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Phase V revenues likely by FY22 end…

Nirlon’s FY21 performance was muted. Revenues in FY21 grew 2.2% YoY to | 316.9 crore. For Q4FY21, it was | 77.1 crore, down 6% YoY. Occupancy, which was at 95.2%, was lower QoQ vs. 97.5% in Q3, as one large licensee moved out post expiry of their license. EBITDA for FY21 at | 237.2 crore was up 2.7% YoY. PAT at | 127.4 crore for FY21 was up 16.4% YoY, also aided by lower interest, due to capitalisation.

License fee to grow at 35% CAGR to | 503 crore in FY21-23E

Nirlon has an operational licensable area of ~1.9 msf across Phase I-IV at Nirlon Knowledge Park (NKP), of which, ~95.2% area has been licensed out. It clocked lease revenues of | 255.6 crore in FY21. Occupancy was lower vs. 99.5% in FY20, as one large tenant has moved out post expiry of the licence term. Nonetheless, the company is in discussions to re-license the vacant area. Morgan Stanley has also agreed to license a further ~ 28,000 sq ft from June, 2021. The company’s board has also proposed a final dividend of | 8 per share for FY21, subject to approval by shareholders. Furthermore, post Phase V resumption, Nirlon’s licensable area is expected to expand to ~3.1 msf. With this, we expect the company’s license fee income to grow at 35% CAGR to | 503 crore in FY21-23E.

Phase V revenues to begin from FY22E end

The company is currently developing Phase-V at NKP with ~1.16 msf licensable area, lease revenues from which are expected to commence from FY22 end as it has received the OC in June, 2021. It has already entered into an agreement to license this entire area to JP Morgan thereby providing revenue certainty. Assuming full occupancy of the additional chargeable area, Phase V has the potential to contribute additional revenue of ~| 200 crore, without a proportionate increase in total operational costs, which would lead to improved margins. With all debt likely to be drawn by Q1FY22 for phase V, we expect debt to peak out by H1FY22E and decline thereafter as rental revenues kick in coupled with deposits in H2FY22.

Valuation & Outlook

We like Nirlon given its quality Grade-A office assets and backing of Reco Berry – an affiliate of GIC. We expect its lease revenues to grow at 35% CAGR to | 503 crore in FY21-23E, led by incremental leasing revenues flow through from phase V. We roll over our NAV to FY22E. We maintain BUY rating on the stock with an NAV-based target price of | 400/share (earlier | 355/share). In our valuations, we conservatively consider a 9% cap rate and 15% discount rate. We see deep value in the stock as the planned expansion is not factored in the CMP. Furthermore, clarity on future growth plans, as and when the company shares it, will be the other key catalyst, which will drive a re-rating.

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