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PHOENIX MILLS 2QFY11; Above est; Higher stake in key Market City projects positive; Traction in residential and commercial sales; Buy
- Phoenix Mills’ (PHNX IN, Mkt Cap US$0.8b, CMP Rs250, Buy) 2QFY11 results were above our estimates. Revenues stood at Rs443m up 68% YoY (v/s est Rs412m). The strong YoY growth in revenue is primarily due to contribution from premium mall, Palladium, at High Street Phoenix, Mumbai.
- EBITDA was up 75% YoY at Rs317m (v/s est Rs290m), while EBITDA margin jumped 30pp to 72% (v/s est 69%). This was primarily due to operational efficiencies like lower energy consumption, decline in promotional expenses and lower repairs and maintenance cost.
- PAT grew 26% YoY to Rs221m (v/s est Rs163m) also on account of 1) lower than expected interest expense due to reduction in outstanding standalone loan from Rs1.6b in 2QFY10 to Rs851m in 2QFY11, and 2) higher than expected contribution from other income. However, YoY PAT growth is lower than revenue growth due to huge ~170% YoY jump in depreciation attributed to Palladium mall and the parking facility.
Higher stake in key Market City projects positive
- During 2QFY11, PML has subscribed to the right issue of Market City projects in Bangalore (E). Its stake has increased to from 28.1% to 32.7%. The management has mentioned that the higher stake has been valued at Rs185m.
- The management has also hinted at increasing its stake in Market City projects at Pune by 8% to 58.5% through the acquisition of the entire shareholding of Butala Farm Lands Pvt Ltd. The transaction has been valued at Rs250m which implies Rs3.12b equity valuation for the project.
- We expect the higher stake in both projects to be value accretive for PML (Rs4/share to its FY12 NAV) on the backdrop of improving outlook for retail and commercial verticals.
Update on High Street Phoenix (HSP), Mumbai
- Palladium at High Street Phoenix in Lower Parel is now fully operational and ~95% has been leased out. The last lease transactions at Palladium have been concluded at lease rentals of Rs280-300/sf/month (minimum guarantee). With this, key stores that opened during 1HFY11 at HSP include Hamleys, Landmark Bookstore, Zara, Burberry, The Comedy Store, etc. Zara has started its operating in 1QFY11 with 8% revenue sharing agreement plus minimum guarantee. The weighted average lease rental for Palladium stood at Rs185-190/sf with minimum guarantee.
- The management has mentioned about strong footfalls of over one million and one of the highest offtake ever during the months of August-September of 2010 in HSP, which augurs well for PML since it has entered into revenue sharing agreements with lot of its key tenants.
- HSP is likely to witness strong growth over FY10-12 driven by 1) re-pricing of old rental contracts of ~150,000sf by ~100% in FY11-12, 2) start of operations of 400-room Shangri-La hotel by FY11, 3) leasing of 35,000sf of incremental commercial space by FY11-12 and 4) possible addition of Phase 4 retail area of ~300,000sf (company contemplating converting it to residential).
- Post the planned expansion the weighted average rentals at HSP are likely to increase from ~Rs170/sf/mth currently to ~Rs190/sf/mth. We estimate the average quarterly run rate of rental income from HSP at Rs440m/qtr by 1QFY12 (excluding revenues from hotel).
Traction in JDA with PMC for Bangalore Residential Development and strong response in commercial sale
- PML has historically been focused on large format retail, hotel and commercial development. However, the company has decided to expedite monetization through residential launches and commercial sale. At some of its large format large format projects at Bangalore (East and West) and Chennai, PML also has some area allocated to residential development. PML has also indicated that they are contemplating converting a large part of its retail dedicated land bank at Bangalore West to residential development, while they are seeking Government permission to convert part of retail area in phase 4 at its High Street Phoenix, Mumbai project.
- During 2QFY11, PML has also finalized the term of joint development model with Phoenix Market City, Bangalore. The management has indicated that as per the agreement, Island Star (the land owner) would be responsible for approvals with 25% revenue share, while PMC would be undertaking construction and sales & marketing activities for remaining 75% of revenue share.
- PML has also decided to monetize a part of its commercial projects at Market City Kurla and Pune. During 1HFY11, the company has sold ~0.13msf commercial space (out of 0.23msf planned) at Pune at an average realization of Rs6,500/sf (total sales value: Rs850m of which the company has received ~Rs500m till 1QFY11) and ~80% of Kurla project called 15LBS (out of 0.25msf planned) at an average realization of Rs9,000/sf. However, revenue from Kurla project is expected to be recognized by 4QFY11, while the revenue from Pune project will be recognized in 1HFY12.
- We believe early monetization is a positive for PML as it would expedite its cash flow.
Update on the progress of other key Market City projects
- Projects in Market City Kurla and Pune are likely to be operational in 4QFY11, while for Bangalore (E) and Chennai projects, the retail malls are expected to be operational in 4QFY11 and 1QFY12 respectively.
- There has been a delay in start of operations of 400-room Shangri-La hotel. Management has guided 4QFY11 as target operational date (earlier expectation 3QFY11). Currently the project is at advance stage of operation with façade and installation work in progress. PML has 51% stake in this property. Hotel projects at Kurla and Pune are also in the advance stage of financial closure.
Other update
- During 2QFY11, Market City Resources Pvt Ltd, a 100% subsidiary of PML, has planned to move into the services and advisory vertical for providing mall management services. It has finalized the terms for providing such services to Phoenix Market City, Bangalore and is expected to finalize the terms with other projects shortly.
- The management expects to achieve overall 5-6% of revenue in the form of base management fees (~2.4% of gross operating revenue), incentive management fees (~3% of gross operating profit), technical fees, leasing fees, etc.
Valuation and view
- We believe PML is a unique play on the booming domestic consumption story, without retail specific risks. We expect the increase in stake in both the Market City projects at Bangalore and Pune to be value accretive for PML on the backdrop of improving outlook for retail and commercial vertical and likely to contribute Rs4/share to its FY12 NAV. Hence we are revising our revenue estimate to Rs266/share.
- During 1QFY11, PML’s 40% associate company Entertainment World Developers (EWPL) filed its prospectus with SEBI on July-10. We have currently valued PML’s 40% stake in the entity at book value of Rs2.5b. EWPL is currently developing 23.3msf of retail area across 14 projects in 8 cities across India. Successful fund raising by EWPL at attractive valuations would be NAV accretive for PML.
- Our FY12 NAV for PML is Rs266/share, the retail vertical forms 72% of GAV while the commercial and hotel verticals each form 10% of GAV.
- The stock trades at 2x its FY12E adjusted book value of Rs121.5/share, and 6% discount to our NAV of Rs266/share. Maintain Buy.
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