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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.
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.
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).
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.
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’.
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