Nelco Ltd: Sky is coming Down-Result update

Last year when we picked Nelco Ltd (click here for earlier detailed post on Nelco ltd) it was still in transition mode and much action was pending for execution but we had the faith in Nelco keeping in view its strong technical capabilities, the scale of opportunity in Indian VSAT industry and its Tata parentage which ensured strong brand image and easy availability of capital/funds. And after 1 year the sky is getting clear. We picked it around 110-120 last time and it is now at 300 after one year and this is one of the best performer of my portfolio in difficult last one year of stock market.

Lets’ first of all focus on its financial performance this year. Nelco has shown stupendous performance both in topline and in bottom line in FY-2018-19. Its topline this year has grown 27% from 150 cr to 191 cr and the same has touched 51 cr in Mar-19 quarter from 39 cr in Mar-18. At this juncture I am more inclined towards growth in the topline than bottom line because there is still vast scope of scale in VSAT industry in India. So capturing the major chunk of the future scale will be the major growth catalyst and this is exactly what Nelco is doing right now.

It has invested quite a bit last year in expansions as its gross assets/capital work in progress has touched 100 cr from 50 cr last year. I am sure that these investments are made for maritime and aerospace connectivity because in Sep-18 its gross assets base including capital WIP was 70 cr and it has crossed 100 cr now only after the approval of maritime and aerospace connectivity by Indian government in Dec-18 (for which I was waiting for long time). This expanded assets base is one of the reason which has impacted its already good bottom line figures due to depreciation and interest charges as it has taken debt to the tune of 34 cr to fund its expansions. Still it has managed to grow the figure of PBT at 20 cr from 15 cr last year. However I think the maximum benefit of the expansions done this year will accrue in the next year and we’ll see high growth in top line but bottom line growth will be even faster.

But the most important move is the declaration of dividend by the company. They have declared Rs. 1.5 dividend which is a significant move and it shows the confidence of the company in the stability of the future growth and profits. Its dividend history was erratic due to subdued performance in last 2 decades and last time it gave dividend was way back in 2013 (50 paise). So this dividend is very important indicator of the future growth. It has given great all round performance this year and I think this will take its stock price to new orbits. Its current PE is around 30 which for a company growing like Nelco is not expensive and we should see this touching 40 and the same will get re-rated after the June-19 quarter results and any other favorable regulatory and policy action.

Its transformation phase started in 2016-17 after it sold its loss making automation business and shifted focused on profitable VSAT business. But due to the dynamics of VSAT industry in India where much action was needed at regulatory and policy front not much was in the hands of Nelco even if it wanted to grow its business. Nelco needed to wait for some important actions in external environment to settle some of the most pertinent issues restricting the growth of satcom industry in India like Satellite capacity/bandwidth was not available to Satcom industry in India even if they wanted to grow their business, Internet connectivity in some high growth sectors like marine and aerospace was not allowed. So for me, more than the action in the topline and bottom line it was the action in the regulatory and satellite capacity fronts which was more important.

GSAT satellites: Game changers by ISRO for India

As I have noted in the last blog post on Nelco that affordable supply (New satellites) and corresponding high demand (Marine/Aerospace/Remote areas) is the most significant factor for a new technology/product to achieve widespread acceptability and growth. So this year, as Government created the new supply avenues by launching new satellites it has also created the scope for demand growth by allowing internet connectivity in marine and aerospace sector and this has really opened the doors of huge growth for Nelco.

This year, ISRO has done some serious work in creating the satellite communication capacity for India. ISRO has launched GSAT-19 in June 2017, GSAT-29 in Nov 2018, GSAT-11 india’s heaviest satellite launched in dec-2018 and GSAT-20 another heavyweight was launched in Jan-2019.  So by mid-2019, these satellites will cover the entire nation and together they have the capacity for 100 Gbps internet capacity but this will provide more benefit to rural and remote areas of India. As I have shared in the last post, the main motive behind these satellites is creating fast reliable internet capacity in rural india. This massive capacity will also support commercial and industrial applications like ATM, Marine and aerospace connectivity, Oil and gas sector, mining, education sector etc. India has huge ambitions for smart cities and without satellite internet connectivity in smart cities is not possible especially keeping in view the mission criticality of satellite internet. Similarly, IOT also needs reliable satellite internet.

So the supply of this massive bandwidth will create the demand for VSAT in remote areas and other industrial application like marine and aerospace. So many of Government’s public welfare and e-governance initiatives like e-banking, e-health, e-governance aimed to grow rural India was on hold due to lack of cheap and reliable internet connectivity in remote and rural areas.

As I have explained in the old post, in remote and tough terrains building of terrestrial communications is very costly and not suitable for mass scale application. Satellite internet is the best choice here as one satellite is enough to cover large area cost effectively. Like, take the case of Indonesia, which has string of 13677 islands so instead of creating terrestrial infrastructure for telephony it has launched dedicated satellite for telephonic communication in the country and this has proved very cheap as compared to creating time consuming and costly physical infrastructure.

Satellite Internet can fight on cost

So we will see satellite internet creating its own space and there may be a situation where it can give tough fight to terrestrial internet on low cost. The biggest factor affecting the cost of satellite bandwidth is not the cost of satellite but it is the high costs of satellite launch. Like, for example, cost of satellite launch by Arianespace's rocket is around $100 million after subsidies. SpaceX due to its backward integration offers the same at around $62 million and India’s ISRO is at $60 million and it is looking to reduce the cost even further and ISRO will launch all of its future heavy satellite on its own.

So due to heavy launch costs, the focus was always on to create long life satellites in order to get the maximum out of the launch costs and it was not possible to use new age technologies in space communication instantly as the same is being used in terrestrial communications like 3G/4G/5G. Further, the focus is always on reducing the weight of the satellite as every KG costs big to launch. So it has resulted in light weight space hardware and machinery which often creates problems in launching and sometimes entire satellites is destroyed.

So this risk of failure and high launch costs discouraged the satellite use for mass scale applications like personal internet. The high cost of a space program has traditionally put it beyond the reach of most countries. For example, Intelsat, the firm which currently operates more communications satellites than any other, has been around for 54 years and has launched just 94.

But space launch costs are declining fast and trend is expected to continue and costs will be reduced even faster which will pave the way for massive growth in space technologies for the benefit of army, industries and general public as a whole.

Along with ISRO, Elon musk owned SpaceX is doing great work in reducing the cost of launch rockets. Its Falcon 9 has reduced the cost of space travel to ISS (International space station) by almost 20 times at $2,720 per kilogram as compared to $54,500 per kilogram earlier. And with current focus, it is expected that space launch costs will go even lower due to focus on reuse of launch vehicle, more demand resulting in further cost reduction due to economies of scale, advanced engineering and technical advances. Reduced launch cost will result in heavier, strong, reliable, and better performing spacecraft to be developed at lower cost and this will revolutionize every sphere of connectivity. At present , due to weight issues more reliable and strong models are not being used but low launch costs will result in better design and materials which will further reduce the cost of space shuttle as the same can be designed keeping in view the performance rather than low weight.

So much work is under way in space technologies and as per our past experience commercial aspect can really transform anything and result in advance technologies and cost reductions. Earlier avatar of satellite internet was mainly for defense and national security where cost was never a constraint but now as people in remote areas has money for connectivity and industries are finding novel applications for satellite internet like IOT the satellite connectivity sector is going to witness radical innovations and investments to create the economies of scale.

Marine and Aerospace connectivity: Big growth factors in the near future

Indian Government in Dec-2018 has allowed internet connectivity for maritime and aerospace sector and this is one big event which will create the demand for satellite internet and attract more investments in the sector.

At present, I think maritime connectivity has high growth prospectus than aerospace because worldwide this industry is one of the few which has embraced satellite internet quite early. Just for a perspective, maritime connectivity in Europe is growing some 20% yearly and generates revenues of some $1 billion. Actually shipping sector due to its dynamics is more suitable for satellite internet. First of all, still sea route accounts for more than 90%of world trade and this is really big!! We think that now is the age of aviation but shipping is still the cheapest when it is about global trade.

VSAT provides these giant ships fast and reliable internet connectivity which is vital for their operation and safety in the vast sea. Further, internet connectivity is a major factor for employees while choosing shipping lines for jobs because they are away from their families for long long time so connectivity is a big factor for them. Same is true for passengers on cruise ships where internet connectivity is a major differentiating factor as they need fast and reliable internet for their entertainment, connectivity and business needs while at sea.

Also, fishing sector was one of the fastest in recent times in using VSAT on their vessels due to crew safety and welfare, weather mapping, regulations and vessel safety. India also has vast fishing lines and I think this is going to be one of the first to embrace satellite internet.

Across globe, maritime VSAT is set to grow fast and the same thing is true for indian shipping lines also. Global satellite leasing revenues for maritime applications alone are going to touch $1 billion by 2026 from the current levels of $500 millions.

For offering maritime connectivity to Indian and foreign vessels sailing into Indian waters, Nelco has already entered into partnership with global satellite communication giant Speedcast International Ltd. As per the deal customers/vessels of the both the companies will be able to connect to the network of both the companies while moving in or out of Indian waters. This is one of the first such partnership for Indian maritime connectivity.

Although there will be competition but i expect Nelco to capture significant share of maritime connectivity just like it did in Oil & Gas and ATM industry in the recent times where it has emerged as one of the fastest growing player. I am expecting Nelco to be very aggressive in its expansions.

Similarly, airlines are going to adopt VSAT technology at fast pace in the near future as just like maritime aerospace connectivity is proving to be the decisive factor in choosing the airlines by passengers. Further, the demand will be created by business class passengers for applications such as emails with large attachments, and video conferencing. 

There are some concerns over the rules by Indian authorities that satellite bandwidth can be taken only through ISRO and this will render satellite bandwidth very costly as even at present satellite bandwidth charges in India are some 6-7 times higher compared to other parts of the world. Due to capacity constraint in the satellite communication the charges are highest in India whereas for broadband the charges are lowest in India. But I think this was when ISRO was not having bandwidth capacity for leasing for commercial purposes but now after the launch of 4 giant GSAT satellites last year there will be no dearth of bandwidth capacity.

So Nelco is still in transition phase and this year will be even more significant as the focus is on maritime and aerospace connectivity and big investments will be done.

Continue to hold for further re-rating.

One last thing I would like to add is that I got so many queries from worried investors about the fall in the price of a stock which they have bought at higher price. Some gets desperate for non performance of their stock over long time. Like, take for example, Narayana Hrudayalaya and HCG which are one of my favorites in healthcare sector and I am investing in these stocks regularly for last 2 years but both these have fallen (although almost all the stocks have fallen some 40-50%) in last one year. But both have invested quite a lot in building capacities and it’ll take time for these capacities to reflect in the top and bottom line so for me current fall is a fantastic opportunity. Same is true for the likes of MCX, Laurus labs, Mahindra lifespace etc. which are fantastic stocks.

I see people getting worried when their stock is not valued, not tracked, not followed by the market and it lies low and down. I see them talking about PE ratio assigned, traded quantity and coverage by analysts and when these are missing from their stock they shiver with fear. But let me tell you one thing-Divine is not divine because of offerings. Offerings do not transform something into divinity..they can't even differentiate between a real or fake because mortal beings offer these as per their expectations. And divine is still divine even if not recognized by mortal beings and if we can see the wisdom level in our mortal world chances are much higher that a real divinity is missed by mortals as they always value bunch of offerings. But a true seeker always yearns for a Lord Buddha sitting alone under a tree…eyes closed...unnoticed…radiating divine…

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).