Edelweiss Research - December, 23 2010- Phoenix Mills

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Phoenix Mills (PHNX IN, INR 219, Buy)

n  Quality retail/hospitality asset play on Indian consumption story

The Phoenix Mills (PML), with its successful High Street Phoenix (HSP) property in Mumbai and upcoming Market City projects in Tier I cities across India, offers a unique play on the Indian consumption story. Moreover, it enjoys strong track record of project execution and established tenant relationships. With these, it is poised to benefit from demand revival for retail space, driven by rise in discretionary spending and recovery in retailers’ expansion plans.

n  Rental income to rise from INR 0.8 bn to INR 2.7 bn in FY12E

With ~4.4 msf space of Market City projects (PML’s share: 1.64 msf) becoming operational by FY12, we estimate PML’s rental income to grow from INR 0.8 bn in FY10 to INR 2.7 bn in FY12E and INR 3.5 bn in FY13E.

n  High Street Phoenix, a cash cow; valued at INR 142/share

PML’s HSP property at Lower Parel, Mumbai offers a mix of retail, office and hotel space at a single location and generated ~INR 0.8 bn of rentals across ~0.9 msf in FY10 (ex-service charges). With ~0.15 msf of anchor space up for renegotiation in CY11 and Palladium luxury mall (~0.3 msf) to earn full year rentals from FY11 we expect 34% CAGR rental growth over FY10-13E to ~INR 1.85 bn). We value this project at GAV of ~INR 20.6 bn (INR 142/share).

n  Market Cities to drive rentals, valued at INR 89/share

With retail assets of ~4.4 msf (~1.6 msf PML’s economic interest) becoming operational by FY12E, we estimate gross rentals of ~INR 4 bn by FY13E on the back of robust pre-leasing activity. Further, PML’s strategy of front-ending cash flows through sale of development assets in commercial/residential space provides comfort on the liquidity front. We value the Market City assets at INR 12.9 bn (INR 89/share), adjusted for associate level debt.

n  Outlook and valuations: Poised for growth; initiate coverage with ‘BUY’

Our FY12 GAV of INR 294/share includes INR 231 for HSP/Market City projects, INR 29 for 53% economic interest in HSP Shangri-La Hotel and INR 34 for other investments. Adjusting for FY12E net debt of INR 31/share (ex-Shangri-La CDs), we arrive at FY12 NAV of 263/share, which implies 17% discount to NAV. Hence, we initiate coverage with ‘BUY/Sector Performer’.