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UBS Investment Research
Phoenix Mills
Q uality asset play on retail growth
Event: recent management meeting underscores strong retail trends
Management highlighted: 1) strong retail consumption trends likely to drive up
HSP rentals with revenue sharing to touch Rs17m/month by December 2011
versus Rs13m/month now; 2) Pune witnessing similar trends—revenue sharing
already kicking in for a few stores, food court opening in October, PVR-multiplex
to open shortly; 3) Bangalore (October 2011), Kurla (January 2012) opening
shortly to capture retail growth, most capex is complete.
Impact: maintain our forecast for 37% earnings CAGR for FY11-14E
We expect growth to be driven by: 1) the recent rental re-negotiations; 2) uptick in
retail revenue sharing; and 3) rental contributions from the upcoming Pune,
Bangalore, and Kurla malls. Phase II of growth from sales of office and residential
projects (4msf) in Kurla, Pune, Chennai, Bangalore will boost cash flows over the
next 1-2 years, in our view.
Action: reiterate Buy rating; our top midcap pick in property
Key potential triggers intact: 1) successful opening of Bangalore, Kurla malls and
Hotel Shangri-La by 4QFY12; 2) strong pre-sales for its office/residential launches
at Kurla, Pune, Bangalore, Chennai over the next two years; 3) interest savings
from re-structuring of construction finance to securitized rentals; and 4) FDI in
retail. We believe risks include expensive buyouts, and inefficient cash usage amid
net debt of Rs9bn, which may rise in the near term.
Valuation: compelling at 52% discount to NAV
Our price target is at a 25% discount to NAV of Rs412. With the stock trading
below our ascribed value for HSP, Mumbai’s value of Rs218, and 1.7x P/BV, we
see solid upside potential given its rental annuity model and undervalued mall and
hotel assets
Quality retail asset play—top midcap pick
We believe Phoenix Mills (PML) will evolve as a leading developer/owner of
large-format retail malls with a pan-India presence. It is differentiated by its: 1)
prime-location assets across key cities, including Mumbai, Chennai, Bangalore,
and Pune; 2) steady rental annuity model; 3) strong execution track record; 4)
unique asset-holding ownership structure and with minimal balance sheet risk.
We expect Phoenix to become India’s largest retail mall owner managing retail
space of 7msf (economic interest of 3msf) with rentals of Rs5bn by FY14E.
Phoenix has largely focused on retail malls (76% of NAV). The company’s
flagship mall High Street Phoenix (HSP) in Mumbai is its strongest cash
generator. We value this asset at Rs218/share (53% of NAV) and believe it sets
a benchmark for creating similar value at its upcoming large format malls (23%
of NAV) at key locations in Mumbai, Bangalore, Chennai and Pune. This apart,
the company is also developing office/residential and hotel projects – plans are
underway to develop 15msf over the next 3-years. We forecast the company to
report 37% earnings CAGR over FY11-14E.
We believe Phoenix’s rental annuity (53% of NAV) provides good support for
its valuation and reduces its risk profile relative to peers, whose developmental
portfolios largely dominate (60-85%) their NAVs. Though, the stock has
relatively done better than peers, outperforming the Sensex by 14% over last 6-
months; we see further upside potential with valuations compelling at 52%
discount to NAV and its business model at inflection point of strong growth. We
consider near-term weakness in stock as a good buying opportunity - offers a rerating
potential and is a good proxy to retail growth.
Near-term catalysts
Strong retail growth
Retail momentum continues to remain robust with High Street Phoenix (HSP).
Management highlighted, revenues sharing contribution from its flagship mall
are expected to grow to Rs17m/month by December 2011 (versus Rs13m/month
currently). With pending renewals of 50,0000sf of anchor tenant in Q3, we
believe rental revisions with revenue sharing will drive rentals higher. Hotel
Shangri-La is scheduled to open in Jan’12 and we expect 50,000sf of prime
Shangri-La retail space to be leased at prime rental rates of Rs400-500/sf,
shortly. We regard HSP as a significant revenue generator that will drive nearterm
earnings CAGR of 37% over FY11-14E and set a benchmark for Phoenix’s
upcoming Market City developments. MarketCity Pune also opened well with
few stores already contributing on a revenue sharing basis. Additionally,
MarketCity Bangalore (75% leased @ Rs60/sf) is likely to open shortly in
October 2011 with Kurla (70% leased @ Rs95/sf) likely by Dec’11/Jan’12. We
foresee visible signs of strong retail demand across these key cities, Hotel
ShangriLa launch expected over the next 6 months as near-term catalysts for the
stock.
Good pre-sales responses to office, residential launches
Mgmt highlighted the focus is on monetization of commercial inventory at
Kurla & Pune. PML already launched ‘15LBS’ at Kurla (0.25msf 75% sold vs.
60% at Q4) & 0.25msf of office & retail space at Pune (sold out). With plans to
launch more commercial space in Kurla (0.8msf), more inventory at Pune, we
see commercial sales picking up in 2012. Further, residential launches are
gaining momentum with 1) Bangalore East & West projects expected to launch
shortly 2) Initial response to Chennai’s residential soft launch has also been
good. We expect a good sales response to these projects to drive cash flows.
Interest costs saving, given re-structuring initiatives
Gross debt is high currently with net debt at Rs 9bn (vs. Rs 7.9bn inQ1)
However, we are comfortable given: 1) ongoing focus on monetization of
commercial inventory at Kurla, Pune and residential launches at Bangalore and
Chennai; 2) visible pipeline of key launches at MarketCity Bangalore, Kurla
Shangri-La in the next six months. Further, management is focused on
restructuring construction debt into securitized rentals of its malls. We expect
these initiatives to lower interest cost from 15% to ~13% over the next 12
months.
Focus on execution
We expect Phoenix’s strong thrust on execution to result in 4.4msf of new retail
assets becoming operational over the next 12 months; where Phoenix’s
economic interest is 1.4msf. Given the challenging leasing environment, we
believe this strong execution is bearing fruit in the faster pre-leasing of
multiplex, anchors, and other retail space. For example, Pune is 85% leased,
Kurla 70% leased, and pre-leasing in Bangalore is also at 75% levels. With most
projects having secured financial closure, and only minimal capex required (Rs
1bn) we see little risk to project completions.
Growth plans on hospitality being re-visited
PML is currently re-evaluating the format and business model of its hospitality
business (PML has already invested Rs1.2bn with 51% ownership; balance held
by co-founder). Previously, PML planned to launch hotels around its MarketCity
projects; we now understand, the management is reviewing its development
plans. We believe directional clarity emerging over the next 12 months will be a
potential catalyst.
Emerging pan-India footprint in retail assets
Phoenix is targeting to offer assets in prime-locations across key cities such as
Mumbai, Bangalore, Chennai, Pune and tier-III cities and is taking both organic
and inorganic routes to become a leading developer/owner of large-format retail
malls with a pan-India presence.
High Street Phoenix—Phoenix’s flagship property in Mumbai with 0.9msf
of mall, office space and 100% occupancy.
Upcoming Market City projects are across tier I cities such as Kurla-
Mumbai, Vimannagar-Pune, K.Puram, Maleshwaram–Bangalore,
Vellachery-Chennai. These offer a mix of mall, multiplex, office, hotel and
residential developments, where it has partnered with investors. Most
projects (9.5msf) are scheduled to be operational by 2013-14E.
Phoenix entered tier III markets such as Indore, Raipur Jabalpur, Ujjain,
Bhillai, Nanded, Udaipur, and Chandigarh by acquiring a 40% stake in
Entertainment World Developers (EWDPL) a developer, which is currently
developing 23.3msf of retail/residential projects. EWDPL already has 1msf
operational across Indore & Nanded. EWDPL opened Treasure Bazaar
(0.3msf) at Ujjain in April ’11 with 80% of mall leased. Further, with
execution picking up at Raipur, Bhilai, Jabalpur, Mohali and Indore, we
expect these projects to be operational in next 12-18 months.
The company gained a presence in North India through its 74% stake in Big
Apple Real Estate (BARE) in 2008. Presently BARE has 3 malls under
construction with 1msf leasing area in Bareilly Agra. BARE recently opened
Phoenix United in Lucknow with a total investment of Rs 1.3 bn (0.3msf)
Valuations compelling at 52% 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.
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%.
Trading at 22% disc 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 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
We believe the key risks to PML include slowdown in retail spending, economic
growth, and changes in regulatory policies
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Phoenix Mills
Q uality asset play on retail growth
Event: recent management meeting underscores strong retail trends
Management highlighted: 1) strong retail consumption trends likely to drive up
HSP rentals with revenue sharing to touch Rs17m/month by December 2011
versus Rs13m/month now; 2) Pune witnessing similar trends—revenue sharing
already kicking in for a few stores, food court opening in October, PVR-multiplex
to open shortly; 3) Bangalore (October 2011), Kurla (January 2012) opening
shortly to capture retail growth, most capex is complete.
Impact: maintain our forecast for 37% earnings CAGR for FY11-14E
We expect growth to be driven by: 1) the recent rental re-negotiations; 2) uptick in
retail revenue sharing; and 3) rental contributions from the upcoming Pune,
Bangalore, and Kurla malls. Phase II of growth from sales of office and residential
projects (4msf) in Kurla, Pune, Chennai, Bangalore will boost cash flows over the
next 1-2 years, in our view.
Action: reiterate Buy rating; our top midcap pick in property
Key potential triggers intact: 1) successful opening of Bangalore, Kurla malls and
Hotel Shangri-La by 4QFY12; 2) strong pre-sales for its office/residential launches
at Kurla, Pune, Bangalore, Chennai over the next two years; 3) interest savings
from re-structuring of construction finance to securitized rentals; and 4) FDI in
retail. We believe risks include expensive buyouts, and inefficient cash usage amid
net debt of Rs9bn, which may rise in the near term.
Valuation: compelling at 52% discount to NAV
Our price target is at a 25% discount to NAV of Rs412. With the stock trading
below our ascribed value for HSP, Mumbai’s value of Rs218, and 1.7x P/BV, we
see solid upside potential given its rental annuity model and undervalued mall and
hotel assets
Quality retail asset play—top midcap pick
We believe Phoenix Mills (PML) will evolve as a leading developer/owner of
large-format retail malls with a pan-India presence. It is differentiated by its: 1)
prime-location assets across key cities, including Mumbai, Chennai, Bangalore,
and Pune; 2) steady rental annuity model; 3) strong execution track record; 4)
unique asset-holding ownership structure and with minimal balance sheet risk.
We expect Phoenix to become India’s largest retail mall owner managing retail
space of 7msf (economic interest of 3msf) with rentals of Rs5bn by FY14E.
Phoenix has largely focused on retail malls (76% of NAV). The company’s
flagship mall High Street Phoenix (HSP) in Mumbai is its strongest cash
generator. We value this asset at Rs218/share (53% of NAV) and believe it sets
a benchmark for creating similar value at its upcoming large format malls (23%
of NAV) at key locations in Mumbai, Bangalore, Chennai and Pune. This apart,
the company is also developing office/residential and hotel projects – plans are
underway to develop 15msf over the next 3-years. We forecast the company to
report 37% earnings CAGR over FY11-14E.
We believe Phoenix’s rental annuity (53% of NAV) provides good support for
its valuation and reduces its risk profile relative to peers, whose developmental
portfolios largely dominate (60-85%) their NAVs. Though, the stock has
relatively done better than peers, outperforming the Sensex by 14% over last 6-
months; we see further upside potential with valuations compelling at 52%
discount to NAV and its business model at inflection point of strong growth. We
consider near-term weakness in stock as a good buying opportunity - offers a rerating
potential and is a good proxy to retail growth.
Near-term catalysts
Strong retail growth
Retail momentum continues to remain robust with High Street Phoenix (HSP).
Management highlighted, revenues sharing contribution from its flagship mall
are expected to grow to Rs17m/month by December 2011 (versus Rs13m/month
currently). With pending renewals of 50,0000sf of anchor tenant in Q3, we
believe rental revisions with revenue sharing will drive rentals higher. Hotel
Shangri-La is scheduled to open in Jan’12 and we expect 50,000sf of prime
Shangri-La retail space to be leased at prime rental rates of Rs400-500/sf,
shortly. We regard HSP as a significant revenue generator that will drive nearterm
earnings CAGR of 37% over FY11-14E and set a benchmark for Phoenix’s
upcoming Market City developments. MarketCity Pune also opened well with
few stores already contributing on a revenue sharing basis. Additionally,
MarketCity Bangalore (75% leased @ Rs60/sf) is likely to open shortly in
October 2011 with Kurla (70% leased @ Rs95/sf) likely by Dec’11/Jan’12. We
foresee visible signs of strong retail demand across these key cities, Hotel
ShangriLa launch expected over the next 6 months as near-term catalysts for the
stock.
Good pre-sales responses to office, residential launches
Mgmt highlighted the focus is on monetization of commercial inventory at
Kurla & Pune. PML already launched ‘15LBS’ at Kurla (0.25msf 75% sold vs.
60% at Q4) & 0.25msf of office & retail space at Pune (sold out). With plans to
launch more commercial space in Kurla (0.8msf), more inventory at Pune, we
see commercial sales picking up in 2012. Further, residential launches are
gaining momentum with 1) Bangalore East & West projects expected to launch
shortly 2) Initial response to Chennai’s residential soft launch has also been
good. We expect a good sales response to these projects to drive cash flows.
Interest costs saving, given re-structuring initiatives
Gross debt is high currently with net debt at Rs 9bn (vs. Rs 7.9bn inQ1)
However, we are comfortable given: 1) ongoing focus on monetization of
commercial inventory at Kurla, Pune and residential launches at Bangalore and
Chennai; 2) visible pipeline of key launches at MarketCity Bangalore, Kurla
Shangri-La in the next six months. Further, management is focused on
restructuring construction debt into securitized rentals of its malls. We expect
these initiatives to lower interest cost from 15% to ~13% over the next 12
months.
Focus on execution
We expect Phoenix’s strong thrust on execution to result in 4.4msf of new retail
assets becoming operational over the next 12 months; where Phoenix’s
economic interest is 1.4msf. Given the challenging leasing environment, we
believe this strong execution is bearing fruit in the faster pre-leasing of
multiplex, anchors, and other retail space. For example, Pune is 85% leased,
Kurla 70% leased, and pre-leasing in Bangalore is also at 75% levels. With most
projects having secured financial closure, and only minimal capex required (Rs
1bn) we see little risk to project completions.
Growth plans on hospitality being re-visited
PML is currently re-evaluating the format and business model of its hospitality
business (PML has already invested Rs1.2bn with 51% ownership; balance held
by co-founder). Previously, PML planned to launch hotels around its MarketCity
projects; we now understand, the management is reviewing its development
plans. We believe directional clarity emerging over the next 12 months will be a
potential catalyst.
Emerging pan-India footprint in retail assets
Phoenix is targeting to offer assets in prime-locations across key cities such as
Mumbai, Bangalore, Chennai, Pune and tier-III cities and is taking both organic
and inorganic routes to become a leading developer/owner of large-format retail
malls with a pan-India presence.
High Street Phoenix—Phoenix’s flagship property in Mumbai with 0.9msf
of mall, office space and 100% occupancy.
Upcoming Market City projects are across tier I cities such as Kurla-
Mumbai, Vimannagar-Pune, K.Puram, Maleshwaram–Bangalore,
Vellachery-Chennai. These offer a mix of mall, multiplex, office, hotel and
residential developments, where it has partnered with investors. Most
projects (9.5msf) are scheduled to be operational by 2013-14E.
Phoenix entered tier III markets such as Indore, Raipur Jabalpur, Ujjain,
Bhillai, Nanded, Udaipur, and Chandigarh by acquiring a 40% stake in
Entertainment World Developers (EWDPL) a developer, which is currently
developing 23.3msf of retail/residential projects. EWDPL already has 1msf
operational across Indore & Nanded. EWDPL opened Treasure Bazaar
(0.3msf) at Ujjain in April ’11 with 80% of mall leased. Further, with
execution picking up at Raipur, Bhilai, Jabalpur, Mohali and Indore, we
expect these projects to be operational in next 12-18 months.
The company gained a presence in North India through its 74% stake in Big
Apple Real Estate (BARE) in 2008. Presently BARE has 3 malls under
construction with 1msf leasing area in Bareilly Agra. BARE recently opened
Phoenix United in Lucknow with a total investment of Rs 1.3 bn (0.3msf)
Valuations compelling at 52% 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.
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%.
Trading at 22% disc 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 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
We believe the key risks to PML include slowdown in retail spending, economic
growth, and changes in regulatory policies
Wow, 5% terminal growth. So, you are saying it will grow faster than the economy in perpetuity?
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