Business momentum on the retail side remained strong for Phoenix Mills’ main malls with overall consumption growing by 19% (partly benefiting from pre-GST sales) and rental income by 17%. Its malls in Kurla, Pune and Bangalore recorded rental growth of 16-28%. Its Chennai mall and High Street Phoenix were relatively weak with 8-9% rental income growth. Its residential portfolio remained disappointing as premium residential real estate market in Bangalore remained sluggish and company didn’t participate in discounts in line with industry. Next leg of growth has begun: After having announced in the last quarter that company won an under-construction mall at auction for Rs 2.34 bn, Phoenix also announced it acquired 1.6msf of developable area for
Rs 1.61 bn for premium retail development in Pune. Both of these investments will be under its newly created platform with the Canadian Pension Board (CPPIB) where CPPIB has already invested Rs 7.3 bn. Investment view and valuation: India’s retail sector is ripe to see strong increase in demand which is attracting leading brands to enter and expand in India. We believe PML’s malls are one of the preferred destinations for new brands entering India. We expect rental growth CAGR of 12.6% over FY17-20e. This should drive c30%+ earnings CAGR.
Valuation and risk: We cut our FY18-19e EPS by 12-13% largely on almost complete slowdown in residential sales of its premium properties and higher debt as company is deploying significant capital for new investments. However, our FY20 estimates increase by 5% on stronger rentals and deferment of sales from FY18/19e to FY20e. Our SOTP DCF-based NAV of company’s malls, office space and residential property business increases as we roll forward to FY19e forecasts (earlier FY18e) and roll forward our fair value target price as of June’17 (earlier Mar’17) to `580 (earlier `530). Our TP implies 12.5% upside and we rate the stock Buy.