Recommendation: Buy
Price target: Rs 216
Current market price: Rs 144
Key points
- Defence orders: Nelco is benefiting immensely from its past initiatives to focus on the niche market of security and surveillance systems for the defence forces. Given its alliances/tie-ups with leading global majors, the company has been able to establish itself as a reliable supplier of superior technology products.
- On the demand side, the government has considerably enhanced its spending on electronic communication warfare systems and is encouraging private participation. Consequently, the strategic electronic business of Nelco is poised to grow at a compounded annual growth rate (CAGR) of 40% over the next three years.
- Robust industrial demand: In the light of the increased investments by the key user industries, such as steel, cement and utilities, the company is witnessing a robust growth in its other businesses of SCADA and power drive systems. It has built a robust order pipeline, which has improved the growth visibility of these businesses significantly. Another key business division of VSAT-based network systems is also growing at a steady rate.
- Margins to firm up: The margins have improved significantly in the last fiscal to double-digit levels. The operating profit margin (OPM; excluding the real estate inflow) is likely to improve further and stabilise around 20-22% on the back of a higher contribution from the high-margin defence orders and service business.
- Realty gains: It will further unlock the value in its real estate business by developing 50,000 square feet (sq. ft.) of saleable area in each of the next three years. We estimate the fair value of the cash flows from the real estate business at Rs 10 per share.
- Attractive valuations: At the current market price of Rs 144, the stock trades at a discount of 9.9x its FY2007 estimated earnings. I recommend coverage on Nelco with a Buy option and a 12-month price target of Rs 216.
