by 40% during the quarter. The top line and profit growth is due
to the growth in revenue from the convention centre business and from leasing out the IT park 3.
The top line for the capital goods segment has grown by around 50%, but continues to lose money
at the segment level.
We are likely to see a small top line and profit growth only if the convention business and the
capital goods segment picks up with an improvement in the economy. It is however unlikely that
the growth will be high till the new buildings are completed and leased out which will take
roughly 1-2 years from now.
The medium term risk (2017) of the new convention centre in BKC (from reliance) remains.
The market has suddenly become excited by this growth and pushed the stock 20% higher than
the recent levels. We have used this opportunity to reduce the size of the holding and re-deploy
the capital into other ideas, as i expect the top line and profit to stagnate for some time till the
new building is completed and leased out. In view of the opportunity cost, I have reduced the
position size in the model portfolio.
We will have a look at this position again closely once we get closer to the completion and leasing
out of the new building and expansion of the exhibition centre.


by the same amount and the net profit grew by 15% during the quarter. The top line and profit
growth is due to the growth in revenue from the convention centre business and from leasing out
the IT park 3.
The top line for the capital goods segment was flat over last year, and broke even at the segment
level
As I shared in the previous update, we are likely to see a small top line and profit growth only if
the convention business and the capital goods segment picks up with an improvement in the
economy. It is however unlikely that the growth will be high till the new buildings are completed
and leased out which will take roughly 1-2 years from now.
We sold a part of the position in Nov 2015 as I felt that the top line and profit is likely to stagnate
till new IT parks come up, which will take another 2-3 years from now. In the meantime, the
medium term risk (2017) of the new convention centre in BKC (from reliance) remains.
The stock price for several current holdings have dropped over the last few months and hence I
am now viewing NESCO as an opportunistic position. If there is better relative value in another
holding, I will not hesitate to sell out of this position and move it into something else.
I will continue to monitor this company on the side and will have a look at it again closely once
we get closer to the completion and leasing out of the new building and expansion of the
exhibition centre.


Posted on 3rd June 2016
by 61% and the net profit grew by 29% during the quarter. The top line and profit growth is due
to the growth in revenue from the convention centre business and from leasing out the IT park 3.
The top line has grown by 33.5% for the year and the net profit is up by the same level.
The convention centre business grew its top line by 30% for the year and profit by 37.7% for the
year. The top line for the capital goods segment was grew by 39%, and broke even at the segment
level. Finally, the IT park is fully occupied and hence the revenue and profit is likely to remain at
current levels for the next few years.
As I have shared in the previous updates, we are likely to see a small top line and profit growth
only if the convention business and the capital goods segment picks up with an improvement in
the economy. It is however unlikely that the growth will be high till the new buildings are
completed and leased out which will take roughly 1-2 years from now.
We sold a part of the position in Nov 2015 as I felt that the top line and profit is likely to stagnate
till the new IT parks come up. The company has shared that the approvals have been received
and the civil work is in progress. In the meantime, the medium term risk (2017) of the new
convention centre in BKC (from reliance) remains.
I am now viewing NESCO as an opportunistic position and would like to monitor the
performance of the exhibition centre and the capital good segment. If there is better relative value
in another holding, I will not hesitate to sell out of this position and move it into something else.


Posted on 21st July 2016
The company performed better than expected due to a 30% growth in the exhibition centre
revenue and full leasing out of the IT park 3 building.
Key risks
The performance of the company is driven by two main factors
 The company’s expansion plans for the exhibition Centre and the new buildings in the IT
park
 The occupancy/ utilization of the exhibition Centre and the buildings.
The new reliance convention Centre at BKC (Bandra Kurla complex) is a competitive threat for
the NESCO exhibition Centre. This threat is likely to materialize by 2017-2018. We need to see if
the overall market for convention will expand enough to accommodate two large players.
The presence of a large competitor will definitely reduce the pricing power for NESCO, especially
during times of slowdown.
The IT park is unlikely to face any new competitive threats (which do not exist already) and the
main risk is a severe slowdown in the economy (including the IT/ BPO space).
Execution risk
The management has shared future plans via some interviews in the press See the report here and
an earlier interview here. So in effect the management has ambitious plans to invest close to 1700
Crs to develop around 50 Lac Sq. Ft of space over the next few years.
The company has started work on IT Park building 4 and the 143 Crs work in progress is related
to that. The company has received approvals and started construction from Q2 of the current
fiscal.
The execution risk is related to clearance and approvals. It takes 1-2 years to get all kinds of
clearances and any delay will hurt the time it takes the company to execute the plans. For now,
the IT park 4 has received approvals and hence that risk has been reduced
In the meantime, there is no risk to the existing cash flows from the assets which have been built
already. The company is likely to earn between 120-130 Crs of cash flow every year and with
around 410 Crs on the balance sheet should have no problem in funding the new capex.

I had done a valuation exercise in 2015 and the inputs remain the same. As a result, I am not
changing the valuation for now.
As I have pointed out earlier, NESCO is different from other positions in that the cash flow and
profits have better visibility, but the increase is in spurts. The operating profit is likely to grow at
a 10-12% growth for the next few years.
Once the building 4 is completed and the exhibition centre expands, we will see a sudden rise in
the profits. The market may react to the change at that point. In the meantime, it is quite possible
that the stock will stagnate for a year or two. In addition to this, we may have a pressure on the
BEC revenue from FY 2018 as the BKC convention centre comes up.
One more point to note is that the management has raised its ownership from around 62% to 68%
in the last three years via open market purchase. It seems to have been done via a foreign
company called – Engineering Global PTE Limited.


The company reported a 13.8% growth on top line during the quarter. The operating profit grew
by 41% and the net profit grew by 59% during the quarter. The top line growth is mainly due to
the growth in revenue from the convention centre business.
Net profit has grown due to lower other expenses (lower expenses from construction of IT park)
and high other income. The net profit growth continues to outpace the top line growth due to the
high operating leverage.
The convention centre business grew its top line by 10% for the quarter and profit by 51% for the
same period. The top line for the capital goods segment de-grew by 20%, and went from a small
profit to a loss. Finally, the IT park is fully occupied and hence the revenue and profit is more or
less the same from the previous quarter and is likely to remain at the current level till the next
project (building IV) comes up in around early 2018.
We are likely to see modest growth for a year or two as the exhibition centre and capital goods
segment are the main growing segments for now and account for roughly 60% of the top line and
45% of the profits. Hence the overall growth is likely to be on the lower side.
I am now viewing NESCO as an opportunistic position and would like to monitor the
performance of the exhibition centre and the capital good segment. If there is better relative value
in another holding, I will not hesitate to sell out of this position and move it into something else.
I will however be tracking this company as FY18 is likely to be another inflection point.

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RC Capital Management is an Investment

Advisory Firm specializing in identifying and

This report is a compilation of our analysis of

The report is meant for subscribers of RC Capital

RC Capital Management is a SEBI Registered Investment Advisor

Company Analysis: NESCO Limited

Page. 1 www.rccapitalmanagement.com Confidential

Management quality checklist

 Management compensation: The management compensation is around 3% of net profits

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Q1-2013 Results Review

Page. 4 www.rccapitalmanagement.com Confidential

Q2-2013 Results Review

Page. 5 www.rccapitalmanagement.com Confidential

Q3-2013 Results Review

Page. 6 www.rccapitalmanagement.com Confidential

2013 - Annual Results Review

Key risk (identified earlier) and their current status

Changes to fair value

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Q1-2014 Results Review

Page. 9 www.rccapitalmanagement.com Confidential

Q2-2014 Results Review

Page. 10 www.rccapitalmanagement.com Confidential

Q3-2014 Results Review

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Q4-2014 Results Review

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2014 – Annual Results Review

Key risk and their current status

Page. 13 www.rccapitalmanagement.com Confidential

Changes to fair value

Page. 14 www.rccapitalmanagement.com Confidential

Q1-2015 Results Review

Page. 15 www.rccapitalmanagement.com Confidential

Q2-2015 Results Review

Page. 16 www.rccapitalmanagement.com Confidential

Q3-2015 Results Review

Page. 17 www.rccapitalmanagement.com Confidential

Q4-2015 Results Review

Page. 18 www.rccapitalmanagement.com Confidential

2015 - Annual Results Review

Key risk and their current status

The performance of the company is driven by two main factors

Changes to fair value

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A few Additional points

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Q1-2016 Results Review

Page. 22 www.rccapitalmanagement.com Confidential

Q2-2016 Results Review

Page. 23 www.rccapitalmanagement.com Confidential

Q3-2016 Results Review

Page. 24 www.rccapitalmanagement.com Confidential

Q4-2016 Results Review

Page. 25 www.rccapitalmanagement.com Confidential

2016 - Annual Results Review

The performance of the company is driven by two main factors

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Changes to fair value

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