Institutional Equities

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1 Initiating Coverage Institutional Equities September 1 Reuters: PHOE.NS; Bloomberg: PHNX: IN Best Proxy Play To Indian Retail Sector We initiate coverage on (PML) with a Buy rating and a target price of Rs791 based on FY1E SOTP valuation. Our optimism is based on PML s strategy which is focused on development and operation of retail malls its key strength. With an average mall vacancy rate of more than 15% (as per consultancy firm Anarock), the stabilised malls have shown a consistent occupancy rate of 9%1%. Further, the ability to increase rental rate at a five year CAGR of 11%1% for three of its malls adds to our comfort. Our other reasons for optimism are: 1) EBITDA growth at a threeyear CAGR (FY1FY1E) of 1%. ) Comfortable balance sheet position despite aggressive capex to develop.95mn sqft of rentable mall space in the next five years.3) Strong operating cash flow growth. ) Attractive valuation. We have valued the stock at FY1E SOTPbased valuation. While the retail, office and residential properties have been valued on NAV basis, we have valued the hotels on cash flow basis. Strategy focused on core competence in development and operation of retail malls: PML has demonstrated strong competency to develop and operate malls across different geographies in India. In a weak operating environment for malls in India (vacancy rate averages more than 15% and closure of.mn sqft of mall space in CY17. as per Anarock), the company has been able to consistently maintain occupancy level for all its stabilised malls at more than 9%. Together with a high occupancy rate, the company has achieved rental income fiveyear CAGR of 11%1% (FY13FY1) for High Streep Phoenix (HSP), Pune, and Bengaluru. Chennai mall has achieved fiveyear rental growth of 7%. The strong growth has been achieved with a judicious mix of regular change in the mix of shops and regular events to maintain and improve footfalls and consequently trading density. To improve footfalls, PML has also built an office complex adjacent to malls to help improve footfalls. The company currently has around 1.mn sqft of rentable office space. Current rentable mall area at mn sqft; further development of rentable area of ~.95mn sqft over next five years: PML has mn sqft of rentable mall space spread over: 1) High Street Phoenix (HSP).7mn sqft. ) Kurla mal l 1.11mn sqft. 3) Bengaluru mall 1mn sqft. ) Pune 1.19mn sqft. 5) Chennai 1mn sqft. ) Bareilly.31mn sqft 7) Lucknow.33mn sqft. ) Palladium Chennai.mn sq ft. The company plans to add ~.95 mn sqft over next five years i.e. by FY3E. EBITDA expected to post a threeyear CAGR of 1% (FY1FY1E): EBITDA growth is expected to be driven by: 1) Revenue growth at threeyear CAGR of 11%. ) Margin expansion of 3.%. The margin expansion is expected to be driven by: 1) Improved rental rates at Kurla mall ) Improved margins in the hotel division with revival of the hotel industry 3) Improved occupancy and rental rates at Palladium, Chennai. Healthy balance sheet despite planned capex for retail and office space expansion: PML had a net detequity ratio of 1.3x in FY1 which is expected to increase to 1.5x in FY1E. However, we derive comfort from the rise in interest coverage ratio from 1.x in FY1 to.1x in FY1E. The company has planned expansion of.95mn sqft in retail rental space and.mn sqft in office space in the next five years. Capex is expected to be around Rsbn which is likely to be funded partially by increase in debt and partially through internal accruals. Strong growth in operating cash flow: We expect the operating cash flow to post strong growth from Rs.bn in FY19E to Rs.bn in FY1E. Operating cash flow in FY1 was high at Rs11bn primarily because of the rise in liabilities and reduction in inventory. The rise in liabilities is primarily because of the liability on purchase of land which has not been paid for. The company does not expect the growth in liabilities to sustain. Earnings to post 1% CAGR (FY1FY1E): We expect threeyear earnings CAGR of 1% to be driven by: 1) Revenue growth with a threeyear CAGR of 11%. ) EBITDA margin expansion of 3.%. 3) Flat depreciation as all the malls are operational and therefore the depreciation is expected to remain the same on straight line basis. We have arrived at a threeyear EBIT CAGR of 1%. However, a higher tax rate of 33% as against % in FY1 led to net profit growth of 1%. Assign Buy rating with a target price of Rs791: Our target price of Rs791 for PML is based on FY1E SOTP valuation. We have valued retail, residential and office properties based on FY1E NAV and the hotel has been valued on discounted cash flow method. Further, our optimism is supported by: 1) Anticipated continued strong growth in rental revenues of operational malls. ) Steady growth in office space rentals. 3) Strong growth in hotels because of cyclical upturn of the sector. The stock currently trades at Rs553, discount of 3% from target price Y/E March (Rsmn) FY17 FY1 FY19E FYE FY1E Revenues 1, 1,19 17,9 19,33,33 YoY (%) 3 (11) EBITDA,9 7,77,5 9,7 11,7 EBITDA margin (%) PAT 1,79,,5,99 3,79 YoY (%) (1) 3 EPS (Rs) RoE (%) EV/EBITDA (x) P/E (x) BUY Sector: Real Estate CMP: Rs553 Target Price: Rs791 Upside: 3% Amit Agarwal Research Analyst amit.agarwal@nirmalbang.com Akash Mehta Research Associate akash.mehta@nirmalbang.com Key Data Current Shares O/S (mn) 153. Mkt Cap (Rsbn/US$bn) 5.9/1. 5 Wk H / L (Rs) 73/79 Daily Vol. (3M NSE Avg.) 11,9 Share holding (%) 3QFY1 QFY1 1QFY19 Promoter... DII General Public One Year Indexed Stock Performance Sep17 Nov17 Jan1 Mar1 May1 Jul1 Sep1 Price Performance (%) PHOENIX MILLS Nifty 5 1 M M 1 Yr (7.7) (5.1) 1. Nifty Index (.9) Source: Bloomberg

2 Investment rationale We initiate coverage on PML with a Buy rating and a target price of Rs791 based on FY1E SOTP valuation. Our optimism on the stock is driven by: 1) Management strategy focused on development and running of retail space (mn sqft over eight malls). ) Historical evidence indicates the management s expertise in mall management occupancy in stabilised malls above 9% with strong rental growth. 3) Anticipated earnings growth in FY1FY1E of 1% based on consistent improvement in trading density. ) Comfortable balance sheet despite planned expansion. 5) Attractive valuation. Consistent management strategy focused on core competence in development and operation of malls PML has consistently shown its ability to develop and successfully run malls across different cities in India. Most of the malls (mn sqft across eight locations) are running at over 9% occupancy. This is a strong performance compared to average vacancy of more than 15% across malls in India. All this, in the context of rationalisation of mall space of.mn sqft (source: Anarock) because of inability of mall operators to run the mall successfully, indicates the expertise of PML in mall management. The company, as a part of its strategy to improve footfalls in malls, has rentable office area of 1.mn sqft in close proximity to the malls. The influx of officegoers near the malls is expected to improve footfalls at the malls. PML s expertise in mall management most operational malls running at >9% occupancy, rental growth (Rs/sqft/mth) at fiveyear CAGR ranging from 11% to 1% for three malls Majorityof the eight operational malls of the company are running at more than 9% occupancy with strong growth in rentals over the past five years. We note that rental fiveyear CAGR of 11 % to 1% (PML, Pune, Bengaluru), 7% for Chennai mall and 3% for Kurla mall, and an occupancy rate of more than 9% shows the ability of the company to attract footfalls and consequent demand for retail space in the malls. While the growth in Kurla mall has been weak historically, the recent rental growth shows that trading density at this mall is also increasing. To maintain consumer interest in the malls, we note that PML has consistently been altering the mix of the shops together with regular events at the mall. Revenue growth primarily driven by retail rental growth We note that revenues from retail rentals constitute approximately 7% of total revenues with hotel revenues and revenues from residential sales constituting approximately 15% and 1% each. Revenues from office rentals constitute only % of total revenues. EBITDA shows a fiveyear CAGR (FY13FY1) of %; expect EBITDA CAGR of 1% over FY1FY1E Strong growth in EBITDA during FY13FY1 was driven by: 1) Increase in mall space under operation. ) Increase in average occupancy rate across operational malls. Many of the malls have commenced operations during FY1FY13 and therefore the increase in occupancy during the period together with the rise in rental rate have been prime drivers of EBITDA growth. For the period FY1FY1E, with all the malls running at more than 9% occupancy, the growth in rentals is expected to be the prime driver of revenue growth. Further, the strong growth in hotel division because of cyclical upturn in the sector and the rise in occupancy at Phoenix Paragon Plaza will add to EBITDA growth. Comfortable balance sheet despite planned expansion PML has a comfortable balance sheet with net debtequity ratio of 1.3x in FY1 which is expected to increase to 1.5x in FY1E because of planned capex for expansion. However, despite the rise in net debt equity ratio in FY1E, we derive comfort from the rise in interest coverage ratio from 1.x in FY1 to.1x in FY1E. Attractive valuation: Recommend Buy with a target price of Rs791 Our target price of Rs791 for PML is based on FY1E SOTP valuation. We have valued retail, residential and office properties based on FY1E NAV and the hotel has been valued on discounted cash flow. Further, our optimism is supported by: 1) Anticipated continued strong growth in rental revenues of operational malls. ) Steady growth in office space rentals. 3) Strong growth in hotels because of cyclical upturn of the sector. The stock currently trades at Rs553, discount of 3% from target price.

3 Strategy focused on core competence, development and operation of retail malls PML has demonstrated its ability over the years of developing and operating malls in India. Regular change in product mix together with organising regular events has consistently maintained customer interest in the malls, leading to consistent increase in footfalls and trading density. PML has total rentable mall space of mn sqft spread over eight malls in five cities. We note that all malls which have stabilised operations have maintained a occupancy rate of more than 9%. This is creditworthy given that, as per property consultant Anarock, approximately.mn sqft of mall space was rationalised in CY17 because of weak occupancy. The chart below shows that while superior grade malls had an average occupancy rate of 91%, grade B malls had occupancy rate of 5% and grade C malls had occupancy rate of 59%. Exhibit 1: Retail vacancy rates in India CY17 Vacancy in operational malls (%) Superior grade Average grade Poor grade NCR Delhi 1 15 Mumbai 1 39 Bengaluru Chennai 3 1 Pune 1 31 Hyderabad Kolkata India Source: Anarock In this context, the graph below shows the occupancy of malls operated by PML as of FY1end. All the malls, except Palladium, Chennai (which commenced operations in FY1) and Bareilly mall, are operating at more than 9% occupancy rate. Exhibit : Retail occupancy rates of various malls of PML in FY1 1% 1% 9% 91% 9% 9% 9% 5% 9% % % % % % % HSP PMC Kurla PMC Pune PMC Bangalore PMC Chennai PMC Bareilly PMC Lucknow Palladium Chennai PML recently entered into a joint venture with CPPIB (Canada Pension Plan Investment Board) through an existing entity Island Star Mall Developers Pvt Ltd. The focus of the JV will be development and operation of malls in India. PML (including CPPIB) plan to spend Rs59,5mn on development of malls and commercial space. It plans to add ~.95mn sqft of retail mall space and over ~3.mn sqft of commercial space over the next six to seven years. Planned addition will be in Pune, Bengaluru, Indore, Ahmedabad, Lucknow and Chennai. 3

4 CPPIB enters into JV with PML The CPP Investment Board (CPPIB) officialy the Canada Pension Plan Investment Board, is a Canadian Crown Corporation established by way of the 1997 Canada Pension Plan Investment Board Act, to oversee and invest the funds contributed to and held by the Canada Pension Plan. CPPIB and PML formed a strategic investment alliance in April 17 to develop, own and operate retailled mixeduse developments across India. Island Star Mall Developers Pvt. Ltd. (ISMDPL) was designated to serve the platform where CCPIB infused Rs1,mn for a 9% stake and the balance stake 51% is owned by PML. Exhibit 3: ISMDPL portfolio (upcoming) ISMDPL portfolio (upcoming) Retail mall (mn sqft) Commercial space (mn sqft) Pune Wakkad 1... Bengaluru Hebbal Indore 1. Bengaluru Whitefield Exp Out of a total of Rs1,mn to be infused by CPPIB, Rs7,mn has been received by PML. PML expects Rs9,3mn (balance amount to be infused by CPPIB) to be received in FY19E. ISMDPL is expected to generate cash flow between Rs3,mn Rs3,5mn which shall be retained by the company. Note: Post FY1, we have assumed minority interest and share premium account to be constant because of difficulty in segregating the balance infusion of Rs9,3mn between minority interest and share premium account.

5 SOTP valuation We initiate coverage on PML with a SOTPbased target price of Rs791. We have valued the real estate operations (retail mall, commercial space, residential) based on FY1E NAV and the hotel segment has been valued at FY1E discounted cash flow. Real estate operations Methodology of NAV calculation Retail malls We have valued each operational mall of the company separately based on information provided by the company. The total rental area of each mall has been considered, but the NAV derived is adjusted based on the proportionate share of PML s ownership. The rental rate charged by the company is based on trading density. Therefore we have based our rental rate on the ratio of historical average of the proportion of the rental rate to trading density. The occupancy rate assumed is based on historical occupancy at each mall. For some of the malls we have assumed an increase in occupancy rates based on our discussion with company and our assessment of the demand. The common area maintenance (CAM) charges are based on the historical charges (Rs/sq ft/month) and then have been escalated by inflation rate of 5%. As CAM charges are recoverable, we have added CAM charges to determine total revenues and then subtracted it to arrive at EBITDA. We have further assumed other expenses as a percentage of rental income based on historical average. We have further subtracted depreciation by straight line method based on % of fixed assets. From the resultant EBIT, we have subtracted income tax at the rate of 33%. Office space We have then added back depreciation (noncash charge) to arrive at cash flow of the mall. The resultant cash flow has then been discounted at 13% based on WACC for the company and the terminal value has been capitalised at 1% to arrive at valuation for the mall. We have added the NAV for all malls to arrive at our NAV forecast for malls of PML. We have considered the total leasable area for each mall, but adjusted the NAV based on PML s proportionate ownership. The occupancy for each project is based on historical occupancy achieved by the company. Art Guild House and Centrium have achieved occupancy rate of 9% and we have assumed the same for our projected period.the occupancy for Paragon Plaza was only 3% in FY1 and we have assumed a steady increase in occupancy rate up to 95% in FYE. We have assumed a lease rate based on the rate achieved in FY1 and then increasing it by an inflation rate of 5% annually. We have multiplied the leasable area with the occupancy rate to get the rented area. We have then multiplied the rented area with the lease rate to arrive at revenues. We have then subtracted depreciation to arrive at EBIT and then subtracted We have assumed depreciation on straight line of total capex for the project We have then added back depreciation to arrive at cash flow. We have assumed WACC of 13% to arrive at current value of future cash flows. To arrive at the terminal value, we have assumed longterm growth rate of 5% per annum which is the same as the inflation rate. The rental yields in the recent past have been in the range of 7.5%.% per annum. We have been conservative and have assumed a capitalisation rate of 1%. 5

6 Residential We have arrived at the sale price (Rs/sqft) and anticipated sales volume for each city, based on our assessment of the market. We have assumed an inflation rate for sales at % for FY19E and 5% for FYE and onwards. From the sale price we have deducted the cost of construction. We have derived our cost estimates after discussion with industry experts and the company. We have assumed an inflation rate of 5% per annum. We have then deducted marketing and other costs using assumptions that they equate to 5% of sales. We have then deducted income tax based on the applicable tax rate of 33%. We have discounted the resultant cash flow based on WACC of 13%. We have added the NAV for all cities to arrive at our NAV forecast for the company. Further, we have assumed the construction cost for each of the upcoming projects based on expected capex (as per company). From the NAV for all three verticals (retail malls, office space, residential and hotel) we have deducted our forecasted net debt and minority interest at the end of FY1E to arrive at final valuation for the company. Exhibit : NAV NAV Retail NAV Ownership NAV adj. for ownership Per Share High Street Phoenix (HSP) 33,19 1% 33,19 1 Phoenix Market City (PMC)Kurla 15,999 1% 15,999 1 PMC Pune 1,751 1% 1, PMC Bengaluru,955 7% 1,9 15 PMC Chennai 15,77 5% 7,93 5 PMC Barreily,177 1%,177 1 PMC Lucknow 3, 1% 3, 1 Palladium, Chennai,3 9% 1,33 9 Commercial Phoenix Paragon Plaza Kurla, Mumbai 3,93 7%, 17 Centrium Kurla, Mumbai 1,33 1% 1,33 7 Art Guild Kurla, Mumbai,1 1%,1 9 Residential One West, Bengaluru 3, %,759 1 Kessaku, Bengaluru,551 % 3,1 The Crest, Chennai 19 5% 11 1 Hotel St.Regis, Mumbai 1,7 73% 7,35 Courtyard by Mariott, Agra 1,57 % Total NAV 119,5 7 Upcoming projects valued at 1x construction cost 59,5 39 Net debt as of FY1E 53, Minority interest as of FY1end,1 3 Per share value 791

7 Exhibit 5: Upcoming projects Capital expenditure Retail Commercial Rsmn mn sqft mn sqft Expected Year of completion Mall/commercial Pune Wakkad, 1.. FY3 Bengaluru Hebbal 1, FY3 Indore 7,5 1 FY1 Bengaluru Whitefield exp., FY Lucknow 7,.9 FY1 Ahmedabad,. FY Total 55, Commercial Pune Vimanagar,5.7 FY19FY1 Chennai,. FY1 Total,5 NOTE: Years mentioned like 17,1 and 19E etc represent Fiscal Years for Graphs and Tables 7

8 Exhibit : Retail mall assumptions FY E E 1E E 3E E 5E Total rentable area (mn sqft) HSP Kurla Pune Bengaluru Chennai Barreily Lucknow Palladium, Chennai Occupancy (%) HSP 9% 93% 9% 9% 9% 9% 9% 9% 9% 9% Kurla 7% 7% 91% 91% 91% 91% 91% 91% 91% 91% Pune 7% 5% 9% 9% 9% 9% 9% 9% 9% 9% Bengaluru 7% 9% 9% 95% 95% 5% 7% 9% 9% 95% Chennai 9% 9% 9% 9% 9% 9% 9% 9% 9% 9% Barreily 5% 1% 5% 9% 9% 95% 95% 95% 95% 95% Lucknow 3% 1% 9% 9% 95% 95% 95% 95% 95% 95% Palladium, Chennai % % % 95% 95% 95% 95% 95% Total rental area (mn sqft) HSP Kurla Pune Bengaluru Chennai Barreily Lucknow Palladium, Chennai Revenues(Rs mn) HSP 3,55 3,759 3,97, 5,11 5,55 5,97,13,3 7,179 Kurla 1,57 1,53 1,7 1,7,1,37,73 3,3 3,33 3, Pune 1,79 1,9,9,51,731 3,7 3,35 3, 3,,53 Bengluru 1,513 1,99 1,93,3,5 3,57 3,9,75,57 5, Chennai 1,95,1,17,,397,59, 3,5 3,19 3,355 Barreily Lucknow Palladium, Chennai Rental rate (Rs/sqft/month) HSP Kurla Pune Bengaluru Chennai Barreily Lucknow Palladium, Chennai Trading density (Rs/sqft/mth) HSP,1,37 3, 3,5,53,59,15 5, 5,5 5,3 Kurla , 1,1 1,17 1,5 1,9,15,39, Pune 1,77 1, 1, 1,33 1,591 1,9,9,5,11,53 Bengaluru 1,7 1, 1,9 1,9,,57,3 3,1 3,3 3,71 Chennai 1,57 1,553 1,9 1,593 1,71 1,93,,9,,5 Barreily , 1,1 1,1 1,57 1,3 Lucknow 97 1, 1,13 1,79 1,33 1,57 1,7 1, 1,913 Palladium, Chennai

9 Exhibit 7: Office space assumptions FY E E 1E E 3E E 5E Total rentable area (mn sqft) Phoenix Paragon Plaza Centrium Art Guild Occupancy (%) Phoenix Paragon Plaza % 3% 3% 5% 5% 7% % 95% 95% Centrium 7% 9% 9% 1% 1% 1% 1% 1% 1% Art Guild 1% 1% 1% 1% 1% 1% 1% 1% 1% Total rented area (mn sqft) Phoenix Paragon Plaza Centrium Art Guild Rrevenues (Rs mn) Phoenix Paragon Plaza Centrium Art Guild Rental rate (Rs/sqft/month) Phoenix Paragon Plaza Centrium Art Guild Exhibit : Other assumptions Inflation rate 5% Discount rate 13% Cap rate 1% Exhibit 9: NAV sensitivity Our sensitivity analysis indicates that the SOTPbased target price is most sensitive to change in the cap rates. Change in key assumptions % Change in NAV Inflation rate 1% Change in inflation rate.% Discount rate 1% Change in discount rate (3%) Cap rate 1% Change in cap rate (%) 9

10 Profit and Loss account Revenues Exhibit 1: Revenues expected to post a threeyear CAGR of 11% (Rsmn) (%) 5, 15, , 1, (5) 5, (1) (11.) E E 1E Total Revenue (15) Revenues (FY151) have remained rangebound at around Rs1,19mn. We oberve a 11% YoY decline in total revenues in FY1 and flat revenue performance as compared to FY15 on account of : 1) Chennai mall and residential property getting deconsolidated and now reported under share of profits from associates. ) Higher revenue recognition in FY15 and FY1 from residential sales. 3) Historically, PML undertook sale of commercial properties which led to higher revenues. However, PML does not plan to sell any commercial properties going forward. We expect total revenues to post a 11% CAGR over FY1FY1E. Total revenue growth is aided by strong growth in retail,commercial and hotel segments. Retail growth willl be driven by: 1).35mn sqft of rental space getting added in Bengaluru in FY1E. ) Strong rental growth from PMC at Kurla In Mumbai. 3) Increase in occupancy rate at Phoenix Paragon Plaza. ) Strong demand for hotel space will lead to a rise in ARR and occupancy rate of St. Regis and Courtyard by Mariott,Agra, leading to hotel revenue CAGR of 1% over FY1FY1E. Revenue breakdown Exhibit 11: Retail revenue 3 year (FY11E) CAGR of 1% (Rsmn) (%), 1 1, , , 1 1, 1 1, ,,, 5.7, E E 1E Mall Revenue 1

11 Mall portfolio contributed 7% to total revenues in FY1. PML is currently operating eight malls, namely: 1) HSP and Palladium. ) PMC at Kurla in Mumbai. 3) PMC, Pune. ) PMC, Bengaluru. 5) PMC, Chennai. ) PMC, Bareilly. 7) PMC, Lucknow. ) Palladium, Chennai. HSP contributes ~31% to total mall revenues of PML. We expect the growth in rental rates for HSP to taper down to ~1% over FY1FY1E. However, PMC Kurla, is expected to deliver rental rate growth of ~17% over FY1FY1E. Addition of.35mn sqft of mall space at Bengaluru will be instrumental in driving mall revenues higher. Exhibit 1: Commercial revenues growth at 3 year (FY11E) CAGR of 1% (Rsmn) (%) 1, , E E 1E Commercial Revenue Source: Nirmal Bang Institutional Equities Research, Company Commercial portfolio contributed % to total revenues as of FY1 We expect commercial portfolio revenues to post 1% CAGR over FY1FY1E. Primary drivers of revenue growth from the commercial portfolio are: 1) Increase in rental rates. ) Rise in occupancy rate of Phoenix Paragon Plaza which currently stands at 3%. Exhibit 13: Residential revenues to weaken because of weak demand (Rsmn) (%), 33. 5,, 3,, 1, (.) E E 1E Residential Revenue Source: Nirmal Bang Institutional Equities Research, Company Residential revenues contributed 1% to total revenues as of FY1end. Sales in FY1 weakend compared to earlier years. While growth in revenues reflects growth in sales in the historical past, weakening sales will lead to slower growth in residential revenues in FYEFY1E (5) 11

12 Exhibit 1: Hotel revenues growth at 3 year (FY11E) CAGR of 1% (Rsmn) (%) 5, 1,5, 3,5 3,,5, 1,5 1, E E 1E Hotel Revenue Hotel portfolio contributed 15% to total revenues as of FY1 We expect hotel revenues to post 1% CAGR over FY1FY1E because of the rise in hotel room demand leading to an increase in ARR and occupancy rate. However, we expect ARR of Courtyard to remain subdued on account of: 1) Drop in FTAs (foreign tourist arrivals) in Agra.) Increased competition in Agra EBITDA Exhibit 15: EBITDA threeyear (FY11E) CAGR at 1% (Rsmn) (%) 1, , 15 1, 9.7 1,,,, (.) E E 1E EBITDA PML reported EBITDA of Rs7,77mn in FY1. EBITDA grew 7% and (%) in FY17 and FY1, respectively. EBITDA declined % in FY1 on account of the sharp rise in administration and selling expenses by 19% YoY. We expect EBITDA to post 1% CAGR over FY1FY1E primarily driven by revenue CAGR of 11% and 3bps EBITDA margin expansion. We expect EBITDA margin to touch 51.% in FY1E from.% in FY1. 5 (5) (1) We expect a rise of 3bps in EBITDA margin over FY1FY1E on account of: 1) Strong performance from PMC, Kurla, as rental rates are expected to post 17% CAGR with trading density touching Rs 1,/sqft/month in FY1. ) Strong demand from hotel segment to lead to a rise in ARR. 3) Rise in occupancy rate of Phoenix Paragon Plaza from 3% in FY1 to 5% by FY1E, leading to higher rental revenues with lower incremental costs. 1

13 Balance sheet Net debtequity ratio Exhibit 1: Net debtequity ratio expected to increase (x) E E 1E PML reported net debtequity ratio 1.3x as of FY1end. We expect the ratio to rise to 1.5x by FY1E because of increase in debt for completion of upcoming malls and commercial space. Given in the table below are details on planned projects and the expected capex to be incurred. Exhibit 17: Upcoming projects Upcoming projects Capital expenditure (Rsmn) Mall Pune Wakkad, Bengaluru Hebbal 1, Indore 7,5 Bengaluru Whitefield Exp.,5 Lucknow 7, Ahmedabad, Total 55, Commercial Pune Vimanagar,5 Chennai, Total,5 13

14 Exhibit 1: Interest coverage ratio expected to improve (x) E E 1E We are comfortable with the moderate rise in net debtequity ratio from 1.3x in FY1 to 1.5x in FY1E as we expect interest coverage ratio to touch.1x in FY1E (1.x in FY1). We expect EBIT CAGR of 1% over FY1FY1E leading to a rise in interest coverage ratio to.1x in FY1E. Cash flow Exhibit 19: Cash flow from operations (Rsmn) 1, 1, 1,,,,, E E 1E Cash flow from operations reported by PML was Rs11,51mn in FY1. High cash flow from operations in FY1 was on account of the rise in creditors for capital expenditure, which can be attributed to purchase of land in Bengaluru which had not been paid for. We expect the cash flow from operations to normalise to Rs,5mn in FY19E and increase to Rs,7mn in FY1E. 1

15 Return ratios Exhibit : RoE expected to increase (%) E E 1E PML reported RoE of % in FY1 and we expect it to touch 11% by FY1E primarily driven by: 1) Rise in net profit margin from 15% in FY1 to 17% in FY1E. ) Rise in financial leverage from.9x in FY1 to 3.7x in FY1E. Though the financial leverage is expected to increase, we draw comfort from the rise in interest coverage ratio of PML. Exhibit 1: DuPont analysis DuPont analysis E E 1E Net income margin (%) Asset turnover Financial leverage RoE (%) 9 11 Exhibit : RoCE to expand to 1% by FY1E (%) E E 1E RoCE declined to % in FY1 from 1% in FY17 on account of the fall in EBIT by 11% YoY. PML reported a fall in EBIT because of the rise in administration and selling expenses by 19% YoY. We expect RoCE to increase to 1% in FY1E driven by the likely rise in EBIT at 1% CAGR over FY1FY1E. 15

16 High Street Phoenix (HSP) PML ownerhip 1% Total rentalable area.7mn sqft Occupancy 9% Exhibit 3: Rental income (Rsmn) (%) 5, 1.9 5,5, 3,5 3,,5, 1,5 1, E E 1E Rental Income High Street Phoenix is the one of the most successful malls run by PML and is currently able to generate rental income of Rs3,mn (FY1). We expect rental income from HSP to post a 1% CAGR over FY1 FY1E driven by growth in trading density leading to higher rental rates. Exhibit : Rental rate (Rs/sqft/month) (%) E E 1E Rental Rates HSP charges highest rental rate among all operational malls of PML. The current rental rate of HSP is Rs359/sqft/month (FY1). Although over the past three years the rental rate posted ~1% CAGR because of a high base, we expect the growth to taper down to a modest 1% CAGR over FY1FY1E

17 Exhibit 5: Trading density (Rs/Sqft/month) (%),5 1 1., 3, ,,5, 1,5 1, E E 1E Trading Density Relaitve to other operational malls run by PML, HSP outperforms in terms of trading density, delivering Rs3,3/sqft/month in FY1. We expect the trading density to post1% CAGR over FY1FY1E. Phoenix MarketCity, Kurla (PMCK) PML ownerhip 1% Total rentable area 1.11mn sqft Occupancy 91% Exhibit : Rental income (Rsmn) (%), 5 1, 1, 1, 1, 1, (.) (3.) E E 1E Rental Income We have seen a decline in rental income in PMCK during 1 and 17 on account of poor rental rate and trading density. However, we witnessed 19% YoY growth in rental income in FY1 driven by higher trading density and rental rate. We expect rental rate to post a 17% CAGR over FY1FY1E on account of a low base and improved mall performance (5) (1) 17

18 Exhibit 7: Rental rate (Rs/sqft/month) (%) (.) E E 1E Rental Rate Rental rate of PMCK was Rs93/sqft/month in FY1 which grew 15% YoY. With the rise in trading density, we expect the rental rate to impove and post a 17% CAGR over FY1FY1E. Exhibit : Trading density (Rs /sqft/month) (%) 1, , , , 1 1, E E 1E Trading Density Over the past three years, the trading density posted a 13% CAGR. However, we see an improvement in the mall s performance going forward and expect the trading density to post a 17% CAGR over FY1FY1E. 5 (5) (1) 1

19 Phoenix MarketCity, Pune (PMCP) PML ownership 1% Total rentable area 1.19mn sqft Occupancy 9% Exhibit 9: Rental income (Rsmn) (%), , , , E E 1E Rental Income PMCP has been a consistent performer in PML s retail portfolio, delivering a 15% rental income CAGR over the past three years. We expect the strong performance of rental income to continue driven by growth in rental rate and trading density. PMCP is expected to deliver a 1% rental income CAGR over FY1FY1E. Exhibit 3: Rental rate (Rs/sqf/month) (%) E E 1E Rental Rate PMCP charged rental rate of Rs1/sqft/month in FY1. We expect the trading density to improve over the next three years, leading to a rental rate CAGR of 1% over FY1FY1E. 19

20 Exhibit 31: Trading sensity (Rs/sqft/month) (%), , , , 1, 1 1, E E 1E Trading Density PMCP delivered a trading density of Rs1,/sqft/month in FY1. We expect the trading density to post a CAGR of 1% over FY1FY1E. Phoenix MarketCity, Bengaluru (PMCB) PML ownership 7% Total rentable area 1.mn sqft Occupancy 9% Exhibit 3: Rental income (Rsmn) (%) 3, 5, , 1,5 1, E E 1E Rental Income PMCB garnered rental income of Rs1,75mn in FY1. Rental income posted a CAGR of 13% over the past three years. We expect the rental income to post a 5% CAGR over FY1FY1E on account of the increase in rental rate and addition of.35mn sqft of retail space in FY1E

21 Exhibit 33: Rental rate (Rs/sqft/month) (%) E E 1E Rental Rate PMCB charged a rental rate of Rs13/sqftmonth in FY1. Rental rate over the past three years posted a CAGR of 1%. We expect the same trend to continue going forward and have assumed a rental rate to increase at a CAGR of 1% over FY1FY1E. Exhibit 3: Trading density (Rs/sqft/month) (%) 3,,5, 1,5 1, E E 1E Trading Density PMCB reported trading density of Rs1,9/sqft/month in FY1, representing a growth of 17% YoY. The trading density posted a 1% CAGR over the past three years. We expect the strong performance to continue, leading to a trading density CAGR of 15% over FY1FY1E

22 Phoenix MarketCity, Chennai (PMCC) PML ownership 5% Total rentable area 1.mn sqft Occupancy 9% Exhibit 35: Rental income (Rsmn) (%) 1, 1 1, 1, 1, 1, E E 1E Rental Income PMCC reported rental income of Rs1,39mn in FY1. Rental income posted a % CAGR over the past three years. We have considered a modest rental income CAGR of 7% over FY1FY1E for PMCC. Exhibit 3: Rental rate (Rs/sqft/month) (%) E E 1E Rental Rate () PMCC charged rental rate of Rs1/sqft/month in FY1. Rental rate posted a CAGR of % over the past three years. We expect rental rate to remain flat in FY19E and grow % and 1% in FYE and FY1E, respectively.

23 Exhibit 37: Trading density (Rs/sqft/month) (%), 1 1, 1, 1, 1, 1, 5.9 (1.) (.1) E E 1E Trading Density Trading density declined 1% and % in FY17 and FY1, respectively. This was a strategy undertaken by PML s management to replace gold and jewellery shops (higher contribution to trading density, but lower contribution to rental income) with other segment shops (example: apparel). Normally, apparel and other shops are charged rentals with a higher percentage of trading density as compared to gold and jewellery shops. After the strategic replacement of shops, we can expect the trading density to post a % CAGR over FY1FY1E. 1 () () () Phoenix MarketCity, Bareilly (PMCBA) PML ownership 1% Total rentable area.31mn sqft Occupancy 5% Exhibit 3: Rental income (Rsmn) (%) E E 1E Rental Income PMCBA reported rental income of Rs15mn in FY1. We expect rental income to post a 1% CAGR over FY1FY1E with robust rental rate and trading density growth

24 Exhibit 39: Rental rate (Rs/sqft/month) (%) E E 1E Rental Rate PMCBA charged an average rental rate of Rs3/sqft /month in FY1. We expect rental rate to post a CAGR of 9% over FY1FY1E aided by a lower base. Exhibit : Trading density (Rs/sqft/month) (%) 1, , E E 1E Trading Density PMCBA delivered strong trading density performance over the past two years. Trading density grew 17% and 1% in FY17 and FY1, respectively, and stood at Rs771mn in FY1. We expect the trading density to post a 1% CAGR over FY1FY1E

25 Phoenix MarketCity, Lucknow (PMCL) PML ownership 1% Total rentable area.33mn sqft Occupancy 9% Exhibit 1: Rental income (Rsmn) (%) E E 1E Rental Income PMCL s rental income grew 17% YoY to Rs9mn in FY1. We expect rental income to post a 17% CAGR over FY1FY1E primarily driven by the rise in rental rates. Exhibit : Rental rate (Rs/sqft/month) (%) E E 1E Rental Rate PMCL charged a rental rate of Rs73/sqft/month in FY1. Rental rate posted % and % growth in FY17 and FY1, respectively. We expect rental rate to post a CAGR of 1% over FY1FY1E

26 Exhibit 3: Trading density (Rs/sqft/month) (%) 1, , 1, 1, E E 1E Trading Density PMCL reported trading density of Rs1,/sqft/month in FY1. Trading density grew 1% and % in FY17 and FY1, respectively. We expect the trading density to post a CAGR of 13% over FY1FY1E. 1 1 Palladium, Chennai (PC) PML ownership 9% Total rentable area.mn sqft Occupancy % Exhibit : Rental income (Rsmn) (%) 1, E E 1E Rental Income PC began operations in February 1. PC reported rental Income of Rs 7mn in FY1 (two months of operations and % occupancy rate). We expect rental income to post a 1% CAGR over FY1FY1E considering that the mall will be operational for 1 months beginning FY19 and achieve 95% occupancy rate by FY1E

27 Exhibit 5: Rental rate (Rs/sqft/month) (%) E E 1E Rental Rate.5 PC reported a rental rate of Rs11/sqft/month in FY1. We expect the rental rate to post a CAGR of % over FY1FY1E. Exhibit : Trading density (Rs/sqft/month) (%) 1, , E E 1E Trading Density PC reported trading density of Rs73/sqft/month in FY1. We expect the trading density to post a 9% CAGR over FY1FY1E. 7

28 Commercial projects Phoenix Paragon Plaza PML ownership 7% Exhibit 7: Rental rate (Rs/sqft/month) (%) (1.) E E 1E Rental Rate 5. Phoenix Paragon Plaza has net leasable area of.37mn sqft out ot which 3% stands occupied in FY1. Phoenix Paragon Plaza charged a rental rate of Rs11/sqft/month in FY1. The rental rate in FY1 was Rs3/sqft/month. We expect the rental rate to post a 5% CAGR over FY1FY1E, which is similar to the inflation rate. Centrium PML ownership 1% Exhibit : Rental rate (Rs/sqft/month) (%) (1) E E 1E Rental Rate 3 1 Centrium has net leasable area of.1mn sqft out ot which 9% is occupied in FY1. Rental rate in Centrium at Rs91/sqft/month has remained flat on YoY basis. However, we expect it to post a 5% CAGR over FY1 FY1E.

29 Art Guild House PML ownership 1% Exhibit 9: Rental rate (Rs/sqft/month) (%) E E 1E Rental Rate Art Guild House has net leasable area of.3mn sqft out ot which 1% is occupied in FY1. Art Guild House charged a rental rate of Rs9/sqft/month. Rental rate has posted growth of 1% and 1% in FY17 and FY1, respectively. We expect a relatively higher rental rate CAGR (in comparison to Phoenix Paragon Plaza and Centrium) of % over FY1FY1E. 9

30 Residential projects One West, Bengaluru (OWB) PML ownership % Total area.mn sqft Area sold till date ~1.mn sqft Exhibit 5: Selling price (Rs/sqft) (%) 11, , , 9,5 9,,5, E E 1E Selling Price 3 1 Selling price of OWB was Rs9,/sqft in FY1 and has witnessed 5% growth YoY. Considering the current subdued residential real estate environment, we have not considered any growth in the selling price for FY19. We expect 5% growth in selling price in FYE and FY1E. Exhibit 51: Sales volume (sqft) 1, 1, 1, 1, 1,,,,, E E 1E Although most residential real estate companies are facing pricing pressure, we expect growth in sales volume over FY19EFY1E. We expect total sales volume of.mn sqft over FY19EFY1E. However, residential portfolio of PML is miniscule and the management may decide to sell the remaining area in a phased manner as and when the residential real estate environment improves. 3

31 Kessaku PML ownership % Total area.99mn sqft Area sold till date ~.3mn sqft Exhibit 5: Selling price (Rs/sqft) (%) 17, , , 3 15,5 15, 1,5 1, (1.) E E 1E Selling Price Kessaku s selling price was Rs15,19/sqft in FY1. The selling price witnessed 3% and (1)% growth in FY17 and FY1, respectively. We expect the selling price of Kessaku to grow 5% in FYE and FY1E. However, we believe the selling price will remain flat in FY19. Exhibit 53: Sales volume (sqft) 3,, 1, 1 (1) () (1,) E E 1E (,) (3,) (,) Negative sales value of.3mn sqft in FY17 is on account of cancellations. Sales volume of Kessaku was around..5mn sqft historically. We expect sales volume of.7mn sqft for Kessaku over FY19E FY1E. 31

32 The Crest PML ownership 5% Total area.53mn sqft Area sold till date ~.3mn sqft Exhibit 5: Selling price (Rs/sqft) (%) 9, 5. 9, 9, , 9,,,,,, E E 1E Selling Price Selling price of The Crest was Rs,7/sqft in FY1. Over the past two years, the selling price has remained flat. We do not expect any growth in selling price in FY19E and we have assumed selling price growth of 5% in FYE and FY1E. Exhibit 55: Sales volume (sqft), 35, 3, 5,, 15, 1, 5, E E 1E Sales volume of The Crest has been gradually increasing from.1mn sqft in FY1 to.3mn sqft in FY1. We expect sales volume of.95mn sqft over FY19EFY1E. 3

33 Hotels St. Regis PML ownership 73% Rooms 395 Exhibit 5: ARR (Rs) (%) 1, 1 1, 1, 1,,, ,, E E 1E ARR ARR of St. Regis was Rs11,5 in FY1, growing % YoY in FY1 and 1% YoY in FY17. We expect the strong demand for hotels over the next two to three years to support ARR CAGR of 1% over FY1FY1E. Exhibit 57: Occupancy rate (%) E E 1E Industry average occupany rate is ~5%, whereas St. Regis managed to register occupancy rate of 77% in FY1. With growing demand for hotels over the next few years, we expect the occupancy rate of St. Regis to touch % by FY1E. 33

34 Courtyard by Marriott, Agra PML ownership % Rooms 193 Exhibit 5: ARR (Rs) (%), 1, ,, (3.) (5) 3, 3, 3, (1.1) E E 1E ARR (1) (15) Courtyard, Agra, reported an ARR of Rs3,11 in FY1. ARR witnessed a decline of % and 1% in FY17 and FY1, respectively. The decline of ARR is because of: 1) Fall in foreign tourist arrivals in Agra and the rise of domestic tourists negatively impacting ARR. ) Rise in competition from other hotel players. We expect ARR to post a modest % CAGR over FY1FY1E. Exhibit 59: Occupancy rate 75% 7% 5% 5% 7% % 7% % 57% 55% 5% E E 1E Courtyard, Agra, had a occupany rate of 5% in FY1. The occupancy rate has been in line with the industry average. Despite the fall in foreign tourist arrivals, there has been a rise in domestic tourists in Agra which has aided the occupancy rate to rise from 5% in FY1 to 5% infy1. We expect the occupancy rate to touch 7% by FY1E. 3

35 Management team profile Mr. Ashok Ruia, CMD A graduate from Cambridge, he has been on the board of PML since 193. He has vast experience in managing the company s affairs. He played an active role in the textile industry, serving as committee member of the Mill Owners Association, Mumbai, for several years. Mr. Atul Ruia, Joint Managing Director He is a graduate from the University of Pennsylvania and business management graduate from the Wharton School of Finance. He joined the board of PML in 199 and is instrumental in the development of High Street Phoenix. Mr. Shishir Shrivastava,Joint Managing Director A graduate from IHM, Bengaluru, he has been associated with the Phoenix group since. He was instrumental in shaping High Street Phoenix to its current reputation, driving strategy and overseeing several critical functions of the company. Mr. Pradumna Kanodia, Director Finance He is a qualified chartered accountant and company sectrary with over 7 years of experience in corporate management, finance and commercial matters. He heads the finance and accounts teams at PML and plays a key role in raising funds. Exhibit : Top shareholders of PML Name Holding (%) Nordea 1 Sicav Emerging Stars Equity Fund 7.3% Fidelity Investment Trust Fidelity Series Emerging Market Fund.5% Schroder Interenational Selection Fund Emerging Asia 1.3% Nordea Far East Fund 1.9% Vaneck Funds Emerging Markets Funds 1.9% Source: Bombay Stock Exchange 35

36 Financial statement Exhibit 1: Income statement Y/E March (Rsmn) FY17 FY1 FY19E FYE FY1E Net sales 1, 1,19 17,9 19,33,33 YoY (%) 3 (11) COGS/direct expenses 7, 5,33 5,7,37,937 Operating and other costs,75 3, 3, 3,599 3,93 EBITDA,9 7,77,5 9,7 11,7 EBITDA growth (%) 7 () EBITDA margin (%) Depreciation 1,953 1,93 1,93 1,93 1,93 EBIT,51 5,791,51 7,5 9,9 EBIT growth (%) (11) 13 1 Interest expenses 3,95 3,9 3,,,5 Other income Earnings before tax,75,71 3,159 3,917 5,7 Tax total ,3 1,93 1,59 Rate of tax (%) Net profit 1,9,113,117, 3,3 Less: Noncontrolling interest Share of profit PAT 1,79,,5,99 3,79 % growth (1) 3 EPS (FD) % growth (1) 3 Exhibit 3: Balance sheet Y/E March (Rsmn) FY17 FY1 FY19E FYE FY1E Share capital Reserves and surplus 1,19,1 3,1 3,7 35,79 Net worth 1,51,5 3, 3,913 3,15 Loans 3,55 3,5 3,15,95 53,5 Minority interest,797,1,1,1,1 Security deposits,5 3,51 3,1,11,1 Deferred tax liability Total capital employed 3,1 73,39,11 9, 9,7 Property, plant and equipment 5,1 57,99 5,37 7, 79,91 Investments,9,9,9,9,9 Loans and advances Other noncurrent assets 5,5,,,, Total noncurrent sssets 5,75 7,951, 7,55 9,9 Trade payables 1,11 1, 1,115 1,5 1,3 Advance from customers,31 1,553,11,5,73 Other current liabilities, 7,9 7,377,3,71 Provisions (current) 7 1,1 1,1 1,1 1,1 Total current liabiities,71 11,7 11,9 11,9 11,91 Inventories 9,55,15 7,7,39 9,17 Trade receivables 1,7 1,9 1,9,179,55 Cash and bank balance Loans and Advances Other current assets 1,991,53,53,53,53 Total current assets 1, 11,175 1,9 1,37 1,933 Deferred tax assets 1,7 51 Net current assets 7,397 (5) 99,,993 Total capital employed 3,1 73,39,11 9, 9,7 Exhibit : Cash flow Y/E March (Rsmn) FY17 FY1 FY19E FYE FY1E Profit after tax 1,79,,5,99 3,79 Depreciation 1,953 1,93 1,93 1,93 1,93 Other income (1) (375) (1) (1) (1) Working capital changes 5,5 7, (1,3) (1,31) (915) Operating cash flow,91 11,51,5 3,1,7 Capital expenditure (1,5) (1,95) (9,3) (9,3) (9,3) Net cash after capex 7,37 (3,) (,) (5,79) (,53) Investments +L.T. Adv (,953) (,5) Others,,53 1 Issue/(buyback of equity) 5 Proceeds/repayment of borrowings (,) 1,5 5,,7 Other income Dividend and dividend tax (3) () (39) (5) (9) Others (7) 1, Changes in MI (1,71) 1,5 Cash flow from financing 3 9,33, 5,5, Total cash generation (1,1) (33) (13) Opening cash balance 1, Closing cash balance Exhibit : Key ratios Y/E March FY17 FY1 FY19E FYE FY1E Profitability & return ratios EBITDA margin (%) EBIT margin (%) Net profit margin (%) RoE (%) RoCE (%) Working capital & liquidity ratios Receivables (days) 9 9 Inventory (days) 9 51 Payables (days) Current ratio (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x)

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