Nirlon Limited (500307) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '23 Conference Call of Nirlon Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, ma'am.

Good evening, everyone, and a warm welcome to you all. My name is Purvangi Jain 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 fourth quarter and financial year ended 2023. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in today's conf 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 the management. All listeners are cautioned not to please undue reliance on these forward-looking statements in making any investment decision. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now I would like to introduce you to the management participating in today's earnings conference call and give it over to them for their 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, VP Finance; Mr. Jasmin, Company Secretary, Vice President and Compliance Officer; Mr. Ashish, VP, Business Development and Investor Relations. Without any further delay, I request Mr. Kunal Sagar to give his opening remarks. Thank you.

Thank you, Purvangi. Good evening, everyone, and welcome to our earnings conference call for the fourth quarter and financial year ended 2023. Let us first take you through the financial performance of the company. For the fourth quarter of the financial year 2023, the company reported a total income of INR 149 crores, an increase of approximately 7.8% on a year-on-year basis. EBITDA stood at INR 117 crores, which grew by 3% on a year-on-year basis, representing an EBITDA margin of 78.72% for the quarter. Profit after tax stood at INR 50 crores, witnessing a growth of approximately 34% on a year-on-year basis. Profit after tax margin stood at 33.47%. For the financial year ending on 31st March 2023, the company reported a total income of INR 576 crores, witnessing a robust growth of approximately 49% on a one-year basis. EBITDA stood at INR 461 crores, which grew by 54% on a year-on-year basis representing an EBITDA margin of 80.09%. Profit after tax was INR 158 crores, a growth of approximately 43% on a year-on-year basis. And the PAT margin was 27.43%. On the operational front, for the current quarter, that is the fourth quarter financial year '23, the average occupancy of the company was 98.5% and as on 31st of March '23, approximately 14,000 square feet area was vacant. During quarter 4 financial year '23, MUFG has licensed approximately 23,000 square feet, an integrated security media group has licensed approximately 12,000 square feet. Also in quarter 4 2023, Protium Finance, expanded their space at NKP by licensing approximately 34,000 square feet, and will be vacating the smaller areas approximately 14,600 square feet during quarter 1 financial year '24. ICICI Prudential assigned an LOI in quarter 1 financial year '24 to expand its space at NKP by 9,600 square feet. The Board has proposed a final dividend of INR 11 per share for financial year '23 subject to approval by shareholders at the forthcoming AGM.. This is in addition to the interim dividend of INR 15 per share that was paid in quarter 4 financial year '23. This will conclude our presentation and open the floor for questions.

[Operator Instructions] The first question is from the line of Rajiv Malhotra from HCPL Parts Company.

I think these are fabulous results, and let me congratulate you of running one of the best stabilized listed real estate companies in the country. 2 or 3 very small points, one is that the loan which our company has taken from HSBC, it seems to be relatively quite expensive seeing the stabilized nature of the cash flows of our company and the pedigree of the ownership which is I would say, close to government orders. Would you like to comment on that? Is there any specific reason for such a high rate?

We refinanced this loan back in May of 2022. We had HDFC as the lender then and we financed it to HSBC because our interest rate at that time was in the region of about 6%. The HSBC rate is linked to the T-Bills, which has of course gone up over -- in the last year, and therefore the rate is toady as per our contract with HSBC 9.11%. That's the context for the current rate being what it is. We will of course watch this carefully to see how the rate -- macro environment moves on rates. And then take it from there in terms of what we see, which way we see the interest rates going and whether it's worthwhile looking at further discussions with them on this matter.

Because I'm sure that you can easily drop off 50 basis points without doing too much effort unless your documentation with the bank prevent early repayments or penalties are prohibitive. Secondly, the way we have restructured our taxation, our loan repayment and our depreciation method. One that is getting us a great dividend. So thank you for that. But this would be a question in everybody's mind, are there any plans of REIT, micro REIT joining a REIT, et cetera.

So we've been discussing and -- this -- the restructuring for some time, as you know, we discussed in our earlier calls also. And with regard to the potential for restructuring at this point, we are continuing to engage with our major shareholders. And we are working through various required clarifications so that we can come to a conclusion as soon as possible -- as soon as practical.

Okay. If I could squeeze in a last small question, what would be the 2 biggest challenges that Nirlon is seeing in the future? When you're talking of all this work from home, et cetera, et cetera. So let's say, from the manage -- CEO's position, what are the 2 biggest challenges Nirlon is seeing right now?

Well, the biggest challenge so to speak would be that now that the park is -- we completed the development -- we had completed the total development of the park with an existing approximately 2.6 million square feet and approximately 3 million plus square feet of chargeable area predominantly at [ 80% ]. I think the most important thing to maintain the level of the license fees and to grow the revenue of the license fees would be to continue to have the right profile of licensees who are paying an appropriate rent or an appropriate license fee and basically to try to see that we get the right people and continue to be at 100% because this is of course what is driving the results is really the top line of license fees. And if we can continue this at 100% with the right people in NKP, then I think we see that as the biggest -- we see that as the important thing we'd like to fulfill as the management.

Exactly, the quality of the cash flow, the quantum and rate of the cash flow and the level of occupancy, all 3 of which we have to find the balance to maintain and keep increasing.

So it's heartening to know that physical occupancy of offices or work from home is not bothering you at all this moment.

No, it's -- of course, it's something which we will like to -- we like to monitor very carefully. But we feel that with the above 2 or 3 points we mentioned with the right profile of licensees who are paying an appropriate rent which is appropriate for us as well as appropriate for them. We feel that it's the best way to ensure that work form home does not put any undue stress on the level of occupancy in -- or the level that we can see in NKP. So yes, that's really what we want to focus on -- we want to continue to focus on.

The next question is from the line of Satinder Singh Bedi from Eon Infotech Investments.

Congratulations on a stable set of numbers. My first question is around the demand outlook in the micro market and around the upcoming Morgan Stanley vacancy which I believe is in December '23. There is slide which talks of the advanced discussions for 320,000 square feet so far. Are we talking about the internal client, existing client who is looking to ramp up? Or is it outside? So around this demand at Morgan Stanley and the inquiry that we have.

The 320,000 square feet in advanced discussion refers to one of our major reviews for 2023-'24. So does answer your question?

There is a mention of advanced discussions for 320,000 probably this is a refill of the upcoming micro -- Morgan Stanley we can see. So the Slide 5 talks of this advanced discussions probably we have some advanced discussions going on for utilization of the 450,000 which is coming up for expiry in this year.

Out of 449,000 or 450,000 square feet due for renewal in '23-'24, one of the clients, a single client is due to renew 320,000. That renewal is coming up. That's the one that we are in advanced discussions with.

Okay. So we've got the Morgan Stanley stuff coming because 449,000 if you're talking of 320,000 for some other clients. Morgan Stanley itself is for 345,000. So where does that fall in?

That is in existing licensee in NKP and...

Just to be clear, the 320,000 is not referring to Morgan Stanley, it's another client.

Morgan Stanley is also an existing licensee in NKP but is -- what you're referring to is concerned with somebody else.

So what you are saying is that for FY '24 talks of only to [ 449, 000 ] out of which Morgan Stanley will be about 345,000. So this means we are talking an advanced...

We don't know where you're getting the 345,000 number, yes, the 345,000 number we don't have. There is no Morgan Stanley renewal for 345,000 in financial year '23-'24. It is somebody else's figure. The Morgan Stanley issue is a separate one where there is a scenario where they intend to migrate to another building at some time in the foreseeable future. So that we -- as we've mentioned a few times on earlier calls that time frame is something that Morgan Stanley will let us know. We will discuss with them to give us the longest possible time frame and requested them also to try and see that the migration is done in phases and not at one time. Frankly, at this point, we -- whether this will begin in '23-'24 or '24-'25 is something that is open and something that we are discussing with them. It depends on when their building is ready and when they move.

And to answer your first question, how do we see the demand in the micro market? We see the demand in the micro market as fairly positive. We should also keep something in mind because of the level of our vacancy which plus minus 0, we may not be getting the full range of inquiries in that much of detail, et cetera, et cetera because everybody really knows of the IT field, who generally are responsible for renting the space to the prospective licensees are aware of the fact that we have no vacancy at this point in time. So while we do receive some inquiry, yes, we may not be receiving the full range of inquiries, but what we see, which is based on the limited inquiry that we get is that the demand is, I'd say, fairly positive. We remain very cognizant of the Morgan Stanley situation, and we will, of course address it.

On the physical occupancy, sir, how has it moved over the last quarter? Last time, it was mentioned that we are looking at typically about 60%, 65%. So has it moved upwards from there? Or is it more west side including Phase V, so the entire premises.

So Phase V is still not yet -- JPMC has not yet moved in to that extent. The last areas of fit outs are going on and they should start moving in gradually in Q2 '23-'24. With regard to the physical occupancy, it's a very important point. And we can see right now that excluding JPMC, we are at about 65% to 70%. There are, of course, some companies which are a little bit more. And yes, we see this as approximately 70% fairly consistently now and we hope to continue to stay strong and we hope continues to increase.

In general the trend continues to be positive. There are days when we see as many people as we had in pre-COVID times, some days are lower. But in general, that's -- the occupancy aspect is something we feel positive about.

Right. I've got a couple of small housekeeping questions. I'll come later in the queue.

The next question is from the line of [ Ashok B. Jain] from Ayush Capital. Mr. Jain I have unmuted your line, kindly please proceed with your questions.

My question is regarding what we had mentioned in the last conf call. In the last conf call, you have mentioned that despite a positive lease through in the terms of government push, incentives around micro REITs and REITs in India, the ground realities of the same were in dark. However, post your last conference call, there has been a lot of major micro REITS, actual ownership, REIT announcements coming from SEBI. So I wanted to know your thoughts on whether Nirlon can convert to a REIT and stay listed or we are continuing on the same path which we had taken during the last conf call. This is the first question, sir.

Mr. Jain, the information and advice we have so far is that a listed entity can -- when it can theoretically become an SPV under the REIT, which is also listed entity. There are no precedence or any framework of potentially converting to a REIT as we put it. The step has to be that one first delist and then post the delisting, whatever one wants to do with the company, whether its RETI or something else. The 2 steps process is what is followed in -- if someone is going to become a REIT. We had mentioned this in the last call as well. So that remains unchanged in that sense. So there's no conversion as such that is possible on a practical level directly to a REIT. As regards to your other point about the various changes that taken place between last time and this time. Yes, there has been back and forth on the REIT regulation. We are keeping fully abreast with them. So to the extent whatever will be applicable to this. Of course, we will make sure that we understand that or we have understood that and we taken it on board.

As of now, we are now open to this regulatory changes I suppose.

Depending on what and which way the restructuring finally proceeds, whichever regulation at that point is applicable, of course, we will make sure that we are fully briefed on that or fully aware of that depending on which one of the changes or which one of the regulations is applicable. As we said, we are working through with our major shareholders. We work through whichever clarifications are required as regards to this potential restructuring. So we are trying to come to that conclusion as soon as possible on it.

So my last question sir. As per an interview published in Business Standard on March 5 this year, the CEO of India Business Parks Division of CapitaLand, that is CLINT unit of CapitaLand, Shri. Gauri Shankar Nagabhushanam, he asserted that the CapitaLand intends to double the leasable IT office space portfolio in India. To this end, they intend to acquire [ 5, 6 million ] square feet inorganically. Since Nirlon is eligible potential acquisition target for CapitaLand. Is the discussion with CapitaLand investment [indiscernible].

That really is question that is more a shareholder level related question than a question that we would answer over here because it's really a shareholder to the shareholder discussion, if all there is any such thing. We are not -- there is no discussion as far as we know along those lines. But that's not a company level discussion, it's more a shareholder level discussion if we may put it that way.

But you also belong to the promoter shareholder level so in spite of being a minority holder, you also belong to promoter holder. So is it -- or can we discuss it post con call?

Mr. Jain can you please repeat what you just said?

Yes. Sure. Am I clear now?

You were asking whether we have any discussions on CapitaLand. The answer is no, if that's your specific question. If it's not do ask your question, again.

No, it's the same question. That is we are not in discussion at present. You from the promoter side of -- Indian promoter.

We don't want to comment on. We don't know anything about any discussions CapitaLand, that is statement that you're making that Nirlon is a potential perhaps acquisition target as a growth of CapitaLand. But then we are not -- that is something that you are mentioning. That's not something that we have any knowledge about or that we have been discussing at least.

No, this is not my guess work. This was published -- it's in public demand. And Shri. Gauri Shankar Nagabhushanam he was at that time, on May 11, CEO of CLINT part of CapitaLand. And he told that they want to acquire this 550 million square feet inorganically and grow the business of India to double the level.

Sure. That doesn't necessarily mean that he's referring to Nirlon or what he is referring to, right?

No, no. He didn't name Nirlon. He didn't name Nirlon but any talks with Nirlon this has been what I'm asking.

Not that we are aware of anything along those lines. Not at all..

The next question is from the line of Rikesh Parikh from Rockstud Capital LLP.

The first question is regarding our Phase V JPMorgan leaving. So --- since they've not yet occupied fully, are we billing them at the full level or there is some till the time they occupy we are partially billing them?

The license -- or the lease and license agreement for Phase V actually began in -- on December 15, 2021. There were 5 months of rent free up to May -- up to May 15, 2022, and then they are paying the full license fee. So that is the answer to that question.

Second is I just want to understand what are the current leasing [ EBITDA ] what we would have negotiated in the Q4 -- in the last year, what we would have done?

Yes, you mean the actual rental -- physical, yes. Range probably. Well, I mean, actually -- the numbers are basically in the range of across [ INR 145 crores to INR 155 crores ] at 80% efficiency and usually, in these cases, there are 3 -- 2, 4 months of rent free usually, sometimes the rent frees are spread out over 3 to 5 years, sometimes the rent frees are upfront in the case of new licensee. So that's the range in which we are in now.

And just in terms of the property -- this leasing update through who we signed 9,600 square feet. So the vacancy what we talk of 14,000 square feet at the end of the year, so we should be reducing that [indiscernible] or that we have included that...

Vacancy what we are talking of 14,000 square feet at the end of the year. It's not really related to office vacancy in NKP. We have -- it includes some parts of Nirlon House which is a building, which is partially owned by the company at Worli and it includes some amenity areas in NKP as well. So [indiscernible] 14,000 square feet in NKP so to speak to answer your question.

And then last, any asset something balance available now for development or we are done with fully more or less?

We are done it with?

FSI at Nirlon NKP?

No FSI is available. Currently FSI is available because we are currently approx 2.6 FSI. And then -- yes, so -- yes, there will be balance FSI available.

But there are no plans to utilize it...

But there are no plans to utilize it.

[Operator Instructions] The next question is from the line of [ Harshit Golecha from Flare ] Investment.

Sir, we are paying a tax of 35% by letting INR 26 dividend, correct sir, in the hands of every minority shareholders as of today. So why don't we take a decision to convert into a micro REIT or if we are in terms of that or if you cannot answer, I request you to kindly make some key persons in [ DIC ] sit in the conf call so that we can get our answers cleared.

Noted your point Mr. Golecha.

Yes. Because it's been noted from quite a long time, but it's not been answered anytime, sir. Why don't we -- what is -- how do I ask, like, any other way to ask you like -- am I not asking you, like, properly or something like that.

No, no. Your point is noted. Appreciate -- update you you're asking for clarity on the restructuring discussions that we have been having. All you want to mention is that, a thereto be things and reputation to mention that we are in -- we continue to have and engage with GIC in REIT serious and meaningful discussions on the matter. And we are trying to come to a conclusion on this as soon as we can.

I know. I know. It's a quite long time taken from our end, like it's a little bit disturbing to the minority shareholders. It's a win-win situation for the GIC, the majority shareholder as well as the minority to convert into REIT. I don't have to make you understand. And today seeing the scenario. Next is coming up with the IPO of REIT. And there are many other companies like GIC, we don't have to teach them about REIT. It's just time consuming from your end? Or I don't know, what are the discussions going on. It will be very good on your part, if you throw some clarity so that I don't disturb you on every conf call like this, sir. I don't want to disturb you. I hope.

Golecha, the only point we'd like to just mention here is that, as we had said earlier, a few times this conversion to a REIT is not something that is either practical or something that we looked at because that's not something that's on a regulatory basis is something that is practical to do frankly. That's the only point we would once again request you to take on board because whatever restructuring is being worked on, we are not working on anything that converts us directly to a REIT. It doesn't -- the framework doesn't allow us to do that. So it has to be done in a step by step manner. That's process that we are working through as we explained it.

No, the only option now according to your statement, it says that only I have to give you time for delisting and then convert into the SPV or something like that. Can I take it in that way? Wait for the time for delisting?

As we had mentioned, that there's potential steps that can be followed would include the delisting. And then what happens after the delisting, again is up to the acquirer to decide that doesn't include minority shareholders at that point, right, in case it is a delisting option. So we don't want to speculate as to what will happen beyond the delisting. Of course, the option to do a REIT may or may not be available at that point in time, but that is what on person acquiring in the delisting has to -- or the entity acquiring the delisting has to be clear about in terms of what their plans are.

No, I don't want to know their plans. I'm fine. So the lines that we are into delisting. So unnecessarily we are paying taxes, like company is paying taxes. We are paying taxes. I just wanted to understand that because we are wasting a lot of time now. So the delisting is an appropriate step which we should be taking sooner or later, if I'm not wrong.

We don't want to speculate on whether we are doing A or B. Delisting is a possibility, as we've discussed various times, but that one of the various things that is being considered, and that's something that we will know whether it's possible to do it or not possible to do it as soon as we can. I think we've now mentioned this many times and we will continue to work on getting an answer on it. So with respect to take this on Board at the moment and bear with us please.

The next question is from the line of Rajiv Malhotra from HCPL Parts Company.

I'm sorry, I really don't want to repeat any of these discussions which happened earlier. But something that did come up, we've been working with REIT CRM in Singapore for over a 1.5 decades now as an investor, of course. The question is, would you know if Nirlon or let's say part of Nirlon -- or let's say, any other company can become a part of a REIT partially.

Malhotra, we don't want to really speculate on that, if you don't mind, because that's a very -- it's a partial question and it doesn't really give us or you any context in terms of giving you some kind of answer. It's involved process, as you know.

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

Well, hearty congratulations on a good set of numbers and consistent dividend. I have no questions.

We have the next question from the line of Satinder Singh Bedi from Eon Infotech Investments.

Yes. Thanks for the opportunity of a follow-up. I believe the annual valuation exercise would have happened in March. So just wanted to understand how the cap rates and discount rates have moved as per the valuer between this 31st March and the 31st of March '22.

Mr. Bedi what is the valuation exercise you're referring to, sorry we don't -- we're not familiar with what you mean.

The annual valuation of the investment property. So I'm assuming we get the annual valuation exercise done?

We don't -- do any kind of publication or we don't publicize any kind of valuations -- we don't put out valuations in the public domain in the sense, so..

Mr. Sagar, I think that's a part of the annual report from last annual report there is the value mentioned of about INR 4,300 something crores, okay, last year, okay? So anything that the valuation is an exercise investment property...

Sorry to interrupt Mr. Bedi, you're voice is breaking. Could you please use your handset to ask a question at this time.

Is this better?

Yes, sir. Please continue.

What we understand, you are referring to the valuation of the annual report and you're saying what it might be in the current report?

The valuation plan of 31st of March, how has the valuation changed, and what are the cap rates and full rate movements over last 1 year...

Mr. Bedi, thank you for your questions. So we will be putting out valuation in our annual report for 31st March '23. It's not yet something that is in the public domain, so we won't speculate on it on this call. But do refer to the one for 31st March '22, which we've already mentioned.

Yes, which we are aware of [ INR 4,357 crores ] is the valuation done as of 31st March.

Yes. Sorry, that is my error and apologies for mentioning that it wasn't there. Thank you for pointing out.

Yes. What's the figure now for 31 March '23?

That will come in the annual report.

Okay. Okay. We will wait. So another question on property companies, typically, okay, both the REIT and the other listed entities normally talk of a metric called the mark-to-market opportunity. This again is even more significant for a company like ours because the development potential is already fully used up, okay? So we wanted to understand and like you mentioned in an earlier answer that the future challenges revolve around the right profile of licenses and the quality of cash flow. So what is the mark-to-market potential that you see on our current leases. So what's the market rate today for our kind of property versus what we are averaging?

So Bedi again, this -- it will be a little bit speculative to answer because most of our licenses now are reasonably close to market. There are some that towards the end of their tenure, may be significantly above or significantly below market, but we don't benchmark it in that sense at all. We look at what we can get going forward from there. But I think the direct way to look at it would be to say that significantly, we are now at a situation where most of the leases are, in fact, largely at the mark-to-market situation. It's not that there's a massive arbitrage upward or downward in this case. Does that help?

Yes. Very clear. Okay. And sir, since now we have a fully completed project, okay? The only expenditure probably is some maintenance CapEx that we keep on getting incurred. So just wanted to understand what is the typical level of maintenance of CapEx that we are looking at on an annual basis? And do we create a reserve for the same, okay, as a percentage of revenues, let's say. So how does this [indiscernible].