CRISIL assigns valuation grade of 5/5 to Phoenix Mills

The Phoenix Mills Ltd’s (Phoenix’s) Q4FY12 standalone results were in line with CRISIL Research’s expectations. FY12 consolidated revenues exceeded CRISIL Research’s expectations but earnings were significantly below due to lower-than-expected margins and higher interest costs. High Street Phoenix (HSP), representing the standalone business, continued steady performance. Cost escalations in market city projects led to an increase in debt and, hence, higher interest costs impacted consolidated profits. We will revisit earnings estimates post interaction with the management. We maintain our fundamental grade of 3/5.

Q4FY12 and FY12 standalone result analysis
• Q4FY12 revenues grew 14% y-o-y and 5% q-o-q to Rs 531 mn driven by an increase in average lease rentals and consumption levels. FY12 revenues grew 12% y-o-y to Rs 1,981 mn. Average lease rentals at HSP increased from Rs 154 per sq.ft. per month in FY11 to Rs 174 per sq.ft. per month in FY12. Consumption levels during the same period recorded growth of 23% y-o-y to Rs 9,708 mn in FY12.

• Q4FY12 EBITDA margin increased 90 bps y-o-y to 68.4% mainly due to an increase in lease rentals. On a q-o-q basis, margins declined 550 bps due to higher other expenses. FY12 EBITDA margin declined slightly by 30 bps y-o-y to 70.7%.

• Improvement in operating margin was offset by higher interest costs, as a result PAT was flat y-o-y at Rs 273 mn. On a q-o-q basis, PAT grew 2% supported by growth in other income. FY12 PAT grew 15% y-o-y to Rs 1,053 mn.

Analysis of FY12 consolidated results
• Revenues grew 74% y-o-y to Rs 3.7 bn driven by growth at HSP and contribution of Rs 1.3 bn from Pune market city which commenced operations in July 2011. In Pune market city, Phoenix has recognised revenues of Rs 0.7 bn from sale of commercial assets and Rs 0.6 bn from lease rentals in FY12. EBITDA margin declined ~900 bps to 57.7% in FY12 due to initial start-up costs in the Pune market city project.

• PAT registered a growth of 26% y-o-y to Rs 1,056 mn as revenue growth was offset by decline in margins and significant increase in interest costs.

FY12 balance sheet key takeaways
Consolidated debt increased from Rs 9.2 bn in FY11 to Rs 14.1 bn in FY12 due to additional drawdown of Rs 2.5 bn (total of Rs 4.8 bn) in Pune market city. Also, due to cost escalation in other market city projects, Phoenix has taken a lease rental discounting (LRD) loan of Rs 2.5 bn to meet short-term funding requirements in these projects.

Valuations: Current market price has strong upside
We continue to value Phoenix by the sum-of-the-parts method. Our fair value is Rs 232 per share. We may revise it post interaction with the management. At the current market price of Rs 183, the valuation grade is 5/5.

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