Phoenix Mills - The right ingredients - Karvy

Over the past 6 months Phoenix Mills (PML) share price has outperformed Sensex by 11%, owing to (i) improving annuity income; (ii) successful Bangalore launches and (iii) no incremental Capex. Despite such an outperformance we initiate coverage with a BUY because of PML's strong annuity asset base, balance sheet deleveraging and upcoming launches.

Assets maturity to yield strong cash-flow; Capex largely over

PML has a well placed city centric annuity assets which derive value from increasing end user consumption. PML marquee asset High Street Phoenix is seeing strong growth traction and with 0.4mn sqft retail space renewals over next 2years, we expect sharp uptick in average rental/sqft/month as these will largely be on revenue share. The market cities in Pune, Chennai, Bangalore and Kurla are now stabilizing. We expect a 26.2% rental income CAGR FY13-15E largely driven by Chennai addition.

Residential launches to support cash-flow mismatch

PML has 3mn sqft of new launches spanning FY14-15E with a Rs32bn sales potential. The profits from the residential segment (expected ~Rs9.6bn contribution to EBIDTA over FY14-18E) shall help provide support to the initial cash-flow mismatch in the annuity business. Whilst we forecast Market Cities to service their debt by FY16E, Shangrila Hotel remains a key concern area as we expect it to be cash breakeven by FY15E and PBT breakeven by FY17-18E. PML will need to provide equity support to service Shangrila debt.

Balance sheet health to improve; debt peaked out

With annuity assets getting operational (except for Courtyard Agra, Luxury Mall in Chennai), Capex is now behind PML. The debt has peaked at Rs30-32bn and economic interest is still lower at ~Rs20bn. We expect the deleveraging to happen from FY15E onwards wherein free cash surplus may be utilized for retiring debt.

Initiate coverage with BUY: Target price Rs315/share

We initiate on the company with a BUY stance and a SOTP-based target price of Rs315/share. We believe that the near-term catalysts are: (i) Success of residential launch; (ii) improvement in Shangrila occupancy rates.

Key risks

i) Slowdown in consumption; (ii) Future land bank replenishment.

Source : Equity Bulls

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