Nirlon Limited (500307) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Q1 FY '23 Earnings Conference Call of Nirlon Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Anuj Sonpal from Valorem Advisors. Thank you, and over to you, Mr. Sonpal.

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 call for the first quarter of financial year 2023. Before we begin, let me mention a short cautionary statement. Some of the statements made in today's con 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 quarter 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 VP of Finance; Mr. Jasmin Bhavsar, Company Secretary and Vice President, Legal and Compliance Officer; and Mr. Ashish Bharadia, Vice President of Business Development and Investor Relations of 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.

Good afternoon, everyone, and welcome to our earnings conference call for the first quarter of the financial year 2023. We hope everyone is safe and well. Let us take you through the financial performance of the company. For the first quarter of the financial year '23, the company reported a total income of approximately INR 139 crores, an increase of 1% from the previous quarter, with an EBITDA of INR 108 crores, a decrease of 5% from the previous quarter. Profit after tax stood at INR 14 crores, representing a PAT margin of 10.22%. We will now explain the significant variations in the financials of this quarter from the previous quarter. There were onetime expenses incurred in quarter one financial year '23 of approximately INR 25 crores on account of refinancing of the company's loan, which were included in the finance cost, and an additional INR 86 lakhs included in the other expenses. The other expenses also include CSR expenses of approximately INR 3.4 crores for the full financial year '23 provided in Q1 of financial year '23 as per statutory requirements, and marketing fees of INR 3.5 crores for a 10-year renewal, which is entirely charged to the P&L in this quarter due to there being no lock-in period as against other renewals where marketing fees are amortized over the lock-in period of the license. Annualized margins are expected to even out such quarterly variations. On the operational front, as you are aware, the company completed the development of Phase V at Nirlon Knowledge Park and licensed the entire Phase V development comprising of 1.16 million square feet of chargeable area with effect from December 15, 2021, to JPMorgan Services India Private Limited for a period of 10 years. JPMorgan has begun paying license fees as per the agreement from 15th May 2022 onwards as contracted. Income and expenses relating to Phase V are recognized in the profit and loss account with affect from December 15, 2021, as per Ind AS. This is the primary reason for increase in license fees and profitability in the first quarter of financial year '23 versus the same period in the previous financial year. The overall occupancy rate of NKP stood at 97.1% in this quarter as compared to 98% in the previous quarter. Barclays renewed approximately 94,000 square feet of its space due for renewal and expiring in 2023. Anunta renewed approximately 13,000 square feet of space also due for renewal in 2023. Growth Source licensed an additional approximately 5,000 square feet and F&B operators renewed approximately 1,600 square feet at NKP. Two parties licensed approximately 4,300 square feet at Nirlon House, of which 75%, that is 3,200 square feet, is Nirlon's share. As on 30th June 2022, approximately 90,000 square feet area was vacant. Of this vacant area, the company has signed an LOI for approximately 37,000 square feet. Cult.fit, the gym operator, has given notice to vacate approximately 6,000 square feet in September 2022. Additionally, in a recent development, during the first week of August, Citibank has renewed approximately 150,000 square feet at NKP. Of this, 129,000 square feet was due for renewal in financial year '23 and the balance was due for renewal in financial year 2024. As on 30th June 2022, the total secured debt facility as sanctioned by HSBC was INR 1,230 crores, which includes an overdraft facility, while the debt outstanding from HSBC was INR 1,150 crores. With this, we conclude our presentation and open the floor for questions.

[Operator Instructions] The first question is from the line of [ Laksh Jain ] from Enam Holdings.

My first question, sir. We have paid INR 3.4 crores as CSR for FY '23. Statutory non-sales corpus must be 2% of net profit as CSR. Sir, this equates that we will be making net profit of around INR 1,700 crores plus in FY '23, sir. Am I right, sir? Is that really right?

The CSR regulation say that 2% of net profit is to be spent based on the previous 3 years, the average of the previous 3 years. So that's what this number is based on.

Okay. My next question, sir. If I'm not wrong, there are 2 ways to get converted into REIT. Sir, this either SPV or through [indiscernible]. I have a doubt under SPV, sir. Say, for example, if GIC has 60% holding in XYZ REIT, then for Nirlon to be part of that REIT, should GIC renew it's holding in Nirlon to the same 60%? Or is it possible with the current 70% holding at it, sir?

Sorry, I'm not sure we understand your question very well.

Shall I repeat, sir?

Yes, please. Yes, please. Yes, you can repeat because it is [indiscernible].

Frankly it was what your -- what the specific question is in terms of…

Yes, definitely. I'll do it. See, for example, if GIC had 60% holding in XYZ REIT company, then for Nirlon to be part of tax rate should GIC reduce it's holding in Nirlon to the same 60%? Or is it possible with the current 70% holding through SPV?

Frankly that's not -- at this point, that's not an answer that we have available. We wouldn't want to try and answer it while guessing. If you want to be in touch with us just specifically, we can try and understand a little better your question, so we don't give you a wrong answer. Is that all right?

Definitely. That's something [indiscernible]

So it's a very specific situation you're answering and we are not sure that we necessarily understand it correctly. So we'd rather understand it from you properly and then try and answer.

Yes, better, better.

Okay. All right.

No, no, you don't have to repeat it. It's just something that may be better answered offline, so we can understand that, in fact, we are understanding you correctly because we don't want to give you a generic answer without specifically understanding your exact question.

And my last question, sir, then. In the recent BLS earning con call, they are very clear on the fact that they are REIT ready. GIC and BLS are just waiting for the right time to launch FCC [indiscernible] REIT. Are we also standing on the same boat, sir?

That's a question that I think perhaps is -- it's not something that we are aware of. And the DLF GIC REIT, frankly, has nothing to do with Nirlon. So again, it's not something that we would want to really comment on except to say that we have no connection with the DLF GIC REIT.

No, sir, the meaning of my question is, sir, they are waiting for the right time to launch their REIT, sir. So are we also planning in a similar way?

No. I think our situation as far as the REIT course is very different from what -- they are REIT ready and they're looking for an appropriate time to launch from what we understand. We are in a situation where we are -- as we have said in our previous calls, we are in the process of evaluating what is the best option in terms of restructuring from Nirlon in terms of REIT, in terms of delisting and how that is to be done, right? And that is a discussion that continues to evolve at our end as we have projected in other calls and as we can again mention in this call. So I think the 2 circumstances are very different. One is the situation where the DLF GIC, in fact you say as per their call they are ready and they're waiting for the right time to do the REIT. The other is a situation where we are still evaluating and the discussion is still evolving as to what is the best structure that Nirlon should evolve to going forward.

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

Sir, in your previous con call, we have been discussing that Nirlon can become a REIT through an FCC route as one of the possibilities. The other possibility you told was a delisting, but that's not the right place to discuss. So I just want to concentrate on this FCC route, sir. Sir, India has a realistic REIT entity, distributing costly dividends based on their net distributable cash flow, NDCF. Sir, even we have traveled a lot and sacrificing a good amount of cash flow and pay taxes, corporate taxation in all regimes. And now in this quarter, we have paid almost 2% penalty on the foreclosure of HDFC loans, sir. Sir, I request you to share your knowledge as per current sale in account and balance sheet, the NDCF that is the net distribution cash flow Nirlon could have if, sir, Nirlon were to be part of a listed REIT as an SPV, sir. Sir, I want you to explain to us that how the depreciation is added back to cash flow, how amortization of our debt is added back to cash flow. This is what I want from you, sir.

Mr. Jain, I'm again not very -- we are not very clear about -- are you asking what is our cash flow or what our cash flow will be under a REIT? Or what exactly is the -- what would you like us to explain? We can very clearly tell you about what our cash flow is. We wouldn't want to speculate what our cash flow will or will not be under a REIT situation. We can tell you what our cash flow is just now, if that's something that you would like to hear.

No. The cash flow there as per the profit and loss account, we do have net profit and the depreciation we are providing around INR 36 crores per quarter. Sir, in case if we were a REIT, this INR 36 crore will go to the cash flow for the distribution of dividend, whether the government puts taxes after depreciation and that amount goes or the whole depreciation that is INR 145 crores will go to the cash flow or distribution of dividend?

Can you hold on just a second? We will try and see if we can understand that a little better. Just a minute.

Yes, yes, yes.

Mr. Jain, see if this answers your question, right? Our understanding is that the depreciation in any case in any situation is going to get added back to the cash flow. It's a noncash item regardless, right? So is that what you're asking?

Yes. Yes, sir. Because in this current regime, we don't pay taxes on depreciation amount. And if it is added back to cash flow for distribution of this dividend under REIT, this whole amount of depreciation will be added to the net cash flow, am I right?

Again, we don't want to be speculating what we will be under a REIT. That's not really -- so we don't really…

No, sir. It's not specific to Nirlon. I'm saying it's applicable to -- I'm just saying also it's applicable to [indiscernible]. But just because we have been selling for the last few quarters that we are working very hard to understand the regulations, that's the reason why I am asking, yes. That's the reason why I am asking.

All right. I think in our understanding, in any case, depreciation is always a noncash item and whatever the amount of depreciation will form part of the cash flow. I don't know if that is specifically answering your question, but that's what we are -- that's our understanding of what you are trying to ask. Are we right?

So your question is in respect to what your -- just to answer your question -- to understand your question, you're saying, for example, for Q1 FY '23, you want us -- your question is will we add back this 369 million to the 142 million of profit after tax for calculation.

Yes, exactly. Yes, sir. Yes, sir.

I mean yes, I mean of course, the dividend is paid based on the availability and the -- is based on the eligibility that the company is eligible for, A. And B, after we analyze what the company is eligible for the dividend is also based on the availability of the cash flow along with the eligibility that the company is eligible to pay in a particular financial year. So theoretically or practically, the 369 of the dividends can be added back to the -- which is the depreciation can be added back to the profit after tax provided the company is eligible to pay that amount in that particular financial year.

The fact that shall we be adding INR 36 crores? Or will be adding INR 24 crores that is paying taxes on this thing, the depreciation also? So this is what I'm asking, yes.

Sorry. And I think, Mr. Jain, we will have to try and -- rather than just speculate, we'll have to have a discussion with you to understand exactly what you're saying. Again, we don't want to have a -- give a wrong answer. We are not able to exactly understand.

Sorry, Mr. Jain, depreciation is a tax-deductible expense. So to that extent, the tax will not be payable on that amount, which is charged to P&L account.

Which is not anything different from what we've always been doing. It's just a normal situation.

No, under REIT, sir, the depreciation is not taxable. It's a tax related to the expense.