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Phoenix Mills
Key takeaways from Pune & Kurla site visit
Pune first to open, likely in Q1
We visited Market City, Pune and found that: 1) ~80% of the mall is leased at Rs60/sf;
2) 175 retailers are amidst fitouts—key being Star Bazar, PVR, Westside, M&S, Zara,
Nautica, Nike; and 3) most interiors, common areas, and services are under the
finishing/testing phase. While management guided for a March 2011 opening, we
believe end-Q1 is more likely, but foresee footfalls ramping up soon given the good
retail line-up.
Kurla mall progressing well; but with leasing at 65%, opening likely in Q2
We visited Kurla and found work progressing well: 1) the mall interiors are in the
finishing stages; 2) handover for fitouts to key anchors has begun—Big Cinemas,
Reliance Retail, M&S, Lifestyle, etc; 3) the office block pre-sold is also nearly ready
for delivery. Management expects to become operational by Q1 FY12; however, with
leasing still slow at ~65% with an average of Rs95/sf, we believe end-Q2, close to the
festive season, is more likely.
Quality retail asset play with near-term catalyst
We view Phoenix Mills as a quality retail asset play. It has prime asset locations in
Mumbai, Chennai, Bangalore, and Pune, and strong rental annuity, with its model
relatively insulated from sector/policy issues. We believe near-term catalysts are: 1) its
rental revision for 0.2msf in HSP over the next 3-6 months; 2) earnings surprise from
recognising commercial pre-sales in Q4 FY11; and 3) the opening of the Pune and
Kurla malls, and Hotel Shangri-la.
Valuation: compelling, our top pick in mid-caps
With the stock trading at: 1) a 58% discount to base NAV of Rs412; 2) a 21% discount
to High Street Phoenix, Mumbai’s value of Rs218; and 3) 1.5x P/BV—we see solid
return potential given its rental annuity model and upcoming undervalued mall and
hotel assets.
Phoenix Market City Pune
PML owns a 58.5% stake in Phoenix market City Pune, with 1.5 msf retail being
developed and 0.4 msf commercial space being developed. With 80% of mall
leased @ Rs60/sf, management guided for a March 2011 opening; however, we
believe it will be in end-Q1, but foresee footfalls ramping up soon given the
good retail line-up.
Phoenix Market City Kurla
Phoenix Mills owns a 24% stake in Phoenix Market City, Kurla. PML will
develop 1.4 msf of retail space, and 1.2 msf of commercial space totalling 2.6
msf. Management expects the mall to become operational by Q1 FY12; however,
with leasing still slow at ~65% with an average of Rs95/sf, we believe it is more
likely to be in end-Q2/early Q3, near the festive season.
Valuations compelling at 58% disc 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 in: 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 good valuation
support, we believe other retail and hotel assets under development are available
cheap. We believe the stock offers re-rating potential and is a good proxy to play
the retail recovery cycle.
Trading at 33% discount to our 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 years’ 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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Phoenix Mills
Key takeaways from Pune & Kurla site visit
Pune first to open, likely in Q1
We visited Market City, Pune and found that: 1) ~80% of the mall is leased at Rs60/sf;
2) 175 retailers are amidst fitouts—key being Star Bazar, PVR, Westside, M&S, Zara,
Nautica, Nike; and 3) most interiors, common areas, and services are under the
finishing/testing phase. While management guided for a March 2011 opening, we
believe end-Q1 is more likely, but foresee footfalls ramping up soon given the good
retail line-up.
Kurla mall progressing well; but with leasing at 65%, opening likely in Q2
We visited Kurla and found work progressing well: 1) the mall interiors are in the
finishing stages; 2) handover for fitouts to key anchors has begun—Big Cinemas,
Reliance Retail, M&S, Lifestyle, etc; 3) the office block pre-sold is also nearly ready
for delivery. Management expects to become operational by Q1 FY12; however, with
leasing still slow at ~65% with an average of Rs95/sf, we believe end-Q2, close to the
festive season, is more likely.
Quality retail asset play with near-term catalyst
We view Phoenix Mills as a quality retail asset play. It has prime asset locations in
Mumbai, Chennai, Bangalore, and Pune, and strong rental annuity, with its model
relatively insulated from sector/policy issues. We believe near-term catalysts are: 1) its
rental revision for 0.2msf in HSP over the next 3-6 months; 2) earnings surprise from
recognising commercial pre-sales in Q4 FY11; and 3) the opening of the Pune and
Kurla malls, and Hotel Shangri-la.
Valuation: compelling, our top pick in mid-caps
With the stock trading at: 1) a 58% discount to base NAV of Rs412; 2) a 21% discount
to High Street Phoenix, Mumbai’s value of Rs218; and 3) 1.5x P/BV—we see solid
return potential given its rental annuity model and upcoming undervalued mall and
hotel assets.
Phoenix Market City Pune
PML owns a 58.5% stake in Phoenix market City Pune, with 1.5 msf retail being
developed and 0.4 msf commercial space being developed. With 80% of mall
leased @ Rs60/sf, management guided for a March 2011 opening; however, we
believe it will be in end-Q1, but foresee footfalls ramping up soon given the
good retail line-up.
Phoenix Market City Kurla
Phoenix Mills owns a 24% stake in Phoenix Market City, Kurla. PML will
develop 1.4 msf of retail space, and 1.2 msf of commercial space totalling 2.6
msf. Management expects the mall to become operational by Q1 FY12; however,
with leasing still slow at ~65% with an average of Rs95/sf, we believe it is more
likely to be in end-Q2/early Q3, near the festive season.
Valuations compelling at 58% disc 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 in: 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 good valuation
support, we believe other retail and hotel assets under development are available
cheap. We believe the stock offers re-rating potential and is a good proxy to play
the retail recovery cycle.
Trading at 33% discount to our 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 years’ 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.
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