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MORNING INSIGHT October 25, 2012 � We tweak our estimates for High Street Phoenix to factor in improved rentals as well as reclassification of expenses related to electricity charges and expect revenues to grow at a CAGR of 33% between FY12-FY14 on a consolidated basis. Status of key market cities and hotel Shangri-La � Pune market city is 85 % leased with average rentals of nearly Rs65 per sqft per month. Occupancy levels have improved sequentially to 76% during Q2FY13 as against 70% during Q1FY13 with opening of PVR Cinemas in Sep, 2012. Entertainment zone Blu O is expected to open in Q3FY13. Company has also sold nearly 85% of phase 1 commercial area of nearly 0.26 mnsqft at Rs 6100 per sq ft. Footfalls in Pune market city are witnessing an increasing trend and have moved up to 2.69 mn during Q2FY13 as against 1.71 mn during Q1FY13. Overall revenues are expected to improve going forward due to improvement in occupancies as well as rentals. Pune market city reported revenues of Rs 284 mn and operating margins of 48% during Q2FY13 and has a current debt of Rs 4.56 bn. � Bangalore market city was opened in Oct, 2011 and is currently 88% leased with average rentals of nearly Rs 65-70 per sqft per month. No. of opened stores have now increased to 204 as against 189 in Jun, 2012. Occupancy levels have also improved to 66% versus 62% during June, 2012. During the quarter, Pure, Bombay High, Splash, Simba, OOD Life and Amoeba were opened and Copper Chimney, Noodle Bar and Blu O are expected to open in Q3FY13. Bangalore market city reported revenues of Rs 289mn and operating margins of 55% during Q2FY13 and has a current debt of Rs6.1 bn. Footfalls in Bangalore market city are also witnessing an increasing trend and have moved up to 1.26mn during Q2FY13 as against 1.11mn during Q1FY13. � Kurla market city is currently 84% leasedand has an occupancy of 70% (improved from 59% in Q1FY13) with average rentals of nearly Rs85-90 per sqft per month. Currently 209 stores have opened as against 189 stores during Jun, 2012. During the quarter, Zara, Lacoste, Nyasa, Funzone and Freezing Rains @ Snow World have become operational. PVR is expected to open from Oct, 2012. Along with this, Amoeba has partially opened with four Bowling Alleys which would ramp up to 14 lanes going forward.Kurla market city reported revenues of Rs 288mn and operating margins of 68% during Q2FY13 and has a current debt of Rs6.67 bn. Footfalls in Bangalore market city are also witnessing an increasing trend and have moved up to 5.3mn during Q2FY13 as against 4.1mn during Q1FY13 � Launch of Chennai market city is delayed and is now expected to be launched by Q3FY13. Key Brands viz. Big Bazaar,Croma, Lifestyle, Pantaloons, Satyam Cinemas, Man U, OOD life, etc. are undergoing fit-outs. Construction of residential space above mall structure is progressed up to 8th roof slab and out of total 0.25 mnsqft (105 apartments), company has already sold nearly 0.2 mnsqft at an average sale price of Rs 7000 per sq ft. PML would have now have a stake of 50% in Chennai market city. Company would have to pay only Rs 620 mn for increasing its stake to 50%. � Phoenix mills has launched Phase 1 of Bangalore(W) residential project - "One Bangalore West" and has sold nearly 7 lakh sqft across 5 towers (over 275 apartments) at an average sale price of Rs 7200 per sq ft. It has booked sales of nearly Rs 5.3 bn.Project comprises of high-rise towers and one luxury tower. It is expected to be developed over four and a half years. Excavation work for 3 towers is nearly complete and is in-progress for remaining two towers. Construction work of Phase1 is expected to begin during Q3FY13. � Phase wise handover of Shangri-La has commenced but PML had faced environmental clearance related issues which have delayed the commencement. PML has already given presentations to committee reviewing its clearance and expects hotel to opensoon. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 8
MORNING INSIGHT October 25, 2012 We recommend BUY on Phoenix Mills with a price target of Rs.230 Operating margins stood strong � Operating margins stood strong at 66% for Q2FY13 on standalone basis but adjusted with reclassification of electricity charges in revenues and expenses, margins stood at 76.7%. � We tweak our estimates and expect operating margins to be 60.1% and 61.9% for FY13 and FY14 respectively on consolidated basis. Margins on consolidated basis are expected to improve going forward with improvement in occupancies, leasing as well as rentals in key market cities. Net profit growth marginally better than our estimates � Net profit growth was boosted by strong operating margins and higher other income. � Borrowings are likely to come down once operations stabilize in different market cities. � We tweak our estimates and expect net profits to grow at a CAGR of 44.3% on consolidated basis between FY12-14. Valuation and recommendation � At current price of Rs191, stock is trading at 20.2x and 12.6x P/E and 12.8x and 9.4x EV/EBITDA. � We value the company on sum of the parts valuation and roll forward our valuation to FY14. We arrive at a target price of Rs 230 on FY14 estimates. (Rs 237 earlier) � We remain positive on the company due to its robust business model, excellent operating cash flows from HSP and expertise to capitalize on the upcoming opportunities in the retail sector in various cities. However, we reduce our valuations from Shangri-La hotel to take into account delays in commencement of the project. � Wemaintain BUY recommendation on the stock. � Key risks for the stock would be further delays in launch of Shangri-La and lower than expected ramp up in occupancies in key market cities. Sum of the parts valuation Phnx Avg rent Avg Rate Value Per share Stake (Rs/sqft/m) (Rs/sqft) (Rsmn) (Rs) High Street Phoenix 100% 180 18632 129 Phase IV @ HSP 100% 12000 3000 21 Market cities Pune 58.60% 60 6200 1219 8 Kurla 24.30% 95 9000 2411 17 Bangalore(E) 46.6% 65 3000 1021 7 Chennai* 31.00% 80 6500 1611 11 Bangalore(W)-Residential 70% 7200 2086 14 EWDL 40% 45-60 2278 16 Big Apple 70% 35-40 662 5 Shangri-La 53% 12000 446 3 Total 230 CMP 191.00 % UPSIDE 20.6% * Stake in Chennai market city is likely to be enhanced to 50%; Source: Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 9
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