Nirlon Ltd. Stock Analysis and Investment Verdict

​​​​​​Nirlon Ltd., one of India's leading players in commercial Industrial/IT parks, has been operating its business at an exceptional 60 %+ ROE over the last year.

Finology Research Desk has analysed the company this week, providing a clear verdict on whether Nirlon Ltd. is a good long-term stock or not. Find out in this article.

What makes the commercial real estate industry special?

India's commercial real estate industry includes office spaces, retail real estate, industrial and warehousing, data centres, etc. This industry has grown significantly in the past decade, emerging as a key pillar of the country's economic development. This growth has been primarily driven by economic performance, urbanisation, MNC expansion, and government policies promoting foreign investment.

The commercial real estate industry in India is estimated to be ~$40 billion as of 2024 and is likely to grow to ~ $ 106 billion by 2029, registering a CAGR of 21.1%, driven by office spaces, retail, warehousing, and the growing co-working segment.

 

This fast growth in the commercial real estate industry is expected to come from higher demand for commercial real estate in the rapidly rising Indian economy, growth in the IT/ITeS sectors and various government reforms like industrial corridors, FDI policy, RERA, and REITs. Also, Government initiatives like Smart Cities Mission, Make in India, and infrastructure projects in building metro rail networks, expressways, airports, etc, focused on improving connectivity, logistics efficiency and urban infrastructure are expected to support the commercial real estate industry.

The office space segment is one of the most significant contributors to India's commercial real estate market, accounting for ~40-45% of the total commercial real estate market. The it/BPO sector dominates this segment and has vigorous leasing activity. India is on the path to becoming `Office to the world', offering commercial spaces. The demand for office spaces is expected to be driven by global and local occupiers, who are expected to keep expanding their operations and consolidating their facilities to enhance their market presence. Technology companies contributed to 23% of the total office leasing.

 

Source: Brickworks

In India, the commercial real estate industry has strong and stable growth prospects in 6 major cities- Bengaluru, Mumbai, Pune, Hyderabad, Chennai and Delhi NCR. Among these major cities, Mumbai had the highest realisation/ sq. ft. for rentals at ~₹151/ sq. ft. (2024).

 

Source: Brickworks

The 6 major office space markets have seen a cumulative Grade A office space (Grade A office spaces are the ones with the highest specifications in terms of functionality, design, onsite amenities, and location) demand of 264 million sq. ft. since 2019. With the highest demand relative to the supply, commercial properties in Mumbai command higher realisations vs other markets along with a lower vacancy level of property.

 

Source: Brickworks

We decided to look for key players in the Indian stock market who could benefit from the booming commercial real estate market in India, especially in the office leasing space in Mumbai. Our search led us to an interesting company: Nirlon Ltd.

Business Model of Nirlon Ltd.

Nirlon Ltd. is engaged in the development and management of industrial parks/ IT parks. The company currently owns two primary assets: Nirlon Knowledge Park, which is an ~IT Park located in Goregaon (East), Mumbai and also 75% of undivided interest in ~45 thousand sq. ft. in Nirlon House (NH), which is a building in the prime location of Worli, Mumbai.

The company’s flagship Nirlon Knowledge Park consists primarily of customers who are licensees in the business of providing IT/ITes, Banking and Financial Services as per the Maharashtra Government’s IT/ITes Policy.

Revenue Mix of Nirlon Ltd.

 

 

Source: Company

1. License Fees: This segment contributes the majority, ~88%, of the total revenues. It includes providing commercial office spaces on lease to businesses in Nirlon Knowledge Park and Nirlon House. The company has ~30.6 lakh sq. ft. of chargeable lease area across the 5 phases of Nirlon Knowledge Park. Chargeable area, as of FY25 accounted for ~64% of the total area of 47.7 lakh sq. ft. constructed area by the company.

 

Source: Investor Presentation Q4FY25

2. Others: This segment contributed a minority of ~12% of the total revenues. It includes revenues from maintenance services of the common area given on leases, recovery of administrative costs and other operating revenues.

Unit Economics of Nirlon Ltd.

 

Source: Company, Finology Research Desk

Employee costs account for only ~1% of the company’s total revenues. These costs have remained low and stable ~1%-2% of the total income over the last few years.

For Nirlon, finance costs account for a big chunk of its cost mix. Over the years, these costs have remained high in the range of ~17%-23% of the total income over the last few years. Given the company having high amount of debt in its capital structure, these costs are expected to remain on the higher side in coming years as well. 

Depreciation and amortisation expenses as a percentage of sales have improved for the company over the years. Accounting for ~25% of the total income in FY18, these costs have reduced to ~9% of the total income in the last two years.

Property management expenses are a key cost for the company. These have remained stable in the range of ~8%-10% of the total income over the last few years.

Tax costs as a percentage of sales have increased for the company over the years. Tax as % of total income accounted for ~19% of the revenues for FY25. It remained at ~ 10-12% of total income pre-COVID.

Other expenses include amortisation of marketing fees, rates and taxes. These expenses have remained stable over the years, ranging from 10% to 12% of the total income over the last few years.

The company's net profit margin, at ~34%, has improved over the years. Before FY20, net profit margins were in the range of ~15-20% of the total income. From FY20 onwards, net profit margins have improved over the years and have consistently remained at 25% + of the total income for the FY20-25 period.

Porter 5 Forces Analysis of Nirlon Ltd.

 

 

Source: Finology Research Desk

1. Low Threat of New Entrants: Nirlon's business is capital-intensive. It is difficult for new players to enter the commercial real estate segment. Not only is capital requirement a key aspect, but the location of the real estate property is also a key consideration. Nirlon's Knowledge Park's location gives it a strategic advantage as a preferred partner for business office rentals.

Most of the city's professional workforce lives in the Western suburbs, which have a ready supply of residential accommodation. Nirlon Knowledge Park is an easy commute from the western suburbs of Mumbai. It is also close to educational institutions, hospitals, and transportation facilities.

 

 

Source: Company Website

2. Low Bargaining Power of Suppliers: The company's business comprises leasing out rental properties in its existing IT park. Hence, the company has no significant raw material input costs and no supplier power risk.

3. Moderate Bargaining Power of Buyers: The company's strategic location makes it a preferred choice for large corporations to set up their office lease spaces, giving the company some pricing power over its customers. However, the company's customers are large multinational corporations like JP Morgan Chase, Citibank, etc., who have some power in negotiating contracts with the company, as they are more stable and reliable sources of income for the company.

4. Moderate Threat of Substitutes: The company faces moderate threats from its substitutes. Switching costs for any company are higher for any corporation shifting its office spaces in the short term. This is because even if any corporation finds any office space at a better deal, they will have to consider its strategic location, ease of commute to that location for the employees, etc. Also, the companies have multi-year contracts with Nirlon Knowledge Park; thus, quitting the agreement in between adds up additional costs. Therefore, switching costs are high for customers in short term.

However, companies can switch at low cost over the long term. Mumbai has many other IT parks in strategic locations. For instance, the  NESCO IT park is located only ~ 1 KM away from the Nirlon Knowledge Park and hosts many large corporations. Any company, if not satisfied with Nirlon’s contract terms could look out and enter into a contract with players like NESCO, if available at better terms at the end of their existing contracts with Nirlon. 

5. High Competition in the Industry: The competitive intensity is high among the players in the industry. This is due to the strategic location of Nirlon’s Knowledge Park. There are multiple IT parks in Goregaon East location (like NESCO IT Park, R Tech IT Park, Infinity IT Park, etc) which compete with each other to increase their occupancy of the commercial office spaces.

What led us to reject Nirlon Ltd. for Finology 30?

1. High Debt Burden: The company's debt has increased significantly over the years, from ~₹ 660 Cr. in FY14 to ~₹1,397 Cr. in FY25. This increase has created a heavy burden on the company's balance sheet. For FY14, the debt-to-equity ratio for the company was ~0.4x. This has increased 8 times over the years; now the debt-to-equity ratio is at  ~3.2x for the company.

According to us, despite the increasing debt, the company has not made any significant efforts to manage the debt burden. Over the last five years, while the net profits have grown for the company,  its total reserves have declined due to excess dividend payouts. The company could have better utilised these profits to pay off borrowings and reduce the debt burden. This appears to be an approach to please investors in the short term instead of strengthening business fundamentals for long-term business sustainability.

 

Source: Company, Finology Research Desk

The company's ROE has improved from ~2% in 2014 to ~61% in FY25. Although this jump appears impressive, an investor needs to understand what has led to the expansion of the company's ROE. We analysed the company's key ROE drivers—net profit margins, asset turnover ratio, and financial leverage—and observed that its ROE increase has been mainly driven by an increase in its financial leverage, which increases the risk of financial stability in the company's business.

 

Source: Company, Finology Research Desk

2. Concentration risks: The top seven licenses contribute to ~90% of gross lease rentals (as of June 2024), which exposes the company to tenant concentration risk. Among the top 7, the largest licensee contributes to 39% of gross lease rentals (as of June 2024). If any of these tenants vacate the premises, it may be challenging to find an alternative within the stipulated time for the entire office space.

For instance, recently, one tenant occupying ~14% of the total leasable area and contributing to ~14% gross rentals (as of June 2024), has given notice of termination and is expected to vacate by the fourth quarter of fiscal 2025. Although management has indicated that the company has received enquiries from existing and new clients for more than half of the area, revenue growth is still dragged down due to the lower occupancy rate of the vacated land.

The Bottom Line

Nirlon Ltd., one of India's leading players in commercial Industrial/IT parks, has been operating its business at an exceptional 60 %+ ROE.

However, we found concerns about its financial position, especially around high debt burden, quality of its ROE and concentration risks.

For Finology 30, our ideology has focused on fundamentally strong business models operating with a strong financial position and with less client concentration risk. For now, Nirlon Ltd. failed to pass our investment checklist. So, we decided not to go ahead with Nirlon Ltd.

However, there are very few stocks that made it to the Finology 30. Check them out here.