Phoenix Mills- Enhanced visibility on earnings growth :: Macquarie Research,

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Phoenix Mills
Enhanced visibility on earnings growth
Event
 We hosted the Phoenix Mills 1QFY12 results conference call today. After
posting encouraging results, management commentary reinforced our positive
view on Phoenix’s asset value and visibility of earnings growth.
Impact
 Phoenix reported encouraging results. PAT came in 26% ahead of our
estimates, primarily driven by solid performance at the existing Phoenix Mills
property in Lower Parel, Mumbai. Importantly, management commentary on
the call provided comfort that trends in earnings growth and strong cash flows
are poised to continue. The visibility on this is provided by:
 Rental renegotiations at High Street Phoenix. Management expects
the average rental run rate to reach Rs175/ sqft/ month (from Rs165
currently). This will be driven primarily by restructuring of the space
currently occupied by one anchor tenant (Big Bazaar).
 New assets coming on stream: Phoenix MarketCity, Pune (1.2mn sqft)
has already started operations with 80 retailers in late June. Other
MarketCities in Bangalore and Kurla (Mumbai) are likely to commence
operations in the next two quarters. In addition, the Shangri-La Hotel in
Mumbai is likely to be (soft) launched by December 2011. This will be
followed by the fourth phase of HSP over next two years.
 Sales of residential/ commercial assets: We also expect cash inflows
in FY12 from the non-traditional (retail) revenue streams. The soft launch
of residential property in Chennai has progressed well. 25% of the
0.25mn sqft project has been sold in a pre-launch. Notably, over 50% of
the 0.25mn sqft of commercial office space in Kurla has now been sold.
This will contribute around Rs1.35bn.
Earnings and target price revision
 No change
Price catalyst
 12-month price target: Rs270.00 based on a Sum of Parts methodology.
 Catalyst: Progress on upcoming and new projects, rent/volume trends in retail
leasing and fund raising
Action and recommendation
 We believe Phoenix is the best way to play encouraging trends in the Indian
retail sector. This is an earnings growth story with visibility of delivery within the
next 24-36 months. This differentiates it from most other Indian developers with
long dated land banks and low free cash flow yields. Cash flows are expected to
strengthen as assets (hotel and retail) come on stream and residential sales
pick up. This will also provide stock catalysts in the next 2-4 quarters. Any
positive news flow on easing of rules regarding FDI in multi brand retail in India
could provide additional triggers. We reiterate our Outperform rating.