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Phoenix Mills Limited- Real estate play on retail revival
Investment rationale
Stable revenues from rental model
Phoenix Mills Ltd. (Phoenix) is the pioneer of utilising textile mill land in Mumbai
for retail and entertainment purposes. In 1987, the company developed High
Street Phoenix, a first of its kind consumption centre, on its mill land. Phoenix
owns and operates retail-led mixed use projects and its focus on high quality
retail projects with rental income are the key differentiators.
Core value derived from High Street Phoenix
High Street Phoenix is strategically located at Lower Parel and has now become
South/Central Mumbai's leading retail and entertainment destination. This
key property comprises ~3.2m sq ft of development including retail and
entertainment, residential, commercial, parking space and a multiplex.
High visibility on execution of market city projects
Phoenix Mills is developing four market city projects at Kurla (Mumbai), Pune,
Bangalore and Chennai on the lines of High Street Phoenix. Construction is
in advanced stages and pre-leasing activities have been implemented for the
market cities. All four projects are expected to commence operations by end
FY12. Besides retail, Phoenix Mills is also diversifying into hotels. Its first hotel
project, Shangri-La at Lower Parel, is expected to open in the next six months.
Presence in Tier II and III cities
Phoenix holds 40% in EWDPL (Entertainment World Developers Ltd) and 74%
in BARE (Big Apple Real Estate). These projects, primarily retail, are located in
Tier II and III cities in India. EWDPL has three operational retail projects in
Indore and Nanded while Big Apple has one operational mall in Lucknow.
Valuation and outlook
We reiterate a BUY on the stock with a target price of INR274 comprising: 1)
INR124 for High Street Phoenix; 2) INR96 for market city projects; 3) INR24
for 53% economic interest in Shangri-La hotel; 4) INR8 for 75% stake in Phoenix
Hospitality; and 5) INR22 for stake in EWDPL and Big Apple Real Estate.
Investment rationale
Flagship development - High Street Phoenix
High Street Phoenix is company's key property and is the main source of rental income
currently. In FY10, the property generated revenues of INR1.15bn, which is expected
to increase to nearly INR1.88bn and INR2.01bn by FY11e and FY12e, respectively.
This sharp increase has been primarily on account of higher rental contribution from
Palladium (0.3m sq ft of luxury retail space; ~95% leased and ~90-92% operational)
which commenced operations in September 2009.
Phoenix, one of the first to convert textile mill land into real estate
High Street Phoenix is a pioneering concept of retail-centric mixed use development in
India, which includes retail and entertainment space, residential area, commercial
and parking space, multiplex and a five-star deluxe hotel.
The total area of High Street Phoenix is ~3.2m sq ft spread over 17.3 acres. Development
of the project began in 1987. So far, three phases comprising ~3m sq ft have already
been completed and construction of the fourth phase of ~0.25m sq ft is still to commence.
High Street Phoenix has a weighted average rental of ~INR150/sq.
ft./mth (ex-Palladium)
With the opening of Palladium, weighted average rentals are ~INR157/sq. ft./mth.
Besides, leases of three of the anchor tenants (Big Bazaar, Pantaloon and Lifestyle) are
expected to be renewed from Dec 2010 to Sep 2011; this is expected to further
enhance average rentals. Moreover, once Phase IV of ~0.25m sq ft is completed,
rental income will increase further.
Distinctive market city model
Phoenix Mills plans to replicate the successful High Street Phoenix model across other
locations in the country. The company is currently developing four market city projects at
Kurla (Mumbai), Pune, Bangalore and Chennai. All projects are strategically located
and are in the vicinity of high catchment areas. Funding both debt and equity has been
tied-up for all four market cities and construction of these projects is in advanced stages.
Market City projects are designed to be large scale retail-led real estate developments
in city centre locations. The projects will have a mix of retail and entertainment space,
food & beverage outlets, multiplexes and office/residential space. Such a format is
expected to attract a wide spectrum of tenants and consumers.
In order to strengthen its market city projects, Phoenix Mills is diversifying into hotels. The
company is developing a ~420 key hotel to be operated by Shangri-La at High Street
Phoenix and has acquired 75% stake in Phoenix Hospitality which has equity interest in
hotel properties being developed in Kurla (Mumbai), Pune, Chennai and Agra.
Strong execution
With land in place, funding tied-up and construction and leasing activity in full swing,
there is high visibility on execution of market city projects. Pune, Bangalore, Chennai
and Kurla market cities are 75%, 70%, 60% and 55% leased respectively and all
projects are expected to become operational by end FY12.
Presence in smaller cities through EWDPL and Big Apple
EWDPL focuses on real estate development, primarily retail in Tier II and III cities
under the brand 'Treasure'. The company has a portfolio of ~13m sq ft (EWDPL's
share), of which ~0.8m sq ft comprising three retail projects at Indore and Nanded
are operational. Big Apple Real Estate develops malls under the brand 'Phoenix United'
in north India, particularly Uttar Pradesh. The company's first mall opened recently in
Lucknow while additional projects are planned in Lucknow, Agra and Bareilly.
Valuation and outlook
We value Phoenix on an SoTP basis and arrive at a target price of INR274 based on the
following assumptions: 1) High Street Phoenix, Market City projects and Shangri-La
hotel are valued on a DCF basis with a terminal growth assumption of 5%. 2) 75% stake
in Phoenix Hospitality is taken at book value i.e., INR1.1bn representing the amount
invested. 3) In EWDPL and BARE, operational malls are valued based on capitalisation
of rentals, while other projects are valued at land cost. 4) WACC is 14.5%.
The following factors provide potential for upside to our target price: 1) Phoenix Mills is
moving to a rental model based on minimum guarantee/revenue share, whichever is
higher. Revenue share could result in higher effective rentals. 2) EWDPL is planning an
IPO which is expected to value the company higher than our estimates.
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