Nesco

NESCO.pdf (555.8 KB)

NESCO has been one of the worst hit stocks in the pandemic. It faced a triple whammy:

1. No exhibitions due to the pandemic resulting in loss of income from BEC as well as NESCO Foods which supplies food & beverages to the exhibitions
2. Poor lease realisations due to the “work from home” operations of most IT and Finance companies
3. Exhibition center being taken over by Municipal Corporation for Jumbo COVID Centre, which would have prevented them from investing in modernisation & upgrades during the lean period.

Add to this is the fear that the new Jio Convention Centre at BKC will eat into its business.

As per page 2, point (ii) of the Chairman’s Speech at the 63rd AGM attached for reference, BEC has the capacity to hold 150 exhibitions per annum, whereas the last year saw only 16 exhibitions, which is barely 10% of the capacity. In other words, BEC could increase its exhibition business by 10x without any new major capex.

The Annual Report 2022 page 20, mentions that in a typical year, BEC can hold 745 different events (not just exhibitions).

During COVID, many people claimed that work from home and online marketing will be a permanent change. The ‘touch & feel’ of seeing products in real or watching gadgets / equipment “live in action” in a physical exhibition is not possible to replicate with an online digital medium. Therefore, I do not believe that exhibitions are dead. My belief is that face-to-face interactions with clients, suppliers, live product displays etc. are all either back to normal or on their way to returning with a Big Bang.

Many tech companies have also raised a problem of employees’ moonlighting due to work from home (i.e. working on a 2nd job). While the right & wrong of moonlighting are being debated (and I do not wish to comment on that), the only meaningful way for the management to control this problem is to bring everyone back to office. Meaning, NESCO’s IT Park should also see good demand going forward.

As described by some of the earlier posts, Jio’s Convention Centre is not a direct competitor to BEC. So I won’t repeat this point.

Against a 10 year median value P/B of 3.4, the current P/B is only 2.7. NESCO’s sales & income both appear to be severely depressed on account of COVID factors, which now appear to be in the rear view (hopefully). The major long term valuation depressor would be that NESCO’s single location risk has now been thoroughly exposed.

However, I think that the earning power of the main assets that NESCO owns – BEC and IT Park has not diminished in any way. Many of us may have encountered the post-COVID huge spike in prices of all events – weddings, parties, etc. It is very much possible that with a sudden surge in demand for exhibitions and no major supply of new exhibition centres in Mumbai, BEC should be able to even command premium pricing.

I feel that the bad news has been baked into the price and we should be able to see mean reversion in the business prospects as well as stock price.

Disc: Biased, invested from much lower levels and holding for more than a decade