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Wednesday, October 7, 2009

Nirlon Ltd:Future growth prospects/target price/realty play/recomendation/analysis

Scripscan: Nirlon Ltd

Story:The management of the company “Nirlon Ltd.” does not readily share information on their reality business plans. Thus, we have analyzed the company based on publicly available data, personal visit to the place & the latest Annual Report 2008-09. Our report is based on various assumptions.

Prime Location In Mumbai:Nirlon Knowledge Park is conveniently located on Mumbai's Western Express Highway. The location is easy to commute from the western & eastern suburbs of Mumbai.

New Construction To Add To Lease Rentals Revenue:Nirlon is developing 2 msf of commercial property near Goregaon in 4 phases, partly by demolishing old structures, partly by developing the existing free area. Of the 4 phases, 1st phase of 0.8 msf will get operational in H2FY10E & 2nd phase of 0.34 msf will get operational in the beginning of FY11E. Both these phases are expected to generate a annual lease rental income of ~ Rs.109 Cr. The balance 2 phases of 0.33 msf & 0.31 msf are expected to get operational in FY13E & FY16E respectively generating lease rental revenue of Rs.40 Cr & Rs.39 Cr p.a. respectively.

Old Constructions Continue To Generate Decent Cash Flows:Nirlon has in total 3 properties namely Goregaon, Worli & Tarapur totaling to 0.72 msf. Of the three properties, the company is in the process of re-developing Goregaon property into a commercial property. The company will continue generating revenue from its other properties namely Nirlon House – Worli & Tarapur. The company will continue to have the cash flow Rs.10 Cr to Rs.11 Cr annually from both these properties.

Company To Become Debt Free Within Four Years Starting From FY10:The company has got a securitize loan of Rs.400 Cr sanctioned from HDFC for its Phase 1 & 2 of which ~ Rs.370 Cr has been withdrawn. We expect the company to repay this loan from the security deposit of ~ ~Rs.130 Cr – Rs.140 Cr & balance through internal accruals with in 4 years beginning from FY10E.

VALUATION – “Beyond The Vagaries Of Real Estate Biz”:Nirlon, traditionally being in the Nylon production business came under BIFR in 1988 due to changing fortune of Nylon yarn business. However, the company had valuable land & property in Mumbai City which is paying well to the company’s dark fortune. Thus, with company’s struggle & efforts to rehabilitate, it decided to make fruitful use of this valuable property by redeveloping its existing property & go in for commercial lease rental business. Nirlon Knowledge Park is thus expected to generate a continuous inflow of Rs.120 Cr to Rs.130 Cr annually by FY11E, by the way of lease rentals, there by mitigating vagaries of real estate business. Thus we expect the company to become debt free by FY13E & also go for further CAPEX which would be financed fully through internal accruals.

Conclusion:Nirlon, with turning around of its financials & huge growth story kicking in; is expected to generate huge free cash flow. Thus, based on DCF we have arrived at 12-18 months price target of Rs.126. The stock has recently witnessed a sharp run up giving an excellent return of 312 % in 6 months. The stock has outperformed BSE 500 & Small Cap Index by 223 % & 175% respectively. We believe that the stock has the potential to give multi-fold returns in the next 2-5 years & hence a good bet for long term investors.

Source:asset alliance sec

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