I first looked at Nesco around 18 months ago when it was ~700 and had love at first sight. They have an annuity business(rentals); the company owns and runs Bombay Exhibition Center, Commercial towers built on adjacent land and some pretty valuable surplus land around it (overall ~70 acres) in Goregaon, Mumbai. If one does the math, the market value of these assets put together is north of INR 4,000 Cr. The underlying business itself is fantastic with a sustainable moat. To understand the business quality and potential, all one needs to read is Prof. Sanjay Bakshi’s note on NESCO.

In the recent rally the stock has run up to 1100. What should you do now? Should you hold? or if one doesn’t have a position yet, can one enter now?

I believe even at price of 1,100 Nesco makes an interesting case for investment for two reasons:

Rising earnings: I understand that the absorption of latest tower (3rd) has picked up and full year effect will be visible in FY15 numbers. Once its fully absorbed it could fetch well over 50 Cr annually. The company is ready with their plans for the 4th IT building (model image below).

Value Unlocking: There are many companies out there with valuable assets but unless you see a trigger for value unlocking, the wait could be very long and that of course has opportunity costs involved. In Nesco’s case, recently two big and smart institutional investors have taken sizable position- ICICI Pru Div. Yield has taken 3.4% stake and Pari Washington 1.3%. So, the entry of such smart and big institutional investors gives some confidence that management would sooner than later start unlocking value OR at least be more liberal in dividends, which could be a great trigger for this stock (a recent case in point-Noida Toll Bridge). As on Mar 2014, it is holding 372 Cr in cash and cash equivalents. Secondly, the current chairman Sr. Patel is in his late 70s, his son Mr. Kirshna Patel has been part of board for some time now and it is reasonable to expect him to lead the company going forward. One can hope him to be somewhat aggressive compared to his father.

Most of the mid & small caps have gone up 3-5 times in last year including our top picks VST Tillers, PTC Finance, Ashiana Housing, Relaxo etc… making it real difficult for value investors to add to existing ideas or identify fresh bargains. Amidst this you have NESCO still available at decent valuation and offering a huge margin of safety(downside protection).Hence, one may ADD/BUY NESCO at current levels.

PS: Goes without saying, invest only if you have a 2-3 years horizon and you don’t panic with 15-20% volatility.

Happy Investing!