Phoenix Mills. CMP: INR184 TP: INR255 Buy

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1 BSE SENSEX S&P CNX 16,439 4,990 Bloomberg PHNX IN Equity Shares (m) Week Range (INR) 229/149 1,6,12 Rel. Perf. (%) -8/-5/10 M.Cap. (INR b) 26.8 M.Cap. (USD b) May QFY12 Results Update Sector: Real Estate Phoenix Mills CMP: INR184 TP: INR255 Buy Phoenix Mills' 4QFY12 standalone/consolidated results were in line with estimates. High Street Phoenix (HSP) revenue grew 14% YoY to INR531m in 4QFY12. For FY12, HSP rental stood at INR1.98b (v/s our est INR1.97b and management guidance INR1.95b). Standalone EBITDA grew 13% YoY to INR363m (margins at 68% down ~5.5% QoQ), PAT remained flat YoY led by higher other income (largely as interest income from loan and advances given to subsidiaries). Consolidated revenue improved 74% to INR3.7b (v/s our est INR3.6b). Barring INR1.98b from HSP, key revenue contributors have been (a) Pune Commercial Phase I (INR0.7b), (b) Pune Mall (INR0.6b) and (c) BARE malls (INR0.3b). However PAT growth was dented owing to commencement of depreciation and interest in Pune Market City mall. Market City projects are steadily transforming into next growth driver for the company with (a) retail assets ramping up, and (b) monetization of Phase II underway. Incremental leasing has been visible in Bangalore and Chennai Malls during 4QFY12. All three operational malls (Pune, Kurla and Bangalore) have ramped up to 50-70% occupancy levels and witnessing encouraging consumptions growth. Consolidated gross debt increased to INR15.2b in line with guidance, on account of drawdown of debt at (a) Shangri-La hotel and (b) other Market City projects (Pune, Kurla and Bangalore). Consolidated net debt increased to INR14.2b v/s INR13.7b in 3QFY12. Net DER of 0.85x. Key triggers for the stock would be (1) leasing momentum and operational ramp-up at Market City SPVs, (2) de-leveraging, and (3) value unlocking from Phase IV at HSP, where an increase in FSI could lend further upside. The stock trades at P/E of 22.2x FY13 EPS of INR8.3, 1.5x FY13 BV and 33% discount to our NAV. Maintain Buy. Sandipan Pal (Sandipan.Pal@MotilalOswal.com);

2 Operational highlights Standalone revenue up 14% YoY; steady consumption growth, re-negotiations at HSP led 12% YoY growth in annual rentals Standalone revenue from HSP grew 14% YoY to INR531m, up 5% QoQ. QoQ rental uptick is attributable to (a) higher revenue sharing led by consumption growth, (b) partial contribution from Palladium Annexe (16,000sf) opened in 4Q, and (c) full quarter contribution from re-priced Pantaloon rentals - concluded in 3QFY12 at 40% higher effective rentals. Revenue sharing has gone up to INR17m/month (9.6% of rentals) from INR15.5m/month in 3QFY12. FY12 rental at HSP grew 12% YoY to INR1.98b, led by 23% growth in sales (13% growth in average sales/sf). Re-negotiation of rentals with 3 major anchor tenants (0.15msf) led to effective hike of ~60%, boosting average rental from INR154/sf to INR174/sf. Average rental for anchors stood at INR110/sf. Standalone EBITDA grew 13% YoY to INR363m (margins at 68% down ~5.5% QoQ). Decline in EBITDA margin is largely due to some provisioning assumed during the quarter with regards to a) ~INR10m for demolishing one small mall management office block at HSP, and b) ~INR25m towards one tenant. PAT remained flat YoY led by higher other income (largely as interest income from loan and advances given to subsidiaries). Consolidated revenue up 74% YoY driven by Market City assets albeit commencement of depreciation/interest dent PAT growth Consolidated revenue improved 74% to INR3.7b (v/s estimate of INR3.6b). Barring INR1.98b from HSP, key revenue contributors have been (a) Pune Commercial Phase I (INR0.7b), (b) Pune Mall (INR0.6b) and (c) BARE malls (INR0.3b). EBITDA grew ~50% YoY to INR2.1b, with EBITDA margin moderating to 58% (v/s 67% in FY11), due to comparatively lower margins in commercial projects and retail mall at Pune, which are yet to reach steady-state optimum margins. Depreciation and interest commenced in Pune Mall post incubation in June 2011, leading to sharp rise in these two components by 1.8x/4x. This has led to only 4% YoY growth in PAT before minority interest and associate profit, and 29% YoY growth in reported PAT. Key balance sheet changes Consolidated gross debt increased to INR15.2b in line with guidance, on account of drawdown of debt at (a) Shangri-La hotel and (b) other Market City projects (Pune, Kurla and Bangalore). Consolidated net debt increased to INR14.2b v/s INR13.7b in 3QFY12. Cost of debt for HSP has been 12%, refinanced debt %, while loan given by HSP to subsidiaries has bp higher cost of debt. The debt level is likely to peak at ~INR16b in FY13 with remaining construction expenditures on Hotel Shangri-La and Chennai Mall. Standalone investment up by INR3.2b, due to reclassification of share application money (earlier reflected in loans and advances) in Phoenix Hospitality Company Private Ltd (PHCPL) and GKW (Bangalore) as investment. The standalone loans and advances declined accordingly. Consolidation of PHCPL has also led to sharp increase in consolidated net block. PHNX has acquired 56.9% stake in PHCPL in 3QFY May

3 QoQ EBITDA margin trend (%) Rental from HSP (INR m) witnessed expect trend to continue with steady growth and booming consumption (INR m) Source: Company/MOSL Market City projects transforming into next growth drivers; Ramp-up of retail malls and monetization of Phase II going steady Pune Market City Retail: Pune mall (1.1msf, 58.5% stake) commenced operation in Jun-11, with 33 retailers and scaled up to 235 in 4QFY12. Occupancy of 70% in 9 months. Total and per sf sales trends are encouraging. Commercial: Sold ~85% of 0.26msf (total sales value of ~INR1.4b); construction has also been completed. However, due to company s stringent practice of revenue booking (linked to certain milestones in transactions), it booked only ~INR0.8b in FY12 (in addition to INR0.17b in FY11). Collection stood at INR1.25b. Due to high interest cost and depreciations, Pune SPV (Mall and commercial) has made accounting loss of ~INR150m (EBITA of INR570m) Bangalore Market City Retail: Commenced operation in Oct-11 with 110 stores and ramped up to 178 stores currently. Residential: Launch of residential projects at Bangalore West (GKW, ~2.8msf) in 1HFY13. Kurla Market City Retail: Mall commenced operation in Nov-11 with 75 stores and moved up to 171 stores currently. Opening up of Reliance mart and PVR would be key crowd pullers. Commercial: Sold ~61% of 0.28msf (total sales value of INR1.4b) at 15LBS. Average sales realization stood at INR9,200/sf. Soft launch commenced for Phase II at Orion Park (0.84msf, sold 10%) and Graceworks (0.42msf, PHCPL assets) during 4QFY12.PHNX is yet to book any revenue from Kurla commercial since most registrations happened post Mar-12. Collection stood at INR1.1b. Chennai Market City Retail: Launch expected in 1HFY13. Key tenants are undergoing fit outs. Residential: Launched 0.25msf, sold 0.2msf (v/s 0.17msf in 3QFY12) at average realization of INR6,750/sf and collected INR440m (v/s INR230m in 3QFY12). Construction work in progress. 30 May

4 Details of Market City projects Incremental leasing at Bangalore and Chennai over 4Q Key Market city projects Kurla Pune Bangalore East Chennai Total area (msf) Retail Area (msf) Commercial/Hotel (msf) Residential (msf) Leasing as on 3QFY12 (%) leasing as on as on 4QFY12 (%) Average Rentals (INR/sf/month) Operational date Commenced Commenced Commenced 1HFY13 in Nov-11 in Jun-11 in Oct-11 Occupancy (%) Number of stores operational Total stores Expected FY13 rental (PHNX stake INRb) Source: Company/MOSL Enters into SPA to buy Kshitij s stake in Chennai Market City; stake increase in stabilizing market city projects key positive During 4QFY12, PHNX has entered into a Share Purchase Agreement (SPA) with Kshitij VCF to acquire the latter s stake in its Chennai Market City projects Classic Mall Development Company Pvt Ltd (0.9msf retail mall and 0.25msf residential project) and Classic Housing Projects Pvt Ltd (another 0.25msf residential project). Currently PHNX effectively holds equity stake of 31%/34% in Classic Mall/Classic Housing; post the transaction, it will hold 63%/66% stake. The transaction has been valued at INR1.06b (INR300m to be paid within 90 days and the balance at the end of 15 months i.e. by 1QFY14). Current net worth in Chennai SPV stood at ~INR1.5b, implying transaction value of 1.9-2x BV. Valuation is in line with our calculations. Going forward, we believe this is a key positive for the company to tap the upside potential from stabilizing assets. Valuation and view With stabilization of its Market City malls over the next 2-3 quarters, we see PHNX's asset-heavy model becoming a strong proxy to the booming domestic consumption story, leading to sharp growth in rental income from INR1.8b in FY11 to INR6.8b (PHNX share of INR 3.9b or 52%) in FY14. Healthy annuity income, cash flow visibility from monetization of 2nd phase of Market City projects, supported by potential re-capitalizations with fund raising of ~INR10b provide strong cushion to address leverage concern. We believe continuous stake increase in Market City projects is a key positive. Post increase in stake in Bangalore and Pune Market City, PHNX has acquired Kshitij VCF's 31-34% stake in Chennai Market City. Most of these acquisitions have happened in line with expected valuation. We believe higher stakes in stabilizing assets would offer meaningful upside going forward. Additionally, to improve the capital efficiency, the company has been avoiding long-gestation projects and re-positioned several hotel plans to other asset classes. Key triggers for the stock would be (1) leasing momentum and operational rampup at Market City SPVs, (2) de-leveraging, and (3) value unlocking from Phase IV at HSP, where an increase in FSI could lend further upside. The stock trades at P/E of 22.2x FY13 EPS of INR8.3, 1.5x FY13 BV and 33% discount to our NAV. Maintain Buy. 30 May

5 Phoenix Mills: an investment profile Company description Phoenix Mills is a pioneer in the development of largescale, mixed-format retail development in India. It is a unique, low-risk play on the booming domestic consumption story with no retail-specific risks. Through its subsidiaries and associate companies it is undertaking 40 retail/ hospitality projects, totaling ~50msf, across India. It owns one of the most successful malls in India, High Street Phoenix (HSP), in Parel, Mumbai. We estimate, with the commencement of market city projects and Shangri-la hotel. rental income from retail to increase from INR1.8b in FY11 to INR3.9b in FY14. Key investment arguments According to the Global Retail Development Index (GRDI), organized retail in India is set to increase from ~5% in 2007 to ~14% by Industry experts estimate the number of operational malls will cross 412, with 205msf by 2010, and 715 malls will be added by 2015, due to retail development in tier-ii and tier- III Indian cities. We believe PML is well poised to benefit from this strong growth. PHNX's growth story is ready for take-off, with several assets slated to yield rent over the next months, taking its total operational assets from 2.5msf in FY11 to 5.8msf/8.9msf/10.7msf in FY12/13/ 14 respectively. Comparative valuations Phoenix Anant Raj Prestige P/E (x) FY13E FY14E P/BV (x) FY13E FY14E EV/Sales (x) FY13E FY14E EV/EBITDA (x) FY13E FY14E Recent developments FY12 rental at HSP grew 12% YoY to INR1.98b, led by 23% growth in sales (13% growth in average sales/ sf). Pune mall (1.1msf, 58.5% stake) commenced operation in Jun-11, with 33 retailers and scaled up to 235 in 4QFY12. Valuation and view The stock trades at P/E of 22.2x FY13 EPS of INR8.3, 1.5x FY13 BV and 33% discount to our NAV. Maintain Buy. Sector view RE sector has been a major underperformer over the last 12 months with multiple operational and nonoperational headwinds such as volume slowdown (due to declining affordability), monetary tightening, pilling liquidity pressure etc. However, with a buoyant macro-picture, likelihood of interest rate cut and increasing focus on execution, we believe the outlook will improve going forward. EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Buy Stock performance (1 year) Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter Domestic Inst Foreign Others May

6 Financials and Valuation 30 May

7 N O T E S 30 May

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