Nirlon Limited (500307) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 and FY '22 Conference Call of Nirlon Limited. [Operator Instructions] I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, Mr. Anuj Sonpal.

I'm 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 fourth quarter and financial year ended 2022. Before we begin, let me mention a short cautionary statement. Some of the statements made in today's earnings call may be 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 call is really to educate and bring awareness about the company's fundamental business and financial court under review. Now let me introduce you to the management participating with us in today's earnings call and hand it over to them for opening remarks. 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 and Vice President of Finance; Mr. Jasmin Bhavsar, Company Secretary and Vice President of Legal and Compliance Officer; Mr. Ashish Bharadia, Vice President of Business Development and Investor Relations, Nirlon Management Services Private Limited. Now without any further delay, I request Mr. Kunal Sagar to start with his opening remarks. Thank you, and over to you, sir.

Thanks, Anuj. Good afternoon, and welcome to our earnings conference call for the fourth quarter and the financial year ended 2022. We hope all of you are safe and well. Let us take you through the financial performance of the company for this period. For the fourth quarter of the financial year ended 2022, the company reported a total income of approximately INR 138 crores, an increase of 48% from the previous quarter, and EBITDA stood at INR 114 crores, an increase of 52% from the previous quarter. This represents an EBITDA margin of 82.43%, which increased by 224 basis points sequentially. Profit after tax stood at INR 37 crores, representing a PAT margin of 26.94%. For the financial year ended March '22, the company reported a total income of approximately INR 387 crores, an increase of 21% from the previous financial year, and EBITDA was INR 300 crores, representing an EBITDA margin of 77.63%. PAT stood at INR 111 crores, representing a profit after-tax margin of 28.65%. As mentioned in our presentation, during the year ended March 31, 2022, the company completed the development of Phase V at Nirlon Knowledge Park and licensed the entire Phase V development comprising 1.16 million square feet of starting area with effect from December 15, 2021, to JPMorgan Services India Private Limited for a period of 10 years. JPMorgan is paying license fees as per the agreement from May 15, 2022, as contracted. Accordingly, income and expenses relating to Phase V are recognized in the profit and loss account with effect from December 15, 2021. This is the primary reason for the increase in license fees and profitability in the fourth quarter. The overall occupancy rate of Nirlon Knowledge Park, including Phase V, has increased to approximately 98% in this quarter compared to 95% in the previous quarter. Of the area that was vacant earlier, JPMorgan licensed an additional 13,000 square feet at NKP and 2 clients licensed approximately 4,800 square feet at Nirlon House, of which, 75%, i.e., 3,600 square feet, is Nirlon share. Separately, Barclays has renewed approximately 63,000 square feet in May 2022 of the space due for renewal expiry in financial year '23 in NKP. As on March 31, '22, approximately 65,000 square feet or approximately 2% of the area was vacant. Of this vacant area, the company has licensed approximately 7,000 square feet -- 7,500 square feet in quarter 1 financial year '23 and is in discussions with the balance area. On the May 2, 2022, the company refinanced its entire debt and availed a green loan facility from HSBC for INR 1,230 crores, including an OD sublimit of INR 80 crores. This new facility is for a tenure of 10 years with a principal moratorium for the first 5 years and the bullet repayment of 75% at the end of the tenth year. As of today, the interest rate applicable at 6.6% on the OD facility and 6.1% for the balance facility. The company has paid an interim dividend of INR 15 per share for financial year '21, '22 in quarter 4 financial year '22. Additionally, the Board has recommended a final dividend of INR 11 per share for the financial year '21, '22, subject to approval of shareholders in the forthcoming AGM. As mentioned on earlier calls, this is in keeping with our practice 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 to questions. Please go ahead.

[Operator Instructions] Our first question is from the line of Dilip A. Jane, an investor.

Am I audible?

Yes.

Congratulations on an excellent set of numbers and the announcement of the final dividend. Sir, we have stated in previous con calls that we would like to maintain a stable dividend policy. Having paid INR 26 per share as total dividend in the current fiscal year, do we intend to maintain a stable dividend payout in the future given that the circumstances are normal? Sir, my second question is, different -- as you have mentioned earlier, in the earlier con call, that one location asset containing REIT structure may not be possible from a regulatory standpoint. So therefore, in case we decide to diversify into different real estate classes, I would like to just mention that various real estate classes globally give returns in the low single digits to mid-teens. So my question to you is, are we open to real estate fees which gives higher rental yields than the office real estate portfolio? I look forward to your responses.

So Mr. Jan will answer your first question, which is under dividend sustainability, I think it was?

Yes. Yes, sir.

Yes. So we believe that the level of dividend that we paid for this year is a sustainable dividend for us going forward. We estimate for the next 2 years that this is a sustainable dividend that we can be able to pay.

Excellent, sir. Very nice.

Okay. Thank you. The second question, we didn't fully understand. Are you saying that would we like to move out of the class of real estate that is not office anymore. Is that what you are suggesting?

Yes, sir. There are other real estate classes globally. For example, there are data center REITs, there are various other classes which give a yield, which is probably low single -- single digit to mid-teens. So are we open to diversifying into them in the future?

We are not presently looking at doing any other class of development in Nirlon other than an office development at the moment.

Okay. So sir, you had mentioned earlier, sir, that from a regulatory standpoint of one location, asset containing restructure may not be possible. Do we have any information on where do we stand on that particular point as far as the REIT conversion, if at all, it were to take place in the future?

So we have more information. The one location aspect is not the defining characteristic in terms of whether one will move towards the REIT or any other restructuring. That is one of the points, but that's the point that we believe would be a secondary point rather than one of the primary points. I think we mentioned last time, the larger issues are that there is no impact -- the support conversion to a REIT is not something that is a regulatory possibility. It's not just possible to convert to REIT. As we had explained last time, there's a convergence of various regulations and various people that need to come together for this. So our understanding so far is that a listed entity can theoretically become an SPV under the REIT, which is also a listed entity. However, there are no residents or no ready framework for this particular circumstance at the moment. So due to these considerations in the absence of any specific approval or any specific exemption, there may be a situation where it may be desirable or required. In fact, the if the company were to transition to a REIT, to do it in 2 steps which may involve either an open offer or a delisting and then move towards the REIT, if in fact that is the direction that one decides to take. As we had said last time, this is a set of discussions that is ongoing at our end, and we have a lot of significant feedback on that, which we will take into consideration before we take any final decision on the matter.

[Operator Instructions] Our next question if from the line of [ Harshit Golan ], an investor. Harshit Golan has left the question queue. We will now take the question from the line of [indiscernible] with Spark Capital Advisors India Private Limited.

And congratulations on a good set of numbers. My question pertains to the rental increase that one has witnessed over the past 1 year. And I must compliment that you have given a very clear chart of how much renewal you expect over the years for a Nirlon. So on that, is there a broad rental increase that we are looking at in terms of percentage terms on per square feet per month basis? And I ask this question in the context of competing office space nearby Nirlon in the form of comments to Nesco and some of these other developments?

Yes. So one, there are a couple of reasons for the increase in the license fees between FY '21 and '22, okay. No doubt, there has been -- acquisitions have come through from the existing phases, Phase 1, 2, 3 and 4, okay? There have been some occupants. There have been some vacancies, which have been filled as well over the course of fiscal year '21, '22. However, if you look at the India's numbers, JPMorgan has -- rent would have started from December 2015, where the rent would be -- the rent will start to be designed for India. So that is another reason and probably a very significant reason as to the increase in the rentals between FY 2021 and '21, '22. Yes, that would really be it. So basically, consistency in the escalation coming through, there is a marginal reduction in the vacancies and then, of course, the speed running of the JPMorgan rent from December 15, 2021. Does that answer your question?

Just if I can be more specific here in asking in terms of increase, are we looking at a 10% to 15% increase in rentals over, say, '21 on per square feet per month basis. Is that a fair assessment?

I think the increase in the rental per square feet between in 2021 and '21, '22 would be -- not be significant to the extent of 10%, whereby there may be a few marginal increases. I don't think it will be as significant at 10%.

Got it. And is it fair to assume, sir, that this number will be...

And speaking of the new -- speaking of the new rental of course, the escalations have come in -- have kicked in as per schedule.

Got it. Got it. And is it fair to assume that given the competition around you, a rental increase would be like mid-single digits. Is that a fair assessment?

Rental increase would be mid-single digit for...

For renewals? For renewals, like whenever they are coming up?

That's a tough question, really. Rent is increasing. I mean there are a lot of factors that constitute a lot of that. So I would not want to make a clear -- I mean, I would not want to comment on the fact whether rental increase will be mid-single digits for renewals or for new legal license for that matter.

It depends on what level of previous license has expired at. And so sometimes you may get something that is more than what you're saying significantly and sometimes we may not get that level because you are starting at a base that's different. So as Rahul said, that's an individual specific situation. So we don't want to generalize on that.

Sure, sure, sure. And lastly, sir, now that everything is sort of leased out, I mean, less than 2% or around 2% vacancy, I mean, how do we think about growth for Nirlon assets going forward?

Well, I mean, the growth has, of course, come in for a company like us at this point, where no additional or further construction and besides the growth would come from consistent occupancy rates and minimum vacancy over a consistent period of time, as has been the case predominantly over the past 10 years approximately. And of course, growth would come with consistent escalations in rentals, which have also been occurring over the past approximately 10 years, et cetera. And thirdly, a very significant part of growth, which, of course, we cannot specifically comment on now, would be if the actual rate per square foot, so to speak, shows a steady and a consistent upward trend. But of course, on the third point, it's not so easy for us to make a specific comment right now. would predominantly be the driver of growth in the top line. And of course, that will be the most significant factor for overall growth in the P&L.

Sure. And just sir, lastly, as we stand today, I mean, is -- are offices working at 100% capacity, I mean, in Nirlon?

Yes, that's a good question. That's a good question. So we see a steady increase of people coming into the campus. Of course, this is something which we monitor very closely. And I'd like to say that based on the first 4 phases, apart from JPMorgan, of course, because that's still in the fit-out date, we see that we are approximately around the halfway mark in terms of the number of people coming in. We see approximately 50% of the pre-COVID volume of people entering the campus every day. So that's extremely important, and that's something which we look at, and we'd be very happy to see further people coming into the campus. But I'd say at this point in time, we are approximately at the 50% mark.

Yes, we've been very encouraged in the last -- since our last call that the occupancy has gone up significantly. As Rahul said, between 50%, sometimes close to 60%, and we do see that trend continuing to go up. So that's something we're really encouraged with.

Our next question is from the line of Niraj Mansingka with White Pine Investment Management.

A few questions. One, JPMorgan took additional 13,000 square feet from you. Was it a similar price or is this a slightly premium or a discount?

Can you -- you're a little a bit...

Are you asking that the13,000 square feet that has been taken by JPMorgan additional, is that at a premium or a discount?

Yes.

So I think it's been like that at the same rate.

And the Barclays that was renewed. So obviously, there would be an escalation because the renewals have come in. So can you give a color on their renewal rates like -- can like -- okay, your question here, I'm trying to get it. Since you have contracted JPMorgan, which has some years back 2 years or 3 years back, there might -- the rates might have gone up gone. I just wanted to understand because currently, the occupancy is increasing and there's also some amount of positive side in the business. So I wanted to know the rate of the Barclays, what is the current rate for the market? And what was the research for Barclays [indiscernible]?

So your question is what rate has Barclays renewed at? Is it higher or lower than the other -- than the earlier rate?

Yes. But I mean there are...

Not really. With regard to Barclays, earlier one, with regards to JPMorgan as a benchmark. I think that would be a better way.

Yes. So with regards to JPMorgan as a benchmark, we'd say the Barclays rate is, if you compare it, is fairly similar to the JPMorgan rate. We'd say it's very close around the JPMorgan rate, if you compare it on a like-to-like basis.

Okay. Sir, the reason I'm asking, development here in the metro stations are coming. There's a huge gap between [indiscernible] and your area. And still, the rental rates don't -- are not going up. So I wanted to get your color on that side also.

Yes. That's a good question. But one must also understand that apart from the [indiscernible] the profile of the agency we have, the profile of the rent we have are very strong relative to licenses -- very strong licensees for any developer or developers. And all these licensees have a very strong footprint in Pune and in Bangalore, et cetera, as well. So need to also take into account that the talent pool of employees accessible to these licenses in Pune and Bangalore is very significant and is very good. And so the competition for NKP, apart from the micro market. And of course, yes, we always think that the prices should increase more compared to BKP. But based on the profile of the space, which is basically the larger loss rate of 30,000 and 40,000 and sometimes even more, there is a very serious competition or there is a very serious space being offered in Pune and in Bangalore, just to name 2 spaces where the talent pool available to this profile or licensee is very decent.

No, I understand this. I just wanted to push further here and a thought on maybe a little bit more understanding on that. See, the capital cost of making a property has gone up. The land prices have also gone up in the last 5 years. So effectively, a new guy building a property would get a lower yield than you would have got, say, 5 or 7, 10 years ago. So don't you think that the lucrativeness of making a commercial property has gone on and as the rates are bound to go up so and it's not going up. So still want more color. Do you see that until the occupancy of the region goes complete, then only you will see a possibility of some industry rate hikes?

Rather than speculate that, let's look at what we've been seeing and what will happen, right? We've come out of 2 years of COVID, there's been no -- there's been such nothing negative that has happened in that time. If anything, there has been various positive development that we had in terms of leasing as well as in terms of rates. We haven't had anything that is negative or anything before that. Also, the kind of transactions that we are doing now are incrementally the trend is an upward trend and it's not a downward trend. Now whether that is -- one doesn't want to be subjective about it as to whether that's good or bad. We've been quite encouraged by, given the way the last 2 years have gone and given where we are now, the kind of inquiries that we have and the kind of rates that we are licensing are certainly higher than what they were earlier. And to that extent, it's been something that is quite positive in our view. Does that better answer your question?

Yes, given the color on the direction. The last question. I want to know on the -- you have a discussion on the -- how the monetization will happen for the investors. Now can you share -- you said about it. Can you give more color on what is the point of stumble and where the decision getting stopped and for maybe converting to a REIT or merging to another REIT? So just wanted to know your thought that where are the decision-making getting stumbled or where are the points where discussion is still to happen?

Are you -- sorry, your line is not the clearest line. But from what we understand, again, I think you're once again asking where we are in terms of the decision-making to -- in terms of decision-making towards a restructuring or a REIT or something along those lines. Is that what you're asking?

Yes. And more color rather than just we are thinking about it.

I think we did offer more color the last time, and I think we did offer more color this time as well, right? There are -- as you would be well aware, a REIT or a restructuring decision that is like a REIT is something that is going to involve certainly more than just the company, and Rahul is sitting here just now. It will involve the sponsors, other shareholders, so many other people and so many other issues. So we did mention there, and I think quite clearly that we had made significant progress in terms of understanding the way -- one of the discussions we've been having is the way towards the REIT as far as Nirlon goes, as far as the regulatory aspect goes. And there, as I mentioned, we have made significant progress in understanding that in terms of whether as a listed entity, Nirlon can be owned by another listed entity which would be a REIT or what would be required to put Nirlon in a structure where it could fit into a REIT. And I think there has been significant progress in terms of our understanding. The decision-making post the understanding will have many other people and many other parties that are involved. And that's something that will play out over the course of the next few quarters. And that's something that -- I think that's as far as one can -- there's nothing that is stuck in any way. So the process is moving forward. And since it's a process that will effectively be happening for the first time in terms of a listed entity trying to transition to a REIT, it will naturally be looked at very carefully and scrutinized from all sides to see whether that is, in fact, beneficial to the shareholders or not at the end of the day. So we don't want to make any commitment beforehand. And it is not something that, unfortunately, we can answer just for the sake of answering. It's a long detailed process, which is being undertaken for the first time. So I hope that does give you some hope. It's not -- again, we're not saying we're thinking about it. We're saying we're doing a lot more than thinking about it.

Okay. Just -- I don't want to comment, just wanted to give my feedback that, see, what's happening is that you are also not moving to the new tax structure because you don't know how it will be required for the -- if you convert to a REIT. So effectively, the decision-making is a cash flow loss to the minorities also. I know it's cash flow loss even to the majority shareholders, but also cash flow loss to the minority shareholders. And so just a suggestion that at least to the majority shareholders should think slightly, to quicken the division rather than the place at which it's happening right now, right? So that's just the feedback I wanted to give to you.

Your feedback is much appreciated and do -- please do. I hope that -- what we want to say that it's something that we are extremely cognizant of. The only point we would like to make to you is that the migration to the new regime, as you know, is not a reversible one. And based on the data we have, if we allow and retain our flexibility now for any future restructuring, the -- and if we continue with the old tax regime, we estimate that the potential value of such an event is significant enough to save the old tax regime to keep this option open now. We are not saying that that's something we're going to do for the next 5 years or for the next 10 years or for the next 3 years. We are saying for the present, for this year at least, staying under the old tax regime will allow us the flexibility to do something that could be much more significant. And if it isn't, yes, there will certainly be a small cash flow loss to all shareholders. But we do believe that the potential value is not something that we should just close the door on and we should make sure that we explore every avenue in that regard to try and maximize that value. So we understand your point of you and we understand what you're saying. It's something that we are extremely cognizant of and we agree with you fully on that.

Our next question is from the line of Lux Jane, an investor.

Hello. Am I audible?

Yes.

Very big congratulations to the Nirlon team for a great set of numbers. I have a couple of questions. My first question, what are the current rates going on in Goregaon for A-grade office spaces like NKP, like first, [ what does it ] cost?

Okay. So essentially, we don't want to say what the rates are in the other developments in and around the micro market. As you can see, the rate, I mean, according to us and NKP would be approximately at the mid-140s, so to speak. Yes, that's what we think the approximate rates are.

You're talking about the rental part, right, 140?

Yes, yes...

How about land, like in general? Not rent, I'm talking about land.

Land.

Land in the sense of [ scarcity ]. We have 50 lakhs [indiscernible].

Sorry?

We started with area of 30 lakhs.

We have now...

We wouldn't want to as to look at the land valuation in our contract. It's a finished asset...

I'm just correcting that. We have like 30 lakhs started with, right?

Yes, started with.

Yes. I'm talking like how much will it be like if it's on the sale, like when 30 lakh is -- you're getting my question, right? Like for 30 lakhs, how much is...

Are you asking what is the rate for [indiscernible] if we wanted to sell it. I mean we don't really want to comment on that because we've not really examined that. We've not looked at it. So it would not be absolutely appropriate for us to answer that question without doing a lot of homework and understanding because it's not...

Our valuation like any other company in our profile would be more on a cap rate and rental basis. It's unlikely to -- the cost per square foot of office space is not likely to be something that will be a realistic valuation one way or the other. I would be done on the more traditional basis for any rental assets or any yield asset.

Okay, okay. The reason why I asked this question is to get an idea and aspect on REIT materializing.

Sorry, you get an idea?

If a REIT materializes, you get the valuation like that.

Well, again, I think we want to -- if you are looking at valuations, we would be comfortable looking at the more -- at the cap rate rental valuation models rather than anything else, whether it's for a REIT or whatever is for because we think that is the more realistic and the more relevant one in this case.

Okay. And my last question. Given the size of Nirlon, the normal -- what we have right now is very small. So do we have the options open for acquisition because when another investor asked about growth, we are focusing on incremental rental and not on acquisition.

Well, I mean, at this point in time, we have not -- we have answered on the earlier calls as well that there's no -- there are no plans for any further growth or further construction within the NKP campus or outside in greenfield, et cetera, brownfield or something of that nature. So we can't really -- yes, so in that context, we see no reason at this point why the debt should be increased.

[Operator Instructions] Our next question is from the line of Niraj Mansingka with White Pine Investment Management.

Last question, Rahul, just wanted to know, how do you see the cash flow -- I think the dividend is good that they have played out. Just wondering how much cash would be left after paying dividends. And if you pay the same design next year, how do you see the dividend payout, and obviously, the dividend payout next year as well?

Niraj, we don't want to offer any kind of specific guidance in terms of what it will be next year. What we will say is that the fourth quarter results should be on an estimated basis, recently representative of what we should be able to look at in the coming year. Does that help you in terms of answering your question?

Yes. Yes. Okay.

Because that -- we do think that the fourth quarter has been quite representative of what we might have -- of what we estimate should be there going forward.

Okay. Sir, the reason I ask is that the amount of dividend which is coming, you're saying, is much higher than the run rate of earnings today. So that's why I'm asking you.

So as we said, we do think that this is a sustainable level of dividend for -- going forward for the next few years. And it's on that basis that we confirmed that in the earlier -- I think another investor had asked that question earlier. We did confirm that it is something we believe is -- we estimate to be sustainable going forward.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to Mr. Kunal Sagar from Nirlon Limited for closing comments.

Thank you all very much once again for attending the call. We appreciate your time and your questions, as always. If there's anything at all that you need further, please be in touch with us. We try as best to make sure that we answer queries or any clarifications as soon as possible. Thanks again. All the best.

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