Nirlon Limited (500307) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 and 9 Months FY '24 Conference Call of Nirlon Limited. [Operator Instructions] I now hand the conference over to Ms. Purvangi Jain from Valorem Advisors. Thank you, and over to you, Ms. Jain.

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 third quarter and 9 months ended for the financial year 2024. 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 the 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 purely 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 conference call and hand 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; Mr. Ashish Bharadia, Vice President, Business Development and Investor Relations; and Mr. Jasmin Bhavsar, Company Secretary and Vice President, Legal and Compliance Officer. Now without any further delay, I request Mr. Kunal Sagar to give his opening remarks. Thank you, and over to you, sir.

Thanks, Purvangi. Good afternoon, and welcome to the earnings call for the third quarter and 9 months ended of the financial year 2024. Let us take you through the financial performance of the company. For the quarter under review, the company reported a total income of INR 153 crores, an increase of 6.2% on a year-on-year basis. EBITDA stood at INR 121 crores, which grew by about 2% on a year-on-year basis, representing an EBITDA margin of 78.93%. Profit after tax was INR 52 crores, a decrease of approximately 3% on a year-on-year basis, while PAT margin was 34%. As regards to the 9-month performance, the company reported a total income of approximately INR 453 crores, representing an increase of 6% on a year-on-year basis. EBITDA stood at INR 359 crores, an increase of 4% on a year-on-year basis, representing an EBITDA margin of 79.18%. Profit after tax was INR 154 crores, representing an increase of 43% year-on-year -- on a year-on-year basis, with a PAT margin of 34.08%. On the operational front, the average occupancy rate for the company as a whole, that is NKP and Nirlon House combined, was stable at 99.6% for the third quarter of the financial year 2024. And as on the 31st of December 2023, NKP was 100% occupied. At NKP, EY has renewed approximately 39,000 square feet of space, Adani Power renewed 9,000 square feet amenity space and an amenity space for a gym was licensed in December 2023 for approximately 6,700 square feet. With reference to the questions from shareholders about potential restructuring or other possible value accretive measures, discussions and consultations with concerned parties to resolve relevant issues are likely to continue for some time. The company understands the importance of this aspect for investors and shareholders and will communicate any decision taken in this regard to investors. As regards, whether the company intends to move to the new tax regime, after a careful analysis and deliberation and Board meetings, the company has decided to stay with the old tax regime for the present. This is primarily due to the accumulated MAT credits available for set-offs in the old tax regime where the company estimates the financial benefits of moving to the new tax regime for financial year '23 and for financial year '24-'25 will be nominal. Whereas the likely benefits to minority shareholders of a potential restructuring by remaining under the old tax regime are estimated to be appreciably greater. Accordingly, there is little to be gained by making an irreversible move to the new regime at this time and closing the option to potentially greater gain from benefits under the restructuring available only under the old tax regime. This position will be regularly reviewed by the company for any change in circumstances. Finally, we are happy to inform you that the Board has approved an interim dividend of INR 15 a share or a payout of 150% on the face value of each share for the financial year '23-'24 in its meeting held yesterday. With this, we conclude our opening remarks and open the floor to questions.

[Operator Instructions] The first question is from the line of Dilip Jain from Ayush Capital.

The decision to continue in the old tax regime to maintain future restructuring flexibility is leading to a higher tax outgo, thereby reducing our cash flows and our ability to pay a higher dividend. Sir, you had promised to consider a special dividend to compensate minority shareholders in the last conference call, kindly let us know your decision taken on this. I'll go ahead with my second question. In the September AGM, we were updated that value addition or monetization of Nirlon House was being assessed and evaluated. I would request you to share the developments on the same. And my last question is, we were supposed to be in the large phase of a possible restructuring conclusion. So any update on the same would be highly appreciated. My best wishes.

Thank you, Mr. Jain. As far as the question on the tax regime goes, as mentioned in our opening statement, we clarified that the benefit of moving to the new regime at this point is nominal, if at all, because the company has accumulated MAT credit, which it is using to set off its tax liabilities under the old tax regime. This credit will lapse if it is not used under the old tax regime. And as a result of this credit, there is no benefit at this moment to move to the new tax regime. So we all not -- we don't have a higher tax outgo by staying with the old tax regime now. In fact, by staying with the old tax regime, it allows us to keep the option open, should there be to use any benefit that is available under the old tax regime, depending on any potential restructuring in the future. So there is effectively very little to be gained at this stage by moving to the new tax regime, and we are not losing by staying in the old tax regime. This is potentially for the financial year '23-'24 and for the financial year '24-'25. So do take that on record, it's not that we are -- we have a higher tax outgo as a result of staying with the old tax regime. And hence, we are continuing with the old tax regime at this stage. As far as your question on Nirlon House goes, we have begun the process of evaluating and moving forward with what kind of value addition we need to do with Nirlon House. And as that process and we take decisions in that process in terms of which direction we want to go, and we'll certainly make sure that we update all of you.

Yes. And sir, about the restructuring conclusion. So it's been quite a while, right, so it's been about 8 or 9 quarters since we've been discussing the restructuring. So -- and I presume that we were in the large phase of a possible conclusion. I understand that this is a time-consuming process. But if you could just share a little information to -- as minority shareholders, we would be really grateful to you, sir.

Mr. Jain, as we said in our opening remarks, the discussions and consultations to address the issues that are still open are likely to continue for some time. So I wouldn't categorize it. We won't categorize it as something that is in the final stage. That's not something that we've indicated on our calls or in any information that we've put out at any stage. We are going -- we are moving on it in a systematic way, which essentially looks to resolve whatever issues are there and move forward. But as we said, those discussions are likely to continue for some time.

Next question is from the line of [ Kiran Gandhi from Capital Growth Advisors ].

Sir, just wanted to understand in how much time can we expect the restructuring to be completed? Even since the earlier participant also asked, it's been quite a long time. And with the whole market, the stock price hasn't performed that great, the restructuring being a very, very key determinant of the value creation for the minority, how much time can we expect this whole process to get finally completed because we have been listening to this problem since quite a long time now. Any possible further like time length will be appreciated from your side, sir?

We don't have a specific time frame to mention at this point. We wouldn't want to speculate on that, as we've mentioned in the past. So nothing different from what we said in our opening statement.

Next question is from the line of Ranbeer Singh from Yashwi Securities.

So I had 2 questions. Number one was relating to the MAT credit. What is the quantum of the MAT credit that you guys have in your books right now?

It's approximately INR 30 crores, just under INR 30 crores.

Okay. And just from a shareholder's perspective because we don't understand like why is it taking so much of time, like what are the road blocks that the management is facing in doing this process of delisting or whatever you guys are up to like? What are the road blocks or challenges that --- are there any challenges that you guys are coming across?

So we wouldn't want to specifically get into on this call in terms of what are the specific issues. I think that would -- it would perhaps be more confusing than in any way clarification. There is a process or regulations that one has to follow and that we have to make sure that we are compliant with as a public limited company. And we are ensuring that we do that as we move forward with discussion. It has been -- it is taking some time to come to a conclusion on this matter. But we do continue to work our way through the various issues that need to be addressed.

Next question is from the line of Yash, individual investor.

So I have a twofold question. The first one is, what was the reason for low growth in this quarter on a year-on-year and a quarter-on-quarter basis?

Sorry, may I request -- what would you mean is the low growth in this quarter because the numbers have grown by about 6.2% in terms of the total income. If we can just ask you to be a little bit more specific, we'd be happy to try and answer.

Absolutely. So what I meant was that if you see the license fees, which is actually the major contributor to the total income, that only grew by 1.1% on a quarter-on-quarter basis and 3.6% on a year-on-year. Just wanted to understand the metrics as to what happened over there.

These are basically license fees that are coming from the existing contracts that are in place. And potentially, there could be escalations in one quarter as opposed to another quarter. These are basically all fixed contracts that are currently in place in NKP. We can also clearly say that all escalations, et cetera, et cetera, are happening as contracted. Some of this could also be as a result of the Ind AS, which is basically straight lining the revenue as well. So there's nothing that we want to say which is significant from an operational point of view, the path remains practically 100% occupied and all contractual escalations are happening. Some may happen earlier, some may happen later but everything as per the contract and in any case that numbers are as per Ind AS, which is 100% straight line. All calculations are straight line.

It may be better to [ look on it ] on an annual basis rather than a quarterly basis which may have an accounting entry in one, which may not be there in the other just to kind of explain a little further. So as Rahul said, there's nothing operational of any significance that has been any different from what is planned, budgeted or projected. So just to clarify that part.

Okay. Fair enough. And the second question was what kind of growth would we be expecting, say, next year for FY '25?

We do not want to speculate on the growth.

Our growth is essentially driven by 2 things: escalation of our ends because we are largely fully rented and renewals in the event we have somebody leaving and the new party is coming in. So there's also -- at this level where we are pretty much 100% occupied, there's also -- these are the 2 drivers of growth or an increase in the top line, two main ones.

Next question is from the line of Satinder Singh from Eon Infotech.

So just continuing with the growth levers, okay, like you mentioned that the growth levers primarily for an asset which is already 100% leased out is in the form of the renewals and the annual escalations. I think it will help to give a flavor of the lease expiry profile and the escalations do okay and the mark-to-market in your presentations going forward. So that's one suggestion that I had to offer. Second was on -- if you could give some flavor on the progress on the Morgan Stanley upcoming renewal or they're moving out. And finally, sir, I had -- just again, one more suggestion. This was regarding the annual valuation exercise, which is now due in the next 45 days or so. So our thing was that -- so we have a property in NKP, which is about INR 145 or INR 148 per month, which translates into about INR 1,750 per annum as rental. Against that, based on the previous valuation, if you calculate the per square feet rate works out to just about INR 17,000, INR 18,000, which means we are talking of a cap rate of almost about 10%. As against this other commercial real estate properties as owned by various REITs, typically are priced at a cap rate for this kind of a property at maybe about 8%. So our feeling is that maybe if you could work with the valuer to understand as to how is it that other REITs have their properties of comparable quality or even lesser quality typically valued at 8% cap rate, while we are valued at about 10% because this could lead to a reset in our property valuation by maybe about 20%, 25%. So there is a case for the management to understand as to why do our -- does our park get valued so conservative. So that's one more suggestion.

I think to just take the 3 parts of your question. As far as the lease expiries and the lease renewals are concerned, this year, for '23-'24, we have just one final lease left to sign, which we expect to sign either later this month or in March. Is that right?

Yes. So essentially, we have Citibank, which we are going to conclude. This year, we have one big renewal this year, which has already been concluded and one in '25 as well. But all in all, we can say that we have not received any indication or any significant notice from any licensee expressing their desire to leave or to vacate, and we estimate at this point that renewals will happen as projected and as planned. Of course, apart from the Morgan Stanley, we don't -- there's nothing significant to say on the licensee front in terms of vacating or in terms of leaving NKP at this point in time. And of course, for MSAs, we have had some indications of interest from existing occupiers as well as external occupiers. So as and when we get clear indications of dates from MSAs that will continue to develop in the normal course. But first, we need to really receive clear indications of a notice from MSAs as to the dates for vacating.

So just to add a little bit to what Rahul said, as you know, the Morgan Stanley planning is a long-standing one, that they will be at some point moving. We confirm that we haven't had any formal notice to vacate from them so far. It's potentially something that we will get that the move is likely to begin in phases in '24, '25. We've anticipated this for a long time. We have -- again, to reiterate what Rahul said because it's very important for us, we have strong interest from other prospective occupants to replace the vacating licensee in phases and at market rates in the normal course. And of course, as we ourselves get more details on this transition, we will make sure that, that is communicated to all stakeholders. So that's as far as the lease renewals and the lease expiries for the -- and the Morgan Stanley go. If we understood your question on valuation methodology correctly, this is a suggestion that you are making to us to perhaps look at -- we look at the valuation methodology to better reflect market value of the asset. Was that your suggestion? Mr. Singh?

Sir, the line got disconnected. [Operator Instructions]

Is Mr. Singh still on the line, Mr. Satinder Singh?

No, sir.

All right. if he comes back on, we can just check whether we understood his suggestion correctly and whether we can explain anything any further.

Sure, sir. The next question is from [ Lakshay Jain, ] individual investor.

So first of all, I would like to congratulate, sir, on 100% occupancy at NKP. My first question. As one of the shareholder has asked already about the Nirlon House, my question is regarding the same thing, sir. Are the tenants and landlords cooperating with us sir, for the same?

Yes. We have nothing significant to say -- anything more significant to say about Nirlon House. We have no issue with any of the other owners or any of the licensees. At this point in time, there's nothing significant to say. And as and when we come to the next step to see what is actually going to happen with Nirlon House, we will keep you informed but we are working on some particular points very, very closely.

Just to clarify, as we've mentioned in the past, this building is owned 75% by Nirlon and the other 25% undivided interest is owned by an entity called the Nirlon Foundation Trust. So the idea is not to be vague or nonspecific about it. It's just that we have to move together with the Trust. And again, we follow that process and we'll keep moving forward. From the Nirlon side, we're doing everything that needs to be done, and we are working with the Trust so that we do everything necessary on that side as well.

So the Trust is open, sir, for the outright sale of the entire Nirlon House?

We wouldn't want to speculate on where that process is because that will just be more -- that will be confusing for no reason. This is a very laid out process that we have to follow, and we are moving along that process.

Okay. My next question, sir. There's a lot of buzz happening around MSM REIT, sir, which includes single asset REIT. So sir, are we in the process of transferring Nirlon Knowledge Park into an SPV and Nirlon Holding that SPV. By doing this, there will be no need for us to delist, sir. We can continue to stay listed, and the dividends will also be tax free. So it is a win-win for everybody, including GIC, which is the majority shareholder, and minority shareholders like us.

Sorry, if you could clarify, are you making this as a statement? Are you asking us if this is a process that is ongoing?

Yes. I'm asking whether this is the process, is it ongoing?

No.

Okay, you have no plans of shifting this -- transferring NKP to SPV?

There is no process of the nature that you described that is underway.

I didn't get you, sir. I'm sorry.

There is no process -- the process that you have described is not something that is underway at Nirlon, this SPV and the transfer of the company into an SPV. That is not a process that is either being discussed or that is ongoing at Nirlon just that.

Is it possible, sir, legally, what I just asked now, this transferring the Nirlon Knowledge Park asset into an SPV and Nirlon then holding that asset?

We won't want to comment on that. It's speculation.

Because today morning -- no, today morning, an article came in Mint regarding the same thing, that single asset REIT is like possible now.

What you're describing is not something...

No, no, sir, there's nothing guesswork or speculation. I'm just telling the fact, it just came today morning, and actually happening from the past 4 months and today, again, it was more stressed upon.

We will take your point on record without commenting on it in any way because we're not sure exactly which -- what exactly you're referring to in terms of what's happened this morning.

No, this discussion is happening for 6 months. It was stressed upon again today, this SPV thing, single asset REIT.

We are not aware of this discussion, and we wouldn't want to or this particular process or this particular transaction that you are referring to. So we wouldn't really want to comment on it, please.

All right. No problem, sir. Okay. And because there is no other option with us, either we have to be listed. We want to stay listed. We have to transfer it to SPV or else the other option is getting delisted.

Your point is noted.

Yes. This point is well noted.

Sir, we have line for Satinder Singh reconnected. Satinder Singh, please go ahead.

Yes, sir, I mentioned -- my question, the line got dropped off. You would want me to repeat it, please?

No, we were -- with regards to the valuation, et cetera, et cetera, yes, I think you can...

We just wanted to understand whether you are making a suggestion to us to consider the revaluation process that we follow now. Did we understand you correctly?

Yes. So my suggestion was only that our valuation has done in the past, does seem significantly lower than the valuation done for other similar commercial real estate assets all over the country as published by various REITs. So we are talking of a large now set of maybe 40, 50 assets, okay, which are valued, okay? And those valuation reports are available in the public domain. We have probably an asset which is even better than 90% of the assets that are in REITs. You have a wonderful asset, which I think you are managing wonderfully well and don't get capitalized typically 8%, we have an asset which gives us INR 1,750 to INR 1,800 per annum as we rent. So valuing it at INR 70,000 to INR 80,000, which is about 10% cap rate does seem very low. So we were just wondering, in the interest of maximization of shareholder wealth, you could look into this please, and once these valuers to see that why is it that we have so much out of line with so many assets, okay? So we are talking of a large pool of assets whose valuation is in the public domain. So that's the suggestion, sir.

I think we'll certainly take a look at what you said, and we appreciate your suggestion and you explained it so clearly. Thank you.

Next question is from the line of Ritvik Jain, an individual investor.

I just wanted to know what is the debt repayment plan and when do the principal repayment starts?

The principal repayment of our loan is broken down into 2 phases. The first phase begins after 5 years from the -- when the loan was taken. So we've had the loan now for roughly 2 years. And in another 3 years, the first part of the principal repayment will be due, which is 25%. Then we have -- just a second, please. I'm just getting a clarification. Just a clarification, sorry, that was my mistake. After 5 years, we have a situation where we have to pay 5% a year from year 6 through 10, which is 25%. And finally, we have a bullet payment at the end of 10 years of 75%.

And one more question, sir, what will be our dividend payout be when it starts?

Sorry, our dividend has been -- I mean, again, our effort would be to ensure that we have a steady dividend going forward. So these are the current terms on our debt, what the terms will be after 3 years in terms of how we would look to best manage the loan part is something that we will continue to discuss and evaluate over the years. Our effort will, of course, be to see that the dividend remains consistent regardless of what our debt repayment situation is.

The next follow-up question is from the line of Satinder Singh from Eon Infotech.

Yes. Just one small question. It was mentioned that there is a MAT credit of about INR 30 crores, which is unused. So is that as of 31st December '23? And is the understanding correct that this will get used up by 31st of March '25 in normal course. So resulting in no real tax loss to the company vis-a-vis converting to a -- vis-a-vis the restructuring or converting to a new regime, is it understanding correct? INR 30 crores as of 31st March '23, used up by 31st March '25?

So we'll answer the question in 2 parts. The first part is that the approximately INR 30 crores of MAT credit is as on 31st of March 2023. Now the use of that is expected in approximately 2.5 years from 1st April 2023 based on current projections. So please note that this is something that can change. It's a forward-looking statement. It's a projection. So do look at it in that context. At this point, this is an estimate that it will take about 2.5 years to be utilized if we continue under the old regime as we are currently doing.

The next question is from the line of Prakash from Lapis India Capital.

I've got 2 questions. One is on CAM. Is CAM positive for us? Do we make some money on the CAM charges? And my second question was, if I look at the total expenses, given the Park is now fully leased, is it possible to create some savings from total expenses?

So the first -- as regards to your question on CAM, we do make -- we have a clear fixed margin on CAM, and it is consistently a value addition for us. We have an open book system, and we have a fixed margin although which is very transparent with our licensees. We didn't fully understand your second question.

Any potential for reduction in expenses, is that the question?

Yes, that's correct.

If you look at the expenses, some are fixed and some are variable...

Sorry to interrupt you, you are sounding a little distant?

Okay. Of course, there are fixed expenses, which are also of a statutory nature for which it's not really possible for us to do much. The other major expense is, of course, always the repairs and the maintenance and that will vary from year-to-year. So yes, theoretically, it's always possible to reduce the expenses, and we are looking at that extremely carefully. But as I said, it's a combination of fixed expenses, which are more of a statutory nature and of course, some variable expenses like repairs, et cetera. And we also want to ensure that the Park is running in the best possible condition and that the licensees are happy with the facilities, et cetera, et cetera. So we will look at all these factors and when it comes to expenses. But yes, we do look at reduction in the best possible way in as much of detail as we can.

But additionally, we also look very carefully to see that the increases in revenue are in excess of any increases in costs that we have on a medium and a long-term basis. There may be fluctuations from quarter-on-quarter, but in general, we would always look to have a situation where we have whether it's an increasing -- where we have the revenue increases in excess of what expenses may be.

As there are no further questions, I will now hand the conference over to Mr. Kunal Sagar from Nirlon for closing comments.

Thank you very much for joining us today. If you have any further questions, please feel free to reach out to either us or our Investor Relations managers at Valorem Advisors. Thanks again.

Thank you.

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