Nirlon Limited (500307) Earnings Call Transcript & Summary

Ladies and gentlemen, and welcome to the Q2 FY'23 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.

Thank you. Good evening, 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'd like to thank you all for participating in the company's earnings call for the second quarter and first half of financial year 2023. 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 to only to educate and bring awareness about the company's fundamental business and financial quarter under review. Let me now 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; Mr. Jasmin Bhavsar, Company Secretary and Vice President of Legal and Compliance Officer; Mr. Ashish Bharadia, Vice President of Business Development and Investor Relations of Nirlon Management Services Private Limited. Without any further delay, I request Mr. Kunal Sagar to go ahead with his opening remarks. Thank you, and over to you, sir.

Good evening, everyone, and welcome to our earnings call for the second quarter and first half of the financial year 2023. We hope all of you are safe and well. Let us take you through the financial performance of the company. For the second quarter of the financial year 2023, the company reported a total income of approximately INR 144 crores, an increase of INR 4 crores from the previous quarter. And EBITDA stood at INR 118 crores, an increase of 9% from the previous quarter. This represents an EBITDA margin of 81.79%. Profit after tax stood at INR 40 crores, representing a profit after tax margin of 38.08%. In the first half of the financial year 2023, the company reported a total income of approximately INR 283 crores, an increase of 81% when compared to the first half of the financial year 2022, reflecting the impact of the commencement of NKP Phase 5 operations. EBITDA stood at INR 226 crores, representing an EBITDA margin of 79.74%. Profit after tax stood at INR 55 crores, representing a profit after tax margin of 19.34%. On the operational front, the average occupancy rate of NKP stood at 97.6% for this quarter as compared to 97.1% for the previous quarter, that is Q1 of financial year '23. Citi renewed approximately 129,000 of space due for renewal and expiry in financial year '23. Evalueserve renewed approximately 15,000 square feet of space also due for renewal in 2023. NIUM, a new licensee, licensed approximately 37,000 square feet of previously vacant space during the quarter. As on 30th September 2022, approximately 60,000 square feet area was vacant. Additionally, the Board has approved changing the accounting methodology from the written down value method to the straight line method of depreciation. This change will be considered with effect from 1st October 2022, and the resultant impact would be shown in the financials from quarter 3 financial year '23 onwards. As on 30th September, the total secured debt facility sanctioned by HSBC was INR 1,230 crores, and the debt outstanding from HSBC was INR 1,150 crores. With this, we conclude our opening remarks and open the floor for questions. Please go ahead.

[Operator Instructions] We have the first question from the line of [ Laksh Jain ] from [indiscernible] Capital.

My first question. We are shifting to straight line method. Is it the benefits from the REIT conversion, if at all possible?

So we've decided to change some WBD to SLM to better reflect the value of our assets on the books based on the profile that they use. And this change is also in line with the practice followed by other assets with a similar profile in India.

Yes... Yes. Because if we get converted to REITs, SLM will give us better distribution thing.

We don't really want to speculate on that. It's just that this is in line with the practice that is followed by similar assets. So we think that will better reflect what we are doing and what we would like to do going forward.

No. We have decided to stay in that 35% tax regime. And now we are shifting to SLM. It's all like connecting these dots, it's clearly showing that we are trying our level best for the REIT possibility. So what is actually stopping us sir?

We didn't fully understand your question. Are you speaking of the tax regime we're under or are you speaking of the depreciation?

No I'm telling that we have decided to stay in the 35% tax regime, right?

Yes.

And now we have converted into SLM method. So now while connecting these dots, it's like very clear that we are trying our level best for the REIT regulations to comply with the REIT regulations. So what is actually stopping us? What is the major hindrance?

So as we've explained earlier, it's not something that is stopping us or starting us. It's a decision that needs to be taken at the level of the primary shareholder, it's a fundamentally strategic decision that needs to be taken. And that's something that will play out once the circumstances will allow that kind of decision to be taken. So as we've always said, we don't want to pre get that. Of course, we would put ourselves in a position where we have the maximum and the best possible options for maximizing any kind of restructuring that we would want to do. But I wouldn't at all describe this as anything that is stopping us or not stopping us. It's a decision that needs to be taken in the logical course by the concerned parties involved, and that's what we are in the process of doing. So I hope that answers the question.

We have the next question from the line of Rakesh Wadhwani from Monarch Networth Capital.

Sir, I missed the initial remarks. So if I ask you repeat questions, sorry, extremely sorry for that. Sir, just wanted to confirm around 60,000 square feet of area that is vacant in the park, rest, everything has been leased out.

Yes, we could say that approximately 60,000 square feet is vacant in the park and the balance is approximately leased...

Okay...

Just to clarify that 60,000 square feet will include about 8% to 10% of that [indiscernible] which is designed also, basically the park is 54,000 or 55,000 square feet as of 30th September.

So okay. So you mean to say you have leased out, so 54,000 is the actual area that we can lease out. Am I correct?

As on 30th September.

Okay. Okay. And sir, one more point. You have given the tenant which had come to offer, which have taken a space, they are like older tenants and the contracts are coming for expiry or the renewals?

Yes.

You have given the schedule also, just want to understand what kind of escalation you expect because we know as on today, there is no supply for commercial real estate in your area. It is coming, but coming after 1 year or 2 year. So I wanted to know what kind of expectations or rent escalation you're expecting?

What kind of expectation we are expecting with regards to our renewals?

Yes.

Renewal number in terms of the percentages, it actually depends on the base from which we are escalating. So if the renewal is finishing up at a relatively lower level, then you'll see the higher escalation for the higher renewal numbers that take place, that would be about 15%, sometimes 20%. If we finish up the previous license term at a level that is already close to market, then we will have an escalation as low as anywhere between 0% and 5%, depending on how that works. So on an average, we can say that there is roughly about a 10% increase that we get on a very broad level, depending on the specifics of these situations because do recognize that each renewal is a very specific circumstance based on what the initial license was in 5 or 9 or 10 years ago. So I hope that's a reasonably accurate answer because we don't want to just give you a number and it has no meaning. It depends on how the specific level at which the licenses expire on. The effort is to get to the market rate as much as it is today. So that brings. So whether that is a 5% increase or 20% increase, the idea is to make sure we get to the market rent that we believe what the market rent is today.

Okay. Okay. Sir, last question from my side. How do you expect the demand for commercial in especially Western markets?

We expect the demand will be fairly robust, fairly strong, okay? And we think it will not be at the level of Q1 calendar year 2020, but it will be, we expect a fairly strong, fairly robust growth in the demand in the coming quarters and hopefully, in the coming fiscal year '23 '24 as well, we are looking and watching very carefully as there are lot of macro developments that are happening. And yes, we expect it to be a steady growth, something exceptional...

Sir, I'm sorry to interrupt, sir, you are sounding too distant. Can you...

Yes, okay. So we essentially make the statement steady growth in the Western...

Yes. So just to add to add to what Rahul was saying, our renewals for the current year for '22-'23, we've largely completed all of those and we are progressing quite well with our renewals, but with the discussions from our renewals for the financial year '24. And that's just to back up what Rahul was saying that there is a steady and quite a strong pipeline that we see in terms of renewals or new...

Sir, just the reason for asking that question. Can we expect that 55,000 area that is vacant can be occupied in the FY '23 only or can be leased out at least by FY''23, end of FY '23?

So I mean, we can't give a commitment saying it will be leased by March '23. However, we can say that we are in active discussions and good discussions with a good profile of licensee that's most important is that it's a good profile of licensee, which is a good fit for the licensee as well as the licensor, which is us. And we are in some detailed discussions with some reputed licensees. And we hope that these discussions will further fructify into LOI and then into an L&L. So yes, we can't give you an exact time line of commitment by March '23, but we are in good discussions.

Again, just a small addition to that would be that when we have an occupancy rate of roughly about 98%, there's relatively small spaces that we have left. So we need to find people who actually pick that space, and that sometimes takes a little longer because we can't offer very large amounts, and we have only very specific very few places left to offer. On the other hand, there can also be people who will give us notice in these months. So we'd like to, of course, have the number of 100%. But I think on the realistic level, the regular attrition would be anywhere in the region of 0% to 5% in terms of the way the spaces get licensed and vacated. We're trying to keep on the lower side of that possible and monitor that very carefully.

[Operator Instructions] We have the next question from the line of Dilip Ashok Jain from Ayush Capital. As there is no response from the current participant, we move on to the next participant, the question is from the line of Dilip, an individual investor.

Am I audible now?

Yes. Yes. Please proceed.

Sir, in the last con call, you mentioned that the Board is very close to taking a final call on the further restructuring of Nirlon into a REIT or a probable delisting of Nirlon Limited. So sir, I just wanted to understand if possible, what kind of time lines are we looking at with respect to how your decision is evolving? And as you mentioned how the circumstances are, is there a rough time line as to when do we expect to come to a conclusion to this decision? I ask this because we are sticking to the old tax regime and paying higher taxes, that's all. And sir, my last question is the macro trend as elucidated very clearly by leading property developers, the macro trend clearly indicates appreciating property prices in the Mumbai residential as well as the commercial segment. So I know you touched upon this with the previous persons who asked you. So are we planning to increase the escalations that we had in mind, are we planning to go above that, keeping in mind the very positive appreciating trend in the current market? That's all from my side.

So we'll try and answer your first question about the restructuring. Just so that we are clear, I don't believe that we had spoken last time about the Board being very close to taking any decision about restructuring. What we had said is that discussions in the Board are occurring in terms of the potential options to restructuring. So just I just wanted to clarify that point. To come to your second question on the escalations, there are 2 aspects to escalations. One is the regular escalations that are contracted in an existing contract, and those are fairly standard depending on each contract between 10% and 15% normally for these 3 years or at the appropriate agreed interval. The other escalation is after the license expires the renewal of that license. So we had explained the earlier one to say that it depends on what is the level at which the earlier contract expires. And on that basis, we would look at increases depending on whether the earlier contract has finished at a low or high level at anywhere between 0% to 20% and the standard escalations remain largely in the region of 15% for us. So that's how we would expect it to go forward.

Okay. So there's room for escalation beyond the standard escalation, right, depending on how the market demand and supply is?

Yes. But again, just to clarify, if there are escalations that happen, which are, let's say, a 20% escalation that, to a large extent, that would mean that the earlier license has finished at a rate that is considerably lower than market, which is why we've got something as high as 20% to take it to market. We are not saying that there is anything exceptional about that. We are simply saying it's bringing it back to market. And as the market continues to move forward at a reasonably steady and solid way, if I may answer it that way.

Okay. So it depends on the base at which the earlier lease was signed at?

That's right.

We have the next question from the line of [ Harshit Golecha ], an individual investor.

Sir, my question is, sir, you have made an investment of INR 37 crores in properties as per the cash flow. Where have we bought this new property? And what is the scope, sir, and LinkedIn profile of Ashish Bharadia, also states that he is doing his best to find out properties to add under Nirlon. Is this INR 37 crore the beginning of additional property development? Does REIT regulation permit one property REIT, sir? This is my doubt. Does REIT conversion regulation permit one property REIT, sir? One more thing, I'm pushed to this question because we have done 2 things. That is from new tax regime, we have come to an old tax regime and change in depreciation method. These are the questions pushing us to REIT question. So I hope you answer my questions, sir, please.

So basically, what we want to clarify is that this INR 37 crores is a CapEx in the existing Phase 5, it's not an additional asset or it's not new asset or any such thing. It's just an additional expenditure, it's just an additional CapEx in the existing Phase 5 so to speak.

What expenditure, sir, like I didn't get it.

It's normal expenditure. It's essentially the normal...

To develop the phase to complete the development of [indiscernible].

It's an expenditure to finish the phase. It's not a new property.

It's not a new property or any such thing. It's just a composition of the existing phase.

Just to clarify your question on Ashish's LinkedIn profile. I mean, that's not really something we answer on this call because if you don't mind, so...

Okay.

And what was your final question, if we may just trouble you.

Yes, the tax regime and depreciation, everything is indicating us towards pushing Nirlon into a good REIT. And I don't know why, I think converting into a REIT will be beneficial for everyone, like not only the majority of the shareholders, like even the minority, even who hold 100 shares, and one property REIT, is it possible, sir, it's a question, like it's a doubt from me. If you can reply to that question.

So just to answer about the...

2 questions, yes.

Yes. So just to clarify your point about this changing of the depreciation method and continuing the old tax regime. Again, the change in depreciation method, as we explained, is essentially to reflect better value of the assets, the more correct value of the assets and to move to be in line with the practice followed by other assets which have a similar profile in this country. So we appreciate that you are correlating that to the REIT. But there are many other things. And I mean, that's not the only point that you point to a REIT or not having a REIT. We just would want to clarify that these are more in the line of industry practices or practices that better serve our focus. And keeping the old tax regime, again, as we have said, is essentially to ensure that it gives us the maximum flexibility to any future restructuring, including REIT. So the only point we want to mention is that it would not be correct to jump to come to a conclusion that this is necessarily going to result in an end situation, which is a REIT or otherwise. We would just look at them for what they are and not to make any kind of correlations at this point unless we specifically clarify that to you just so that the wrong impression is not created. That's all. We would like to keep our options open and we'd like to keep all our circumstances to the extent possible in the way that would allow us whether it's REIT or whether it's any other approval.

Sorry to interrupt, we are not able to hear you. Sir, there is a disturbance on your line.

Did you get the last answer? We just said that we want to make sure we keep all our options open for the most beneficial possible restructuring, whether it's depreciation, whether it's the old tax regime and that would include the REIT, but it doesn't necessarily mean the restructuring will be a REIT or will not be a REIT. We just, again, requesting that, that point we looked at lot, that conclusion, there are several different options that are available, we shouldn't just finish up with one conclusion just because our depreciation method is one way or because our tax regime is the other way. Those give us the option to do many more potential restructuring if we want to, and that's why we are keeping it.

Okay. So the other question was like, does one property can it convert into a REIT, yes or no? Can one property convert into a REIT?

Yes, we understand that, do you want to answer that?

So theoretically, what you're saying, we believe is correct. We are not the absolute legal expert...

You mean to say it can convert into a REIT, like one property.

Let's not use the word convert. But in theory, there is a possibility that a single asset can be converted into a REIT. Once again, we are in no way shape or form implying that, that is anything that we are, it's just a theoretical answer to the questions you are asking. We are not saying that, that is something that we are considering -- please do note...

My question is very simple, sir, like want to understand does the regulation allow single property convert into a REIT?

We believe that the regulation in theory would allow that. There are many practical challenges for a single location or a single asset REIT which need to be considered before that question is answered. By definition, REIT is not normally a single location or a single asset. The definition of REIT essentially, the focus of the REIT is to diversify your risk and to increase your liquidity in many ways. A single asset or a single location REIT doesn't necessarily do that. In fact, it certainly doesn't do that. So it would have to happen under very specific or special circumstances. That's what we...

Like converting into SPV, something like that, like a special purpose vehicle.

No, no, I'm sorry, we don't want to speculate being specific...

We have the next question from the line of [ Dilip Ashok Jain from Ayush Capital ].

Sir, the interest rate with HSBC was fixed for first 6 months, if I recollect correctly and you had told that we will be paying a new rate of interest from 1st of November. So now with the rising interest rate, what's the interest rate, at what rate we have to pay from 1st of November, sir?

With the current interest rate on the covenant 8.75%. From the 1st of November, the current interest rate on the term loan is 8.75%.

Did you get the answer?

No, the line was disconnected. Can you please repeat the...

The current interest rate on the term loan is 8.75%.

8.75% and what we paid till [ 15th ] September?

6.1%.

Okay. This increased from 6.1% to 8.7...

Yes.

Okay. Okay, sir. And sir, secondly, we are changing this depreciation policy from WDV to SLM, we had provided INR 37 crores of depreciation in Q2. Had it been in SLM, what would the figure look like, sir?

The change is going to be prospective. So we wouldn't want to discuss what it would have been in the previous quarter. The change can only be prospective as per the accounting standard. So as we said, the decision is something that will be implemented from 1st of October.

Just the rate of WDV and SLM, what's the difference like sir If you can elaborate, it will be helpful, sir.

Well, I think we can just confirm a fairly clear point that SLM will be of a lower quantum of depreciation than the WDV, at least for the initial years, that is certainly what we expect to happen.

Okay. And sir, about taxation, sir?

Do you mean does the change in depreciation affects our taxation?

Yes, I want to ask you, yes.

The change in depreciation essentially is neutral. It's a tax neutral as far as our taxation expense is concerned.

So that is, you mean to say that for income tax purpose, we can claim WDV for accounting purpose, we'll claim SLM. Am I right?

Yes.

Okay, sir. And sir, in your previous con call, you had mentioned that we have the intention of maintaining the dividend of INR 26. Will rising interest rate allow us to maintain this dividend. Sir, just your views, sir.

We believe that if there are any, at the current level of interest rates, we believe that we could maintain the dividend that we've been paying in the last year. And to reiterate our intention is always to make sure that we do have sufficient funds to be able to maintain this dividend distribution at the levels that we've done in the past, unless there is again a force majeure or any kind of abnormal macro event, we believe that even in the rising interest rate regime, we should be able to maintain our dividend level.

We have the next question. That is a follow-up question from the line of [ Harshit Golecha ], an individual investor.

My question has been asked.

As that was the last question for today. I would now like to hand the conference over to the management for closing comments.

Thank you very much again for your interest and for your participation, and we look forward to hearing from you either during the quarter or once again on our next earnings call.

Okay. So thank you very much, and we hope to see you again for the Q3 results and have a nice weekend.

Thank you.

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