Phoenix Mills

 

Phoenix Mills is likely to benefit from commencement of some of its projects in the next few quarters. Investors could consider buying into this stock

 

PHOENIX Mills started operations as a textile mill company and gradually forayed into real estate with a focus on retail, commercial and entertainment segments in tier I and tier II cities. Located at Lower Parel, Mumbai, High Street Phoenix (HSP) was the first property developed by the company. Spread over 1.5 million sq. ft, the complex houses commercial, residential and entertainment properties.

   In December 2007, Phoenix bought 74% stake in Big Apple that owns the United Malls in Uttar Pradesh. Big Apple will build malls in North India under the brand 'Phoenix United'. Phoenix also acquired 40.28% stake in Indore based EWDPL through a combination of cash infusion and merger of certain entities that held equity in the company. EWDPL operates malls under the 'Treasure Island' brand in Tier II cities. Presently there are 24.7 million sq. ft projects under construction including the projects under Big Apple and EWDPL in Mumbai, Bangalore, Chennai, and Pune.

GROWTH STRATEGY:

Phoenix has 6-lakh sq. ft of leased area and is expected to ramp it up to 9.5-lakh sq. ft by the end of FY10. Its key tenants include Lifestyle, Big Bazaar, Pantaloons, Mc Donald's and PVR Cinemas. The company is now developing 'market city' with total built-up area of 9 mn sq feet. Coming up in Mumbai, Pune, Bangalore and Chennai, it would be operational in phases starting June '10. The project include retail, hotel, residential and commercial developments.

   All these projects are under special purpose vehicles (SPV) for which funding has been tied up. The company would earn in the form of dividend income. The company also plans to develop a 419 - room hotel in Mumbai under management contract with Shangri La brand.

   The hotel is scheduled to be operational by Dec '11. Going forward, Phoenix plans unlock some value by list ing EWDPL separately.

FINANCIALS:

In last five years, Phoenix net sales grew at compounded annual growth rate (CAGR) of 19% to Rs 99.6 crore in FY09. Net profit during the period grown at a higher CAGR of 34.8% to reach Rs 51.5 crore last year. At a 5-year average payout ratio of 27.2%, the company's dividends have grown at a CAGR of 41%.

   The company has a debt of Rs 600 crore on its books which takes its debt to equity ratio to 0.35 as on Sep '09. The company has roughly Rs 300 crore of construction expense to be incurred on its hotel project and Phase IV of High Street Phoenix. This would drag down its Rs 381 crore of cash reserves. Its borrowing may increase by another Rs 250 crore in near term. Based on its future plans, the company's consolidated revenue is expected to grow to Rs 137 crore in FY10 and further to Rs 285 crore by the end of FY11 (including expected revenue from the hotel projects). The company reported a higher margin in Sep '09 quarter due to some extraordinary gains. Going forward its operating margin is expected to revert its historical level.

CONCERNS:

The company has about 90 acres of land, which would be available for development over and above the mentioned construction activity. Though the company has the bandwidth, timely execution could prove to be a challenge. This could further impact cash flows. Besides, its rental business would be adversely affected by any change in demand for retail properties.

VALUATIONS:

The company is currently trading at45 times its net profit in trailing twelve months'. At the current market price of Rs 192, its estimated FY11 EPS would work out to be Rs 9.8 and thus its forward P/E works out to be 19.6x. We have not included future revenues from Market City and projects under Big Apple for valuations, which would further boost its earnings. For investors who believe in the India consumption story, it is time to check out this stock. Though valuations appear stretched, it is expected to deliver good returns in the future.