'Outperform' on Phoenix Mills, target price Rs 272: Macquarie

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SummaryWe maintain our thesis that Phoenix Mills would continue with stake purchases in its malls and other SPVs. While the valuation is in favour of Phoenix Mills

We maintain our thesis that Phoenix Mills would continue with stake purchases in its malls and other SPVs. While the valuation is in favour of Phoenix Mills, there exists a risk of dilution due to continued stake purchases, which, at the moment, is funded by debt. Retain ‘outperform’ with an increased target price of R272 (from R261).

Phoenix Mills is buying out a 29.3% stake in Kurla mall (1.1 msf) and commercial building space (1.12 sf) from IL&FS for R157 crore. The company has not shared the IRRs offered to the private equity partner. Note that the mall has an equity base of R310 crore. The stake purchase is value-accretive, but would be funded by debt.

Kurla mall has stabilised but mall IRR is low. Kurla mall has stabilised after opening in CY11. However, the mall is still ramping up. At the moment, Kurla mall is annualising R100 crore of Ebitda on a capital cost of R1,100 crore (IRR of ~9%). However, the capital cost includes the land cost for 1.12 msf of commercial space to be sold of which ~0.45 msf is left to be sold.

Phoenix Mills had indicated in its earlier results’ conference calls that it will be spending R140 crore for buying out stakes in various SPVs until March-2015. Phoenix had spent ~R150 crore in FY13 to buy out stakes in Chennai and Bangalore malls. In the earlier buyouts, the stake purchase was at IRRs of 5-7%. We raise our target price by 4% to factor in the latest stake purchase.

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