Phoenix Mills Research Report By Nirmal Bang

Strong Residential Sales And Cost Optimisation Drives Earnings

Phoenix Mills (PML) reported a net profit of Rs2,284mn in 4QFY19, up 146% YoY and 223% QoQ. In 4QFY19, the revenues increased 64% and 66% QoQ and YoY, respectively. The sharp upswing in revenues is because of:

1) Increase in residential revenues by 481% in 4QFY19, on account of recognition of revenues from Phoenix Kessaku project in Bengaluru.

2) Increase in commercial revenues by 35% YoY.

3) In 4QFY19, retail rental income at Rs2,908mn was up 8% YoY, driven by Phoenix Market City or PMC – Kurla and Pune.

4) St. Regis reported total revenues of Rs875mn, up 12% YoY, on the back of improved occupancy rate of 87% and ARR of Rs12,514. Earnings growth of PML was primarily driven by: 1) Decline in employee benefit expenses. 2) Decline in finance costs. We have retained Buy rating on PML with an unchanged target price of Rs791.

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Revenues increase and EBITDA margin expands YoY:

Revenues in 4QFY19 stood at Rs7,232mn, up 64.2% QoQ and 65.6% YoY. EBITDA at Rs3,771mn increased 74.3% YoY and 69.5% QoQ. EBITDA margin rose 260bps YoY and 160bps QoQ to 52.1%. Revenues and EBITDA growth on YoY basis was because of:

1) The Phoenix Kessaku project in Bengaluru receiving occupation certificate in 4QFY19, as a result of which the revenues and costs relating to the property were recognised on a completion basis. Commercial rental income at Rs244mn in 4QFY19 grew 35% on YoY basis. EBITDA margin of Phoenix Paragon Plaza rose to 79% from 42% in 4QFY19.

2) In 4QFY19, EBITDA of St. Regis increased 16% YoY and EBITDA margin rose 200bps YoY to 45%.

Earnings up YoY supported by lower employee expenses and finance costs:

For 4QFY19, employee costs stood at Rs374mn, down 19% QoQ, and finance costs stood at Rs826mn, down 10% QoQ and 1% YoY.

Decline in net debt-to-equity ratio to 1.1x is not sustainable:

Net debt-to-equity ratio declined to 1.1x in 4QFY19 from 1.3x in 4QFY18. However, we believe the net debt-to-equity ratio will increase as the management gave guidance that the equity component in construction expenses for upcoming projects except PMC Indore has already been utilised and a major portion of the future construction costs will be met by raising additional debt.

Rental income growth driven by rise in occupancy and rental rates:

PMC Pune and PMC Kurla are the malls that have outperformed, leading to 8% YoY growth in total rental income to Rs2,908mn in 4QFY19. PMC Kurla witnessed rental income growth of 10% YoY at Rs310mn. Occupancy rate rose from 93% in 4QFY18 to 98% in 4QFY19. PMC Pune’s rental income at Rs406mn increased 13% YoY led by a 10% increase in rental rate and the rise in occupancy rate by 300bps to 98%. The rental income of HSP, PMC Bengaluru, and PMC, Chennai, rose 8% each and their occupancy rate stood at 94%, 98% and 98% respectively. Palladium Chennai commenced operations in FY19. The rental income in 4QFY19 stood at Rs54mn with an occupancy rate of 81%.

Going forward, retail rental growth is expected to be driven by:

1) 21% of rental renewals in HSP taking place in FY20E.

2) Strong consumption growth in PMC Kurla supporting better rental renewals in FY21.

3) PMC Lucknow is expected to begin operations in the next few quarters.

Hotel segment income increases on the back of healthy occupancy rate and a rise in ARR:

Occupancy rate of Courtyard Marriot, Agra, touched 83% in 4QFY19 as compared to 77%% in 4QFY18 and ARR rose to Rs4,795, up 2% YoY. F&B revenues increased 10% YoY. St. Regis reported above-industry occupancy rate of 87% and ARR of Rs12,514, up 4% YoY. Food and beverage business revenues grew 25% YoY to Rs438mn and were higher than room rental revenues in 4QFY19.

Retain Buy rating with a target price of Rs791:

Our target price of Rs791 for PML is based on FY21E SOTP valuation. We have valued retail, residential and office properties of PML based on FY21E NAV and the hotel business has been valued through the discounted cash flow method. Further, our optimism is supported by:

1) Anticipated continued strong growth in rental revenues of operational malls.

2) Steady growth in office space rentals.

3) Strong growth in hotels because of cyclical upturn of the sector.

PML stock currently trades at Rs605, at a discount of 24% from our unchanged target price of Rs791. We shall be revisiting our estimates shortly.