Event Update Institutional Equities NESCO 27 August 2018 Reuters: NSEN.NS; Bloomberg: NSE IN Revenues From Bombay Exhibition Centre May Take A Hit This event update relates to an application made on 14 August 2018 by NESCO to the Brihan Mumbai Mahanagar Palika requesting permission for conducting an exhibition and also construction of a temporary tunnel (walkway) from Hall 1 to Hall 2 for Automation 2018 scheduled to be held in the Bombay Exhibition Centre (BEC) located at Goregaon (East) in Mumbai from 29 August 2018 to 1 October 2018. The Brihan Mumbai Mahanagar Palika has decided not to grant permission for any exhibition/event at the BEC. The reason given by the civic body is that during the exhibition days, mostly at peak hours, the adjoining roads and Western Express Highway will get severely congested because of heavy vehicular traffic and the ongoing construction of metro rail also adds to the traffic woes. Ambulances and other vehicles approaching hospitals, school buses, etc also get impacted as a result. Based on this development, we have considered a scenario that is given below. Exhibit 1 shows the impact on the cash flow from operations, EBITDA, other income, earnings and target price of NESCO considering the recent development. NESCO could potentially take legal action against the order. Reference to our Initiating Coverage Report: NESCO- Step In Before It Is Too Late Event impact: We have assumed no revenue stream from the BEC in the near future (during the second-half of FY19 and 9MFY20 till the completion of metro rail work). In this case, we have not considered any revenues and operating profit coming from the BEC and assume that there are no exhibitions/events during the stated time period. The negative impact on earnings will be through loss of revenues generated from the BEC and lower other income (considering the capex plan continues, and also because of lower internal accruals NESCO may liquidate additional investments). Exhibit 1: Our current estimates versus scenario-based estimates and target prices Current estimates (Rsmn) Target price FY18 FY19E FY20E FY20E NAV Operating cash flow 1,932 1,281 2,417 EBITDA 2,185 1,895 2,661 768 Other income 361 241 241 Earnings 1,787 1,074 1,606 Scenario-based estimates (Rsmn) Target price FY18 FY19E FY20E FY20E NAV Operating cash flow 1,932 475 1,238 EBITDA 2,185 1,287 1,510 741 Other income 361 161 89 Earnings 1,787 595 700 Retain Buy rating with a target price of Rs768* Our current valuation is driven by the restructuring of NESCO IT Park, rise in rentable space in the BEC and the expected increase in rental rates. Our optimism is supported by a healthy balance sheet, consistently positive free cash flow and the management s growth-oriented focus with expansion of the flagship business over the next 20 years. We have retained Buy rating on NESCO with a target price of Rs768*. In case, BEC is not operational during the second-half of FY19 and 9MFY20, our FY20E NAV would be Rs741. *With the Brihan Mumbai Mahanagar Palika not granting permission for any exhibition/event at the BEC, there will be better clarity only after our interaction with the management. Based on this we may revise our target price and/or rating on the stock. Any change in the target price and/or rating will be dependent on quantum of the impact of the recent development and predictability of revenues from the BEC (currently 60%-70% of BEC clients have continued to conduct events at the BEC since the past 10-15 years which provided greater visibility of revenue generation). NBIE Values your patronage- Vote for The Team in the Asia Money poll 2018. Click Here BUY Sector: Real Estate CMP: Rs504 Target Price: Rs768 Upside: 52% Amit Agarwal Research Analyst amit.agarwal@nirmalbang.com +91-22-6273 8033 Akash Mehta Research Associate akash.mehta@nirmalbang.com +91-22-6273 8062 Key Data Current Shares O/S (mn) 70.5 Mkt Cap (Rsbn/US$mn) 35.5/508.1 52 Wk H / L (Rs) 650/471 Daily Vol. (3M NSE Avg.) 22,673 One -Year Indexed Stock Performance 160 150 140 130 120 110 100 90 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Price Performance (%) 1 M 6 M 1 Yr NESCO 1.3 (14.9) 5.6 Nifty Index 2.5 9.5 17.2 Source: Bloomberg NESCO Nifty 50
Consolidated financials Exhibit 2: Income statement Net sales 2,635 3,114 3,219 3,268 4,281 Growth YoY (%) 35.5 18.2 3.4 1.5 31.0 COGS 146 179 192 229 300 Operating costs 405 560 565 871 963 Other expenses 198 230 278 273 357 EBITDA 1,885 2,146 2,185 1,895 2,661 EBITDA growth (%) 36.6 13.8 1.8 (13.3) 40.4 EBITDA margin (%) 71.5 68.9 67.9 58.0 62.2 Depreciation 67 81 110 536 536 EBIT 1,818 2,065 2,075 1,359 2,125 EBIT (%) 69.0 66.3 64.4 41.6 49.6 Interest expenses 40 50 56 56 56 Other income 329 430 361 241 241 Earnings before tax 2,108 2,445 2,379 1,544 2,310 Tax- total 666 745 592 471 704 Rate of tax (%) 31.6 30.5 24.9 30.5 30.5 Net profit 1,442 1,700 1,787 1,074 1,606 Exhibit 4: Balance sheet Share capital 141 141 141 141 141 Reserves and surplus 6,672 8,370 9,970 10,903 12,361 Net worth 6,813 8,511 10,111 11,044 12,502 Loans - - - - - Other financial liabilities 687 721 120 141 228 Provisions 140 128 35 128 128 Deferred tax liability 163 273 232 273 273 Other non-current liabilities 108 77 34 - - Total capital employed 7,911 9,709 10,533 11,585 13,130 - - - - - Property, plant and equipment 3,082 4,500 5,855 8,760 10,099 Investments - - - - - Loans 22 28 39 28 28 Other non-current assets 447 499 407 499 499 Total non-current assets 3,552 5,027 6,301 9,286 10,626 Trade payables 94 229 186 222 291 Other financial liabilities 400 392 664 695 851 Other current liabilities - - 396 - - Provisions (current) 2 3 3 3 3 Total current liabilities 495 624 1,248 919 1,144 Inventories 110 134 124 157 205 Investments 4,422 4,818 4,985 2,700 2,700 Trade receivables 146 121 141 143 188 Cash and bank balance 65 57 116 44 381 Current tax assets (net) - - 37.92 - - Other current assets 110 175 76 175 175 Total current assets 4,854 5,305 5,480 3,219 3,649 Net current assets 4,358 4,681 4,231 2,299 2,505 Total capital employed 7,911 9,709 10,533 11,585 13,130 Exhibit 3: Cash flow Profit after tax 1,442 1,700 1,787 1,074 1,606 Depreciation 67 81 110 536 536 Finance costs 40 50 56 56 56 Other income (329) (430) - - - Working capital changes (324) 109 (21) (385) 219 Operating cash flow 895 1,511 1,932 1,281 2,417 Capital expenditure (2) (1,493) (1,443) (3,446) (1,875) Net cash after capex 894 17 490 (2,166) 542 (Purchase)/sale of Investments (252) 34 (188) 2,249 - Proceeds/repayment of borrowing - - - - - Finance costs (40) (50) (56) (56) (56) Dividend & dividend distribution tax (251) - (187) (99) (148) Cash flow from financing (291) (50) (243) (155) (204) Total cash generation 18 (8) 61 (72) 338 Opening cash balance 48 65 57 116 44 Closing cash & bank balance 65 57 116 44 381 Exhibit 5: Key ratios Profitability and return ratios EBITDA margin (%) 71.5 68.9 67.9 58.0 62.2 EBIT margin (%) 69.0 66.3 64.4 41.6 49.6 Net profit margin (%) 54.7 54.6 55.5 32.9 37.5 RoE (%) 21.2 20.0 17.7 9.7 12.8 RoCE (%) 23.0 21.3 19.7 11.7 16.2 Working capital & liquidity ratios Receivables (days) 20 14 16 16 16 Inventory (days) 311 271 248 250 250 Payables (days) 233 467 354 354 354 Current ratio (x) 9.8 8.5 4.4 3.5 3.2 Valuation ratios EV/sales (x) 13.4 11.3 11.0 10.8 8.2 EV/EBITDA (x) 18.7 16.5 16.2 18.6 13.3 P/E (x) 24.5 20.8 19.8 32.9 22.0 P/BV (x) 5.2 4.2 3.5 3.2 2.8 2 NESCO
Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 30 January 2018 Buy 613 794 14 February 2018 Buy 595 794 26 February 2018 Buy 592 794 22 August 2018 Buy 505 768 27 August 2018 Buy 504 768 Rating track graph 650 600 550 500 450 400 Not Covered Covered 3 NESCO
DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I/We, Amit Agarwal the research analysts, and Mr. Akash Mehta research associates are the authors of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 4 NESCO
Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. NBEPL is not soliciting any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. This research has been prepared for the general use of the clients of NBEPL and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. NBEPL will not treat recipients as customers by virtue of their receiving this report. This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject NBEPL & its group companies to registration or licensing requirements within such jurisdictions. The report is based on the information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up-to-date and it should not be relied upon as such. We accept no obligation to correct or update the information or opinions in it. NBEPL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. NBEPL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This information is subject to change without any prior notice. NBEPL reserves its absolute discretion and right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, NBEPL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. Opinions expressed are subject to change without any notice. Neither the company nor the director or the employees of NBEPL accept any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Here it may be noted that neither NBEPL, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profit that may arise from or in connection with the use of the information contained in this report. Copyright of this document vests exclusively with NBEPL. Our reports are also available on our website www.nirmalbang.com Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Email Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com +91 22 6273 8017 / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com +91 22 6273 8230, +91 22 6636 8833 Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com +91 22 6273 8100/8101, +91 22 6636 8831 Michael Pillai Dealing Desk michael.pillai@nirmalbang.com +91 22 6273 8102/8103, +91 22 6636 8830 Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-400013. Board No. : 91 22 6273 8000/1; Fax. : 022 6273 8010 5 NESCO