Nirlon Limited (500307) Earnings Call Transcript & Summary

Ladies and gentlemen, good Day and welcome to the Q3 FY '22 Conference Call of Nirlon Limited. [Operator Instructions] I would now like to hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you and over to you, Mr. Anuj Sonpal.

Thank you. Good afternoon everyone and a very warm welcome to you all. My name is Anuj Sonpal from Valorem Advisors. We represent the investor relations of Nirlon Limited. On behalf of the company, I would like to thank you all for participating in the company's earnings conference call for the third quarter and 9 months ended of financial year 2022. Before we begin, let me mention a short cautionary statement as always. Some of the statements made in today's con call maybe forward looking in nature. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings con call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now let me introduce you to the management participating with us in today's earnings call and give it over to them for opening remarks. First we have with us Mr. Rahul Sagar, Chief Executive Officer and Executive Director; Mr. Kunal Sagar, Promoter and Non-Executive Director; Mr. Manish Parikh, Chief Financial Officer; Mrs. Jasmin Bhavsar, Company Secretary and Vice President, Legal and Compliance Officer; Mr. Ashish Bharadia, Deputy General Manager of Business Development of Nirlon Management Services Private Limited. Now without any further delay, I request Mr. Rahul Sagar to give his opening remarks. Thank you and over to you, sir.

Good afternoon, and welcome to our earnings conference call for the third quarter and 9 months of the financial year 2022. We hope all of you are safe and well. Let me take you through the financial performance of the company. For the third quarter of the financial year 2022, the company reported a total income of approximately INR 93 crores, an increase of 16% from the previous quarter and EBITDA of about INR 75 crores, an increase of 23.6% from the previous quarter. This represents an EBITDA margin of 80.19%, which increased by 491 basis points sequentially. PAT was about INR 13 crores, representing a PAT margin of 14.53%. For the 9 months ended December 2021, the company reported a total income of approximately INR 249 crores, an increase of 3.15% from the same period of financial year 2021 and EBITDA of about INR 187 crores, representing an EBITDA margin of 74.95%. PAT stood at about INR 74 crores, representing a PAT margin of 29.63%. As mentioned in our presentation on Slide 14, the company is opting to stay with the old tax regime for the present. This will allow itself the flexibility for any future restructuring that if we want to explore, which may necessitate continuation with the old tax regime. As a result of the same, in quarter 3 financial year '22, the company has recognized tax expense on account of measurement of tax balances pertaining to earlier years and preceding quarters. The consequent impact of the same is the reason for the PAT numbers for Q3 and the 9 months for financial year '21, '22, not being comparable to earlier corresponding periods. The company has also capitalized Phase 5 on December 15, 2021. Phase 5 depreciation and interest are both charged to the P&L from 16th December, and revenue from Phase 5 is also included in the income from December 16, 2021. Hence from quarter 4 2021-'22 onwards, the benefit of Phase 5 will be reflected in the P&L. Coming to the operational highlights. The overall occupancy of NKP has increased to 94.5% in this quarter compared to 91.9% in the previous quarter. In November 2021, Morgan Stanley has licensed and occupied approximately 38,000 square feet. On January 25, 2022, the company also signed a leave license agreement with JPMorgan Services India Private Limited for approximately 1.16 million square feet of chargeable area, comprising its entire Phase 5 development for a period of 10 years. The license fee commencement date is May 15, 2022, after the contracted license fee free period of 5 months. As on December 31, 2021, approximately 78,000 square feet of area was vacant compared to 148,000 square feet as on September 30, '21. Of this 78,000 square feet of vacant area, the company has licensed an additional approximately 13,000 square feet in Q4 2022 to JPMorgan in early February 2022. As we come towards the end of the financial year '22, it is encouraging to see that the Omicron variant of COVID-19 was milder than the previous one. Nirlon expeditiously took many measures and modified our processes, infrastructure and facilities to provide the required related health and safety measures in NKP and Nirlon House since the onset of the pandemic. This included a comprehensive vaccination drive at NKP. These measures remain in place and are regularly updated as required. NKP also has the WELL Health and Safety rating for facility operations and management by the International WELL Building Institute in the U.S. The continuing efforts being made by our employees, partners, vendors, et cetera, and the constant support received from our licensees, lender, Board and major stakeholders during this period is heartening to see. Finally, the company is glad to be able to declare our first ever interim dividend at the Board meeting early yesterday. As mentioned on earlier calls, this is in keeping with our policy of ensuring the maximum amount of surplus cash is regularly paid out to investors while ensuring a prudent level of liquidity is available for contingencies. With this, we conclude our presentation and open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of [ Kiran Nayak ] from [indiscernible].

The company has any plans to come out with REITs? Are there any plans of company coming out with REITs?

So the company is evaluating for its options for what the future structure may look like. And those discussions continue to be ongoing along with our major stakeholders. And whenever we have any update on that, we will let you know straight away.

Second question, new any construction work is going on?

We've finished the construction of Phase 5 in December. And at this point, that is the last phase of construction that we have planned currently in NKP.

The next question is from the line of Samarth Singh from TPF Capital.

Could you walk me through the delta? I think there's a INR 14 crore increase in the top line between last quarter and this quarter. Could you walk me through the delta between where the increase has come from?

Okay. So essentially, what this is, Samarth, is basically from September 30, '21, to September 30, 2021, is your question, correct? The increase from approximately 684 to 827. Is that your question, just so that I've understood it?

I don't know what the 684 to 827.

That's the increase in the license fee. So just in short, there were basically 4 new licenses that happened in Q3 '21, '22 of October to December quarter. And one was a company called Growth Source from October 15 for approximately 11,000, and then there was 2 Morgan Stanley transactions in November and December as well of approximately 37,000. And finally, the JP market rent also started on December 15. So to that extent, there will be some straight lining as well of that.

So there was no rent escalation coming in during…

Did you have any escalations in the last quarter?

We had the escalations, but in [indiscernible].

So to answer your question, escalations are happening as contracted, but in the accounts, in the revenue, you'll see them in the straight line as for the India's rising.

And I think there is mention in the presentation that our current debt stands at INR 1,000 crores and it will go up to INR 1,200 crores by next quarter or next 2 quarters. I'm just trying to understand some of this construction and handover, how will it...

So the debt will be in and around the number of INR 1,200 crores that -- if that was your question, we can confirm that, Samarth.

I'm just wondering, I think it was mentioned that it's at INR 1,000 crores as of December end. Is that right?

That's right. And between this quarter and the next, it will reach that level of roughly INR 1,200 crores.

And since you've already given possession to JPMorgan and there were no further construction going on. Why is that debt going up?

There we have -- essentially, there's a lot of our internal accruals, our cash accruals that we have used in earlier quarters because we wanted to postpone growing down the debts to the latest stage so that we had the lease interest cost. So on that basis, we get reimbursed for the accruals that we -- that the cash accruals that the company has internally generated at the last stage. So it's essentially a postponement of the debt, so we postponed payment of interest as well. Postponing -- drawing down the debt.

But since you already, are you -- okay. So is my understanding correct that you would be using part of that to pay the dividend as well.

Dividend is paid from -- as I said, from internal accruals. What we have drawn down in this quarter and what we will draw down -- reimbursement for Phase 5 expenses that we have already paid out of our accruals in earlier quarters so that we didn't have to draw the debt at that stage.

So why would you be drawing down the debt now that we're already, the internal accruals paid down to finish the construction, what would be the additional…

We could have drawn down the debt in earlier quarters and paid the Phase 5 cost from that. We have chosen to use our internal accruals in those quarters and pay Phase 5 expenses from the internal accruals so that we can postpone as far as possible. The drawdown of Phase 5 debt, which is a INR 1,200 crore limit that we have, which is what we are drawing down in this quarter. So whereas otherwise dividend would have been paid out of the accruals that we would have basically had cash sitting on the books over the last 2 or 3 quarters.

And what is -- so great job, we've completed Phase 5, successfully leased it out. So what is -- in terms of management, what are you guys thinking of now? What are you spending your time on now?

Well, essentially, the stabilization of Phase 5 and the handover of JPMorgan -- and the handover to JPMorgan and the integration of Phase 5 into the campus is a very long drawn out and complicated process in a manner of speaking at a micro-level, of course. So this is, of course, a very serious process, which is ongoing given the size of the -- given the size of the development in Phase 5 and also the fact that it's a single user. So there are additional obligations, et cetera, additional things which you need to do for a single user building, single tenant building, which we are doing. And then, of course, the property management, which is ongoing and which is also a little bit more complicated because of the ongoing COVID related issues with regards to safety and other various measures that the company has taken. So yes…

So there's one other -- there's the other major aspect apart from the operational points, which Rahul has described correctly and well, is that we spent a very significant amount of time evaluating what in fact we should be doing going forward and discussing that with our various stakeholders. So the various options in that context and also in the context of our regulatory environment, the fact that we have a private -- rather a public limited company is something that takes up a good amount of time since you asked specifically that question, we thought we should mention that as well to you.

I was asking in terms of -- I'm sure Phase 5 took up a lot of your bandwidth and now that it's sort of coming to a completion, what is the next trigger for this business? I mean, how much time are you -- have you started spending enough time for that -- on that? Or is that decision or discussion still some time away?

So the discussions are very much ongoing, Samarth, and that's something that does take up a significant amount of our time. And we are hopeful that we will have some specific directions on that as we go through this coming financial year going forward. We'll keep discussing it with the stakeholders and narrow down which direction we want to go in. There's been discussions that have been ongoing for a while, and they are getting increasingly focused in what direction we want to take. And we feel that it's in a good direction at the moment.

The next question is from the line of [ Ashok Jain ] from [indiscernible].

Congrats for giving such an excellent dividend as you had hinted previously. Sir, in our presentation on the slide 14, we have stated that we are shifting to old tax regime of 35% and have provided revisit that expense for both, 1, preceding quarters and, 2, earlier years. Sir, I want to know how much is tax expense for earlier years. And you have also stated that the change to new tax regime is irrevocable. Sir so did we not to shift to new tax regime last year? Sir, please explain to us about the new and the old tax regime as applicable to Nirlon in layman's term.

Yes. So let's -- what Nirlon is currently under is the old -- the existing tax regime. Nirlon has not shifted from the old tax regime at all. That's just one thing to be quite clear on. Nirlon had thought that there was a chance that we may shift in the financial year '21-'22 based on circumstances. Post that, there were regulatory changes -- this initial thought we had was in 2019, September of 2019. Post that, there have been additional regulatory changes, which make it clear that should we opt to change to the new tax regime, those benefits -- the benefit of those changes in the regulatory regime would not be available to us. So we have, at this point, said that we -- and since once we change to the new regime, we cannot go back to the old regime. So we -- after very careful consideration and discussion, decided that we should continue with the old tax regime for the '21-'22 financial year as well, and that is presently what we are doing. Does that answer your question?

Yes, sir. And sir, how much is the tax provision for earlier years?

I will just check with Manish, but I think it is about INR 13 crores.

Yes. It's INR 16 cores for the 9-month period until December 2021.

INR 16 crores. Okay. And rest for last 2 quarters.

And last quarter is INR 20 crores.

And sir, one of the benefits which you've talked about it, is it so that if we pay tax as per old regime on in case we convert to REIT, so REIT will be dividend tax free in the hands of shareholders. Am I right, sir?

You are correct. The clarification to the extend -- the clarification that was received was that if a company transitions to the new tax regime, the benefit of the dividend or the distribution that the unit holder of the REIT gets would not get the benefit of tax that it gets. In order to get the benefit of the tax-free distribution, the company has to stay with the old tax regime. So until that issue is decided, we want to ensure that we keep that option open to us. And therefore we've mentioned the flexibility for any future restructuring, which will include this particular option that you mentioned.

The next question is from the line of Arun Malhotra from CapGrow Capital.

I think my question on tax was answered, I know. I still wanted to understand, in terms of REIT, there would be an inflow of capital in case we decide, we have been evaluating this option for now a couple of months. What are the pros and cons for the company because they would be getting capital? So what is the use of -- possible use of that capital? Is the company looking for more assets, increase asset base? What's the thought process there? That's one. And in terms of the management bandwidth, it was not that clear that which direction are we looking for?

Mr. Malhotra, as far as your question on REIT, on the specific pros and cons of REIT goes, we prefer that we don't answer that incomplete presently because as we indicated, that is something that we are still in the process of looking at in terms of the pros and cons in our -- of transitioning to REIT from our current status as a public limited company. So those pros and cons are still something that we're evaluating properly and we'd like to give a complete answer on that, if you don't mind. And in terms of our bandwidth, there is a point more that a lot of it is essentially taken up or is devoted to getting to the appropriate direction in terms of what we will be doing going forward, whether it's REIT or it's any of the other options that we're evaluating or a combination thereof. That is something that we are discussing and looking and evaluating consistently and what we want to come to conclusion on going forward.

I would still maintain that the answer is unclear because our assets, Phase 5 is also complete. Now we see a lot of cash flows in the future. There is no site or land which we need to develop. So what direction we plan to go? Is it REIT? Is it -- I don't know. It is still unclear. But it will be beneficial for all the minority shareholders that we get some clarity on that from the management.

We're completely with you on that. And that is exactly what we're working towards. We are not in any way trying to tell you that, that direction is clear. We're in fact saying that, that is the direction which we're evaluating and you're quite right to say that you should and we should have a clear direction on that. That's exactly what we want to provide you and that's what we're working on.

Any time lines you think you would be to concretize your plans?

We wouldn't want to mention that right now, if you don't mind, but we take your point that the earlier the better. You're quite correct about that.

The next question is from the line of [ Lax Jain ], an individual investor.

I just have one question. How are we looking at the opportunity of data centers in India because one of the Singapore player Ascendas is already investing very heavily in the Indian data center market?

Currently, we have not gone into any serious depth or have done any detailed analysis with regard to the possibility or the potential of looking at data centers and around Mumbai or Nirlon. If there is any -- if there is any serious discussion of, for the -- discussion or if there is any discussion on this issue, of course, we will keep you informed. But at this point, the company has not looked at any serious growth opportunity with regard to data center.

And one more question. In the previous con call, you had mentioned that being one property, it is difficult to get converted into REIT. So what is the development on scouting process for more properties to be added on the Nirlon Limited, sir?

So I'll just repeat the answer that we had given earlier is that this is, we appreciate you remembering what we had said the last time, and that is part of what we are analyzing, part of what we are evaluating is to address that particular question as well in terms of what the transition would look like for a single asset REIT for a single location property or a single location company largely like us. And to what extent that can be mitigated, to what extent that can be addressed is part of the evaluation that we are going through just now, whether it means -- but there are various ways in which one can address it, and that is part of what we are in the process of discussing and deciding with our main stakeholders.

The next question is from the line of Samarth Singh from TPF Capital.

I understand we're running at high occupancy right now. Could you just talk about the actual usage? How is that running as a topic? I was wondering about the actual usage of the property. I understand the occupancy is high, but in terms of usage, how is that running?

Well, do you mean the number of people who are actually coming in? I mean, you know that -- I'd say it's excluding JPMorgan of course, that the [indiscernible] is still in the early stages. I'd say it was -- of course, it's fluctuating depending on the severity of the variant at that particular time, but it's been around 15% to 20% consistently for a few months in this financial year '21-'22. Of course, it's come down to approximately 10% in the last month in January because of the severity of the -- and the high volume of the cases. So yes, it's been at an average, I'd say, approximately 20% in the last year. Or except for periods where it has gone down to 10% when there is -- when the volume of the cases has increased.

And now we've just, again, very recently seen as uptake once again in that -- in those numbers.

So -- and in general, just talking to your clients, you believe that, I mean, they will -- it will go up back to full usage? Or do you think there's been some sort of permanent change that people were talking about 2 years ago at the start of the pandemic where work from home would be a permanent feature and…

I think the indications we've got right now is that the clients are very keen to come back to work as much as possible, as quickly as possible. But it happened about 3, 4 times, and I think this will be a consistent theme across other parks that we've spoken to is that it goes to a particular level. They are ready to take the next level, let's say, from 25% to 50%, and then there's been another outbreak or there's been another concern and then it goes back again. So that effort is again going to be made, and we are hopeful that the next time that it is going to go up from these numbers to the next step, it will happen.

And last question from my side. Could you just maybe talk a little bit about the demand supply dynamics in our particular micro-market?

I mean, the level of inquiries are much better. The volume of inquiries are better, has increased [ throat to cheek ].

In Q3 and Q4, the inquiries are better than in the first half.

Yes. Sure. In Q3 and Q4, the volume of inquiries are better, where we mean inquiries, we mean actual inquiries which are fructifying somewhere or the other, a lot of them may not fructify in NKP because we have only X amount of space available and some people are looking for contingent space and some people are looking for higher floors and some people are looking for more specific space, so they may go to -- they may go to parks or they may go to buildings which have higher levels of vacancy than us. But we do see a good inquiry flow from the -- profile of the licensee is also very important and that we see a profile of the licensee from whom we are getting the inquiries is extremely positive. And yes, we hope to come back to the original pre-COVID levels as soon as possible. But we do see in Q3 and Q4, hopefully, in Q1 2023, a good volume or a better volume of inquiries with the right profile as well.

Samarth there is just one part to point out. I fully endorse what Rahul is saying, but just one thing to point out. Once we go beyond our 95% or 96% and presently we are in the 96%-plus range just now. Then even though inquiries can tend to be good, as Rahul pointed out, we often time doesn't fructify over here purely because we don't have enough space. There is a fairly limited amount of space that's left. So filling that last 2%, 3%, 4%, sometimes can take longer. But in the context of inquiries, it's been much better in the second half of Q3 and so far in Q4 despite the Omicron issue.

And given the robust inquiries, I believe our policy is not to sort of take up our rates and more or less mid-teens steady rates because we have long-term relationships with the client. Is that right? Or do you -- is there a possibility of a jump in our realizations per square foot going forward?

We would essentially look to try and see that we certainly make sure that we maintain our rates, but we'd also look to try and see that we would increase rates up to a point which we believe are sustainable and where someone can -- we don't want the situation where someone comes in and leaves in 3 years. But where we believe that the rate is maintainable over a period of 9 or 10 years, and that's been our policy, our thought process, our philosophy from day 1, we would certainly look to try and push our rates. We're not saying that there's any big or significant increase that is going to happen tomorrow. But we're certainly not looking at stagnating and sitting on these rates. We will always try to push them as high as we can, but within a sustainable context, not that we get it just so that we show a headline and then somebody disappears in 3 years. That doesn't help anyone.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Kunal Sagar from Nirlon Limited for closing comments. Thank you, and over to you, sir.

Thank you very much for participating in this call. We appreciate your interest, as always, and look forward to being in touch again in the next quarter or any time in between, if anybody has any questions or clarifications, we are happy to address those as and when you need to. Thank you very much again. All the best.

Thank you. On behalf of Nirlon Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.