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UBS Investment Research
Phoenix Mills
Q311: results in line; robust retail pick-up
Results largely in line with expectations
Phoenix Mills (PML) reported revenues of Rs451m (+2% QoQ, +49% YoY). Net
income grew 8% QoQ to Rs238m, while EBITDA margins were steady at 73%,
both in line with our expectations. Strong YoY growth was due to higher
operational area and increased consumption at HSP vs. the previous year.
Sequential revenue growth was largely driven by higher revenue-sharing income.
Operationally doing well, with debt levels in check
1) Retail recovery was strong with 1.5m footfalls in December 2010 at HSP, which
drove higher revenue-sharing of Rs11m/month (vs. 10m in Q2); 2) Phoenix Market
City update—Pune, 130 retailers commenced fitouts, with the mall expected to
open by March 2011; Bangalore and Kurla, handover for fitouts commenced with
malls expected to open by Q1 FY12; 3) Hotel Shangri-La is expected to open in
Q2 FY12; and 4) Paid down its standalone debt, with consolidated net debt also
comfortable at Rs5.2bn (D/E of 0.4).
Key catalysts: sustained retail growth, timely launch of Market City’s
1) Strong rental revision for 0.2msf in HSP over the next 3-6 months raising
average rentals of Rs160/sf by ~20%; 2) Good/early launch of Market City’s and
Shangri-La vs. targeted next 3-6 months; 3) Earnings surprises from recognising its
commercial/ residential pre-sales; and 4) steps to consolidate ownership in Market
City projects.
Valuation: maintain Buy Rating; attractive at 50% discount to NAV
We believe HSP’s value (Rs218) based on its rental yield provides good valuation
support; other retail and hotel assets under development are available cheaply. Our
Rs310 price target is based on a 25% discount to NAV of Rs412.
Results analysis
Revenues grew 49% YoY and 2% QoQ to Rs 451mn, slightly below our
expectations. Net Income grew 8% QoQ and 1.3x YoY to Rs 238 mn, in line
with our expectations. EBITDA Margins were at 73% in Q3 (vs 72% in Q2), inline
with our expectations. We believe results year-over-year have been strong
due to higher operational area and increased consumption at HSP vs. previous
year.
Valuation compelling at 50% discount to NAV
Phoenix is differentiated by its unique rental annuity model. Its annuity (53% of
NAV) is a good valuation support. We believe a combination of a rental yield
model and NAV-based valuations methodology is most appropriate.
Our price target of Rs310 is based on a 25% discount to NAV of Rs412,
factoring risks of delays for its upcoming market city malls. We ascribe a lower
discount to Phoenix than to its Tier-II peers (30-35%) due to: 1) its strong rental
annuity and deleveraged balance sheet; 2) the near-term execution visibility of
Market City projects.
Our NAV estimate of Rs412 is based on the following assumptions: 1) Rs218
per share for High Street Phoenix using a rental-yield model with a 9% cap-rate,
5% terminal growth; and Phase IV land (0.25msf) valued at Rs10,000/sf; 2) a
3.75msf economic interest in Market City projects (ex-hotels); 3) a 5.1msf
economic interest in EWPDL and BARE projects; and 4) Rs15-20m capital cost
per room for 1,000 rooms following its 75% stake in hospitality venture. This
apart, we have factored 1) total consolidated net-debt of Rs8.8bn, 2) cost of
capital of 13%; and 3) a tax rate of 30%
With HSP’s strong rental annuity (Rs218/share) providing a good valuation
support, in our view, other retail and hotel assets under development are
available cheaply. We believe the stock offers a re-rating potential and is a good
proxy to play the retail recovery cycle.
Bull-case and bear-case NAV
With NAVs likely to remain volatile during recovery cycles, we highlight the
bull-case and bear-case scenario for Phoenix’s NAV. The bear case: 1) factors in
2% terminal growth for HSP at 10% cap-rate (53% of NAV), 2) values EWDPL,
BARE and other hospitality projects on basis of undeveloped land reserves
(22% of NAV); and 3) factors in 1-2 yrs delays in the execution of malls and
hotel projects (Market City projects, 25% of NAV). Our bull case builds in 1) a
9% cap-rate for HSP’s valuation; 2) 10% higher prices/rentals for Market City
projects and other assets; and 3) a faster execution cycle. We believe this
provides a good perspective on NAV downside risks and upside potential.
Phoenix Mills
Phoenix Mills is a leading Indian developer of large-format retail-led mixed use
developments. Its developments are in prime locations feature retail stores;
hypermarkets; multi-screen theatres; entertainment zones; food courts; and
hotels, and total more of 2.5msf. The company began operations as a textile
manufacturing company in 1905 on 17.3 acres of land in Lower Parel, Mumbai.
In 1987, the company largely exited the textile sector and entered the real estate
market in Mumbai.
Statement of Risk
Key risks to PM include a slowdown in retail recovery, a deceleration in
economic growth and FDI policy risks in retail
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Phoenix Mills
Q311: results in line; robust retail pick-up
Results largely in line with expectations
Phoenix Mills (PML) reported revenues of Rs451m (+2% QoQ, +49% YoY). Net
income grew 8% QoQ to Rs238m, while EBITDA margins were steady at 73%,
both in line with our expectations. Strong YoY growth was due to higher
operational area and increased consumption at HSP vs. the previous year.
Sequential revenue growth was largely driven by higher revenue-sharing income.
Operationally doing well, with debt levels in check
1) Retail recovery was strong with 1.5m footfalls in December 2010 at HSP, which
drove higher revenue-sharing of Rs11m/month (vs. 10m in Q2); 2) Phoenix Market
City update—Pune, 130 retailers commenced fitouts, with the mall expected to
open by March 2011; Bangalore and Kurla, handover for fitouts commenced with
malls expected to open by Q1 FY12; 3) Hotel Shangri-La is expected to open in
Q2 FY12; and 4) Paid down its standalone debt, with consolidated net debt also
comfortable at Rs5.2bn (D/E of 0.4).
Key catalysts: sustained retail growth, timely launch of Market City’s
1) Strong rental revision for 0.2msf in HSP over the next 3-6 months raising
average rentals of Rs160/sf by ~20%; 2) Good/early launch of Market City’s and
Shangri-La vs. targeted next 3-6 months; 3) Earnings surprises from recognising its
commercial/ residential pre-sales; and 4) steps to consolidate ownership in Market
City projects.
Valuation: maintain Buy Rating; attractive at 50% discount to NAV
We believe HSP’s value (Rs218) based on its rental yield provides good valuation
support; other retail and hotel assets under development are available cheaply. Our
Rs310 price target is based on a 25% discount to NAV of Rs412.
Results analysis
Revenues grew 49% YoY and 2% QoQ to Rs 451mn, slightly below our
expectations. Net Income grew 8% QoQ and 1.3x YoY to Rs 238 mn, in line
with our expectations. EBITDA Margins were at 73% in Q3 (vs 72% in Q2), inline
with our expectations. We believe results year-over-year have been strong
due to higher operational area and increased consumption at HSP vs. previous
year.
Valuation compelling at 50% discount to NAV
Phoenix is differentiated by its unique rental annuity model. Its annuity (53% of
NAV) is a good valuation support. We believe a combination of a rental yield
model and NAV-based valuations methodology is most appropriate.
Our price target of Rs310 is based on a 25% discount to NAV of Rs412,
factoring risks of delays for its upcoming market city malls. We ascribe a lower
discount to Phoenix than to its Tier-II peers (30-35%) due to: 1) its strong rental
annuity and deleveraged balance sheet; 2) the near-term execution visibility of
Market City projects.
Our NAV estimate of Rs412 is based on the following assumptions: 1) Rs218
per share for High Street Phoenix using a rental-yield model with a 9% cap-rate,
5% terminal growth; and Phase IV land (0.25msf) valued at Rs10,000/sf; 2) a
3.75msf economic interest in Market City projects (ex-hotels); 3) a 5.1msf
economic interest in EWPDL and BARE projects; and 4) Rs15-20m capital cost
per room for 1,000 rooms following its 75% stake in hospitality venture. This
apart, we have factored 1) total consolidated net-debt of Rs8.8bn, 2) cost of
capital of 13%; and 3) a tax rate of 30%
With HSP’s strong rental annuity (Rs218/share) providing a good valuation
support, in our view, other retail and hotel assets under development are
available cheaply. We believe the stock offers a re-rating potential and is a good
proxy to play the retail recovery cycle.
Bull-case and bear-case NAV
With NAVs likely to remain volatile during recovery cycles, we highlight the
bull-case and bear-case scenario for Phoenix’s NAV. The bear case: 1) factors in
2% terminal growth for HSP at 10% cap-rate (53% of NAV), 2) values EWDPL,
BARE and other hospitality projects on basis of undeveloped land reserves
(22% of NAV); and 3) factors in 1-2 yrs delays in the execution of malls and
hotel projects (Market City projects, 25% of NAV). Our bull case builds in 1) a
9% cap-rate for HSP’s valuation; 2) 10% higher prices/rentals for Market City
projects and other assets; and 3) a faster execution cycle. We believe this
provides a good perspective on NAV downside risks and upside potential.
Phoenix Mills
Phoenix Mills is a leading Indian developer of large-format retail-led mixed use
developments. Its developments are in prime locations feature retail stores;
hypermarkets; multi-screen theatres; entertainment zones; food courts; and
hotels, and total more of 2.5msf. The company began operations as a textile
manufacturing company in 1905 on 17.3 acres of land in Lower Parel, Mumbai.
In 1987, the company largely exited the textile sector and entered the real estate
market in Mumbai.
Statement of Risk
Key risks to PM include a slowdown in retail recovery, a deceleration in
economic growth and FDI policy risks in retail
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