The Phoenix Mills (2QFY15) : Hotel losses mask strong mall operations. Downgrade to NEUTRAL :: HDFC Sec, link

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Hotel losses mask strong mall operations
The Phoenix Mills (PHNX) reported standalone
2QFY15 PAT of Rs 365mn, in line with our estimates.
However, PHNX’s consolidated 2QFY15 PAT of Rs
209mn was lower than standalone profits for the
second consecutive quarter owing to accounting
losses of Rs 389mn at the Palladium hotel in 2QFY15
(loss of Rs 268mn in 1QFY15) . As a result, although
we retain out FY16-17E estimates, we cut our FY15E
EBITDA and PAT estimates by 11% and 24%
respectively to factor in higher losses at the
Palladium hotel.
However, PHNX’s operating metrics remained strong
with 25% YoY consumption growth and 15% net
rental growth across malls. PHNX’s development
portfolio continues to see robust sales off take with
Rs 20.2bn of cumulative sales till Sep-14 of which Rs
14.0bn has been collected till date. Although we like
PHNX as a play on the Indian urban consumption
revival theme, we believe that the recent run up in
stock price leaves limited upside at our TP of Rs
390/sh (CMP Rs 376). Hence, we cut our rating to
NEUTRAL from BUY. Any upgrades to earnings will be
driven by improved operating performance at the
Palladium hotel.
 Market Cities witness traction in rentals : 2QFY15
rentals across malls stood at Rs 1.6bn, up 15% YoY with
25% YoY ramp up in consumption across malls (Kurla
saw 40% YoY growth and Chennai clocked 53% YoY
growth). The Palladium hotel (erstwhile Shangri-La)
hotel, achieved 54% occupancy in 2QFY15 in spite of
Shangri-La not being present as the hotel operator,
which is a positive. PHNX is in advanced discussions
with potential operators for the hotel.
 Introduction of REITs/CMBS possible triggers :
With the recent issuance of CMBS worth Rs 5.3bn by
DLF (SELL) at a coupon of 10.9% for Emporio Mall, we
believe that PHNX may also explore the option of
converting existing lease rental discounting (LRD) loans
to CMBS to achieve better capital efficiency. Further,
any clarity emerging on taxation issues with respect to
REITs in India may enable PHNX to achieve
compression in cap rates.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009823