The organised retail in India is witnessing substantial action on back of changing lifestyles and higher discretionary spending by people. Phoenix Mills, a well known real estate company in Mumbai, would benefit from its new retail projects getting operational in coming quarters apart from its diversification into hospitality and residential projects.
Business
Phoenix Mills Limited is one of the leading real estate companies focused on development of retail, hospitality and commercial projects. Incorporated in 1905 as a textile mill, the company entered the real estate market in 1987 by developing India’s first consumption-centric property ‘High Street Phoenix’ (HSP) on its 17.3 acre textile mill land in Lower Parel, Mumbai. Today, this property spread over 3.15 million square feet (msqft) of space has become one of the most frequented places housing residential complexes, offices, retail establishments, food courts, multiplex, gaming and entertainment centres at one place. Spread over three phases, it offers around 1 msqft of leasable retail space with some of the famous names like Zara, Hamley’s, Burberry, Manchester United, Armani, Chanel, Marks & Spencers etc.
The company is replicating the HSP model todevelop mixed-use consumption-led ‘market city ‘ projects in other areas like Kurla in Mumbai, Bangalore (2 locations), Chennai and Pune. Phoenix has also made its presence in tier II and tier III cities like Agra, Lucknow, Varanasi, Bareily, Indore, Raipur etc through its investments in Big Apple Real Estate (BARE) and Entertainment World Developers (EWDL). The group plans to develop residential townships, retail malls and commercial office space measuring a total of over 21 msqft in these locations.
The company has also entered hospitality business where it is developing Shangri-La Hotel at its Lower Parel property while its subsidiary Phoenix Hospitality plans to develop four hotels at Mumbai (Marriott), Pune (Hilton), Chennai and Agra (Marriott) with total capacity of over 1000 rooms in the next 2-3 years.
Investment rationale
With rising income levels and change in demographics, there has been a surge in discretionary and lifestyle spending which has led to rising footfalls in malls across the country. Phoenix Mills with its various retailing formats including large scale mixed-use projects would stand to benefit from this rising consumption.
The company’s flagship property ‘High Street Phoenix’ itself contributes more than half to its consolidated revenues. The project attracts over 10 lakh footfalls per month and has a tenant occupancy rate of over 90%, thereby contributing an average rental of ¤145/sqft per month across its current operational 0.9 msqft leased area. The company expects to grow its revenues from HSP by 20% per year driven by rental re-negotiations and commencement of revenues from additional planned 0.25 msqft leasing area.
Also, the company’s ‘market’ city projects in metro cities are expected to get operational in the next 2-3 quarters with most of the space already pre-leased out to big known brands. These projects would help to aid the revenues further. The company through its strategic investments would also benefit from rising consumption in smaller cities, while its strong brand image would help it attract big retailers to its projects.
The company is developing residential projects mostly in south India where the demand continues to remain stable. The company’s Shangri-La project is not expected to contribute to revenues this year but would help to drive revenues in coming years.
The company has no debt in its standalone business, while high capital requirement for its hospitality business has led to debt which is manageable.
The potential listing of EWDL where it has 40% stake could unlock more value for the stock.
Concerns
Any slowdown in economy or higher inflation would lead to decline in consumer spending thereby affecting retail business. Even as Phoenix is well placed in terms of leasing space in metro cities, oversupply of retail space in smaller markets is a concern. The company may face challenges in smaller cities where organised retail has not yet caught up with people. The company’s foray into highly capital intensive hospitality sector and residential projects may also strain its balance sheet.
Valuations
Driven by increase in rentals at existing projects along with commencement of operations at new projects, the company’s revenues are expected to grow at a CAGR of 71% over FY10-12E.
The net
profits during the same period are expected to grow at 53% driven by higher rental rates. At current market price of ¤199.15, the stock trades at price to earnings ratio of 30.36 times its expected consolidated FY11 earnings and 1.67 times its FY11 expected book value. Considering its steady revenue stream from leasing, high visibility in its future projects and comfortable debt position, one can consider entering the stock on correction from medium to long term perspective.
Source : DNA
