Nirlon Limited (500307) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q1 FY '24 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 afternoon, 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 first quarter of the financial year 2024. Before we begin, I would like to 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 the management. Audiences are cautioned not to place undue reliance on these forward-looking statements in making any investment decisions. 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 V. Sagar, Chief Executive Officer and Executive Director; Mr. Kunal V. Sagar, Promoter and Non-Executive Director; Mr. Manish Parikh, Chief Financial Officer, VP, Finance; Mr. Ashish Bharadia, VP, Business Development and Investor Relations. Without any further dealing, I request Mr. Kunal Sagar to give his opening remarks.

Thank you, Purvangi, and good afternoon, everyone. Welcome to our earnings conference call for the first quarter of the financial year 2024. Let us take you through the financial performance of the company. For the first quarter of the financial year '24, the company reported a total income of INR 149 crores, an increase of approximately 7% on a year-on-year basis. EBITDA stood at INR 170 crores, which grew by approximately 9% on a year-on-year basis, representing an EBITDA margin of 78.4%. Profit after tax was INR 50 crores, which was a growth of more than 250% on a year-on-year basis. While PAT margin stood at 33.4%, this growth of 250% over quarter 1 of the previous year is largely due to the effect of the change in the depreciation method that was expected from quarter 3 financial year '23 and one-time expenses for debt refinancing, which was incurred in quarter 1 of the last financial year. On the operational front, for the current quarter, the average occupancy rate of NKP increased to 99.4%. And as on 30 June '23, approximately 14,000 square feet of area was vacant. ICICI Prudential has expanded its space at NKP by approximately 9,600 square feet. Deutsche has concluded terms to renew approximately 320,000 square feet of space in NKP, which is due for renewal in financial year 2024. And Ipsaa, our creche amenity, has reduced -- rather renewed its approximately 3,000 space -- 3,000 square feet of space at NKP in quarter 2 financial year 2024. With this, we conclude our small presentation and open the floor for your questions.

[Operator Instructions] The first question is from the line of [ Shirish Vaze ] from Moneylife Advisory Services.

I just have one question. We have been talking about restructuring for a while. So the most tax efficient kind of way to restructure would be to merge with any of the 3 listed office REITs. So, I just wanted to understand, are you in conversation with any of the 3 listed REITs for a possible restructuring?

We continue to engage with our majority shareholders, our advisers and stakeholders on the subject of restructuring. All concerned are working within our regulatory framework to arrive at a reason and a thought-out path forward in this matter. We won't specifically comment on whether we are looking at A, B or C auction because it's a work in process. I hope that's something that answers your question to some extent.

We'll take the next question from the line of Satinder Singh from Eon Infotech Investments.

Congratulations on the successful conclusion of the Deutsche renewal. So what is the mark to -- what's the rental reversion that we would have received on this renewal?

Sorry, I request you to repeat your question. We didn't understand.

It is, what's the license fees we received for the renewals?

Yes. Reversion in terms of the new lease rent -- license rent versus the previous license on renewal?

In general, as we said, the license fees are in the range of approximately with 3 months to 4 months of license fee period in the range of approximately INR 150 square foot. That is what [ Eni ] has been achieving in NKP for the past few quarters for the past few renewals. And with Deutsche Bannk as well, the terms are very similar to what we mentioned -- to what I have just mentioned, approximately INR 150 a square foot at 80% efficiency with 3 months to 4 months of license fee period.

My question was in terms of understanding [indiscernible]. So what was the exit rental? Like so the rent, they were previously paying in the last license compared to the rent now. So with a view to understand as to whether there's an uptick expected in the next results?

See, the rents that were previously paid across 3 or 4 particular locations within NKP, those leases have been signed not at the same time and the leases are not really running currently so to speak. So in general, it would be hard to quantify that because there are leases of different volumes, which have been signed at different times over the past few years. So, we can generally say as being as specific as possible that when you look at the price of approximately INR 150 per square foot with 3 to 4 months of rent fee, generally, there is a gradual increase of some -- to some extent over the past -- over the previous license agreements. Over the previous license agreement, there is really fee rentals, there is a gradual increase. But since it's coming from different timeframes, et cetera, et cetera, it's not so easy to specifically quantify.

Okay. And any risks to the balance INR 130,000. So, we talked about 450,000 of renewals to come up in FY '24. So with that, we have about 130,000 remaining left. Any risks that we see to renewal of the same based on the visibility that you have as of today?

No. We don't see specifically any risk at this point. Of course, we are working and we are monitoring very carefully, but there's nothing significant in terms of risk that we want to stay. We feel in general that the majority of the renewals have been going on in a very thematic and steady way with a marginal of gradual increase towards the INR 150 mark in 3 months to 4 months of rent fees. So, we don't really see there's nothing significant to say in terms of any risk at this point in time. There's nothing that we really know of, so to speak.

Right, sir. One final question, if I can squeeze in before I come back again in the queue. So any risks that you see from upcoming supply in the micro market? So are we to understand that, that we do not foresee as of today much of a risk on occupancy or on rental increase from the upcoming supply in the market -- micro market?

I mean, there is always going to be upcoming supplies in the micro market as well as in the macro market. That's very normal actually. We find that if the licensees are happy here, of course, with the commercial as well as with other conditions in NKP, as well as with the day-to-day conditions and the day-to-day service in NKP, then we're not so worried as to what upcoming supply is coming because that's not really something within our ability to control. So I mean, actually, we have no issues. There is upcoming supply that comes in the micro region as well as of NKP well as in the macro area, whether it's in Mumbai [indiscernible] or outside as well. Yes, we're just focused on giving the licensee a good experience and if we satisfy commercially to some extent, vacancies with good value here, then we're not worried about what's happening out there.

[Operator Instructions] We'll take the next question from the line of [ Dilip Jain ] from -- an Individual Investor.

Am I audible?

Yes, sir. Please proceed.

Since we have been continuing in the old tax regime, it's still flexible for future restructuring opportunities. Our tax outgo has been about INR 18 crores higher in fiscal year '22-'23 than if we had paid tax at 25% had we moved to the new tax regime. Similarly, in fiscal year '21-'22 also, we had paid around INR 32 crores extra tax. Post de-listing -- post the process at the intended de-listing of Nirlon, only the promoters will get the benefit of sticking to the old tax regime, which is kind of unfair to the existing non-promoter shareholders given that GIC is one of the most ethical promoters globally. It is my humble request to you, sir, and to the promoters to announce a special dividend in the amount of the extra tax outgo. That's about INR 50 crores only to the minority shareholders, only to the non-promoter shareholders so that our group of minority shareholders are adequately and fairly compensated? Is my request fair, sir, and will you consider it?

Mr. Jain, we have heard your request. We will take it on board. I won't say anything more about it at this point, but we hear your request and we've taken it on board. Just to mention that when we had explained the reasons for staying with the old tax regime, we had mentioned in earlier calls, and we'll just refresh our explanation there is that we feel that the potential value of doing that is significant enough for any -- the flexibility that we would get from staying in the old tax regime is significant enough to stay with the old tax regime. We understand, as you said, that there is a finite timeframe for which it will be -- continue to be beneficial. We are very conscious of that. And your point is well taken.

Okay. One last question for you. Sir, yesterday, as per media reports in business lines, GIC is in talks with Blackstone to buy around USD 2 billion of their stake in commercial reality in Pune. If this were to fructify, if the stocks were to fructify, since Nirlon is also into similar portfolio of assets that is commercial reality, can these assets be combined into a possible REIT listing? I understand it's all out in the future, but I just wanted your opinion on it. I'd be really thankful if you could just mention a line or 2.

Mr. Jain, as you correctly said, that's a press report on which neither Blackstone, nor GIC has said anything. So, I basically wouldn't like to mention anything on that at the moment.

Okay. But sir, on such lines, if such deals were to fructify, are we open to combining assets because the promoter is the same as GIC? Are we open to combining assets into a possible REIT?

I think that could be given to anyone of our [Technical Difficulty].

Okay, sir. No problem at all.

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

Yes. What is physical occupancy that is currently now achieved in the -- any move up from the previous 65, 70 that was indicated or it continues to be stable? Or any update on that, sir?

Yes, it's -- fortunately, that -- this is the footfalls in the campus, and that's what you are asking are increasing. And they are -- if one excludes for just a moment, the new Stage 5 and J.P. Morgan, the footfalls are increasing to about 80%, 85% of what they were at pre-COVID levels and the trend continues to be upward. Also, J.P. Morgan who have started recently, their occupancy are already very quickly up to 65%, and we're hoping to go to 100% in the next few weeks as well. So, those trends are personally encouraging both those trends. Rahul?

Yes, yes. That's the most important thing or that's one of the most important things. If is the physical occupancy is going in the right direction, which thankfully it is at this point in time, it's something that we monitor very carefully and we do consider it to be a very important factor. And at this point at this time, it is going in the right direction.

That's very heartening to know. I think 80%, 85% and 60% for JPM, I think it's great. Sir, the 14,000, while it is effectively nitpicking, but this 14,000 vacant, how much of it -- this is in Nirlon House out of this 14,000?

So approximately half of this is in NKP and I think approximately -- sorry, approximately 6,000, which is approximately half a little less and half is in NKP and the balance is in NH. And what is in NH? Also, a large part of that is in the basement, which is basically a storage space. So it's not very significant by any stretch.

One other point Mr. Singh is that given the NKP split, none of it is office space.

Amenity. Yes.

It is an amenity space.

No, no. That's okay. Sir, on NH, okay, so we know that there are multiple stakeholders in the building. And to that extent, the value unlocking is kind of constrained, okay? So today, if one were to consider the market value of Nirlon limited stake in NH versus the rental income of about INR 3 crores that we get every year, the yield will be very low. So what are the various possible value unlocking options that the management sees at this point in time, given the constraints?

We are evaluating the options with regards to Nirlon House value. I probably know Nirlon House is a multi-owner building. So it's always a little bit -- it takes a little bit longer to come through any decision or to come to any restructuring or what future plans are when there is -- when it's a multi-owner building. But it is something which we are spending some time on and we are spending -- and we are very keen that the potential or whatever it is that we decide in NH is to the benefit of the shareholders of NL. However, as I've said, with multiple owners who have a completely different profile because of the profile of the space and the volume of the space and the location than NL, it's not so easy to conclude this issue so easily. And once we have anything significant to say, we can tell you. Just to add to that, just to be very clear, it's a significant priority for us, and we do believe that there are good leases to it. And as soon as we have anything concrete, we will make sure we let you know.

Thank you for this encouraging input. And while the management has mentioned that if we kind of build out NKP fully, okay, even though the FSI is underutilized, okay. And since the assets are not very old, okay, probably there isn't much development potential in the immediate. But is it a fair assumption to make that in the after 5 years or so, maybe there could be a future development opportunity by redeveloping something or you feel it's even farther out than that?

Nothing has been specifically discussed at this point in time. At this point in time, Phase V, as you know, we got the OC in June 2021 and Phase V is fully licensed as well. And since these buildings are not significantly old in terms of their life, if we look at Phase I was ready in 2000 -- approximately 2008. So far there's nothing significant for us to say with regards to future land within NKP, which concerns utilization of FSI, which is readily available.

I would agree with Rahul. I think it'd be a little premature to try and guess what we might do in 5 years. I think there are so many different factors. Obviously, we understand that, that is something that is one of several options. But whether in fact it's realistic or in fact, it's something that we would be even thinking of going down the road, I think it would be too early to say just now.

Yes. Right. Okay. One final observation on the HSBC loan. The feeling is that probably the rate of interest being paid is quite high for the kind of asset that entity is and the kind of corporate governance that NL delivers, okay. So I wonder if, okay, there's some action on this, okay, because we could lock-off a meaningful interest cost, okay, possibly.

So, we have a contracted rate with HSBC, which is linked to 3-month T-bills. That's our contract with them now. At some point, it has been to our advantage. At some point, it is not necessarily entirely to our advantage. That's the current contract we have with them. Of course, on a common sense basis, we hear what you have to say. Whenever there is any opportunity to address that, we certainly would try and do so.

Right, sir. One final suggestion. As you mentioned, I know it's something that, okay, I don't want to push it beyond a point and you are already ceased of this. Just a small request again. Kindly do try and expedite this restructuring to [ unlocking ], the company pays 31% plus. And then as dividend [ with CPS ], we end up paying another 35%. The promoter, GIC affiliate in this case might not be paying the 35% tax, okay, being a foreign company. Probably they might have advantage of a lower tax on the dividend. So to that extent, there is not full alignment of interest between the minority shareholders like us and even the Sagar family, okay, and the foreign affiliate. So the sooner it can be sorted out -- I think it's been something that has been on for a few years now. It will be great if this could be resolved today. Thank you. And all the best, and thank you for frank answers.

[Operator Instructions] We'll take the next question from the line of [ Jill Gada ], an Individual Investor.

Am I audible?

Yes, ma'am.

Yes. Okay. So actually, my first question was like now that the majority of our area has already been rent out, right, so how do we see our top line grow other than the escalation over the due course of the business?

How do we see the top line grow apart from the...

Apart from escalation and?

Escalation, basically, over the due course of the business.

So as you said, predominantly, I think the capacity is now full. Predominantly, the escalations will come with the contracted escalations and all this in the agreement. Apart from this, we also have a few opportunities with regards to renewals and/or with regards to, if somebody exits the campus to get in the same existing person with the renewal or a new licensee at a higher license fee. Predominantly, it would be the 2 other ways to do it. With regards to your question, it would be renewals and, of course, upcoming potential vacancies where the management would try and maximize the license fees of the incoming occupancies.

Okay. And how much would be the contribution of the Nirlon House to the total revenue then?

I think the contribution of Nirlon House is approximately a little bit less than 1% of the license fees of NL.

Okay. And my last question would be like, we have been paying like hefty dividends in financial year '22 and financial year '23. So like can we expect this trajectory to continue this year as well? And like, potentially, can this payout increase as we reduce our debt over the next few years since we have no other usage of our cash currently?

Yes. We believe that this -- with the current levels of occupancy, we believe that this is a sustainable dividend. Our intention is to try and keep it in this range, plus-minus a little bit, but we try and keep it as steady as possible.

Okay. That answers my question.

We'll take the next question from the line of [ Lakshya Jain ], an Individual Investor.

Am I audible?

Yes, sir.

Yes.

Congratulations on a great set of occupancy rates. Sir, we are paying 35% tax for quite a long time now, sir? And the dividends which we distribute again, that is also taxed at 35%. It's been quite a time now. By when can we expect a possible de-listing or any other possible shared swap of another listed REIT company is possible? By when can we expect this, sir, because it's been a long time now. So can we get a clear picture on this, sir?

Mr. Jain, without giving you a very specific timeframe to say when we will have an answer on this, we just want to reiterate that we understand the concerns that you and other shareholders have raised on the matter, and that we are working together with our major shareholders to try and come to whatever the final conclusion on this matter is as early as we are able to make sure that we understand the implications in all regards as far as the implications that is concerned.

There are only 2 possibilities. It's going to be either de-listing or a shared swap of another listed company. And if the swaps are possible without de-listing?

Mr. Jain, we don't want to comment on the specific -- whether it's a shared swap or whether it's de-listing. That would not be very fair when the process is still ongoing in terms of what we are trying to understand the implications and the impact of all the relevant regulations and the various issues that are involved in taking the decision.

But it's going to be either of the 2, if I'm not wrong. Is there any other option we have apart from this?

Again, we don't want to speculate on exactly what shape or form this may or may not take because whatever we are working on, whether that is an answer, the answer is still to be -- there is an answer that we are still -- that's the decision that is still to be taken. So, we don't want to say whether it is A or B.

[Operator Instructions] The next question is from the line of Satinder Singh from Eon Infotech Investments.

Yes. Sir, any update on the Morgan Stanley vacation plans, okay, from the last call? Any update on that, that you would like to share?

No specific update, Mr. Singh. What we mentioned last time is that the fact that Morgan Stanley is contracted to move from NKP remains clear. We don't have any specific notice from them as to when that move would commence, how long it would take. We continue to be in close touch with them in terms of their development, in terms of how the places they are going to is progressing. And they will let us know as soon as they have a concrete plan of actions so that they can issue us a notice and we can also take concrete steps to fill in that vacancy. So as you know, we are very cognizant of that, and that's where it is. But there hasn't been any specific or formal updates since the last time.

How many years have they been a tenant here, sir, at NKP, Morgan Stanley?

Sorry, I didn't get.

What's the question? What would be the vacancy?

No. No. How many years have they been a tenant here at NKP?

Morgan Stanley has come in phases over various phases over the past 14 years. They were unoccupied initially in Phase 1 and approximately in 2009, where they came into Phase 2 as well. In approximately 2011, they came into Phase 3. In maybe -- I'm not entirely sure but maybe 2014 or in '13-'14, '14-'15 and then they even came into Phase 4, which was after '15-'16. So, there's been growing. And apart from this, they have further increased their footprint in Phase 1 as well over the past few years. So, they've been growing consistently within NKP over the past 14 years across all 4 phases.

So what is the area we occupy currently, sir, total area in all?

Approximately 450,000 square feet.

About 450k. Right, sir. Sir, finally, sir, is the valuation of the investment properties concluded, sir, kind of? That's a normal exercise that NL does for the assets. Is that already concluded? And what's the value of the investment property arrived at?

Hold on a second. We'll just check that for you. Just to answer your question, that valuation has been concluded, and it will form part of our Annual Report that will be going out to shareholders shortly.

[Operator Instructions] Ladies and gentlemen, we'll take the next question from the line of [ Harshit Kuleja ], an Individual Investor. Ladies and gentlemen, I would now like to hand the conference over to Mr. Kunal Sagar from Nirlon Limited for closing comments. Over to you, sir.

Thank you very much again for attending, and we appreciate your interest and look forward to remaining in touch.

Thank you very much.

Thank you very much, sir. Ladies and gentlemen, on behalf of Nirlon Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.

Thank you.