Initiate Buy: A pure play on Indian retail real estate

Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: HSBC Securities and Capital Markets (India) Private Limited View HSBC Global Research at: https://www.research.hsbc.com   India’s largest specialist shopping mall operator  Set to benefit from rental renewals, strong brands, area addition and a falling cost of debt and capitalisation rate  Initiate with a Buy rating and a target price of INR500 Preferred destination for retailers. Phoenix Mills is the purest available play on India retail real estate. Unlike other listed property developers which focus on the sluggish residential market, its retail portfolio contributes about 70% of the company’s value. It is one of the largest owners and operators of shopping malls, with seven malls in six cities. Our discussions with industry experts and operators suggest its malls are the right size, in the right places, have a good retailer mix and the management is among the best in the business. This makes the malls a preferred destination for international brands entering India, like H&M and Zara. Catalysts. About 40% of the portfolio is up for rental renewal over the next two years. After three years of strong growth and with revenue sharing now part of rental agreements, we expect rental income to rise at a CAGR of 12% over FY16-19e, which will further boost profitability. This will be supported by the liberalisation of India’s retail sector and strong demographics which are attracting leading foreign brands. Lower interest rates, increasing private equity investment and a potential REIT listing should compress the capitalisation rate, improving the valuation of Phoenix’s asset heavy business. Our EPS forecasts are well above consensus – 23% in FY17 and 17% in FY18 – based on higher rental growth assumptions. Investor concern about e-commerce. As in other countries, e-commerce is taking market share from shopping malls by offering discounts and convenience. However, we believe the best malls are meeting this challenge by becoming urban centres of entertainment and consumption. They will benefit from strong overall retail growth, the movement from unorganised to organised retail, and global brands entering India. Phoenix ticks all the boxes, while underperforming malls will fall by the wayside, in our view. Valuation and risks. We initiate with a Buy rating. We use a SOTP DCF to value the company’s malls, office space and residential property business to arrive at a target price of INR500, implying an FY18 PE of 15.6x and EV/EBITDA of 8x, well below its historical 5-year averages of 30x PE and 15x EV/EBITDA. Key downside risks include an economic slowdown, loss of major customers, and competition from new malls and growing consumer attraction to e-commerce. 25 October 2016 INITIATE AT BUY TARGET PRICE (INR) PREVIOUS TARGET (INR) 500.00 N/A SHARE PRICE (INR) UPSIDE/DOWNSIDE 371.00 35% (as of 24 Oct 2016) MARKET DATA Market cap (INRm) 56,788 Free float 37% Market cap (USDm) 848 BBG PHNX IN 3m ADTV (USDm) 0.5 RIC PHOE.BO FINANCIALS AND RATIOS (INR) Year to 03/2016a 03/2017e 03/2018e 03/2019e HSBC EPS 7.98 18.70 23.75 29.75 HSBC EPS (prev) - - - - Change (%) - - - - Consensus EPS 13.68 15.65 21.35 25.91 PE (x) 46.5 19.8 15.6 12.5 Dividend yield (%) 0.6 1.1 1.3 1.6 Price to NAV (adj) - - - - Acct'g prof rtn (%) 5.0 7.4 8.6 9.4 52-WEEK PRICE (INR) Source: Thomson Reuters IBES, HSBC estimates Puneet Gulati*, CFA Analyst HSBC Securities and Capital Markets (India) Private Limited puneetgulati@hsbc.co.in +9122 2268 1235 Saurabh Jain* Analyst, Auto Ancillaries & Property HSBC Securities and Capital Markets (India) Private Limited saurabh2jain@hsbc.co.in +9122 6164 0691 *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Phoenix Mills (PHNX IN) EQUITIES REAL ESTATE India 210.00375.00540.0010/1504/1610/16Target price: 500.00High: 432.80 Low: 242.40 Current: 371.00Initiate Buy: A pure play on Indian retail real estate  EQUITIES ● REAL ESTATE 25 October 2016 2 Financial statements Year to 03/2016a 03/2017e 03/2018e 03/2019e Profit & loss summary (INRm) Revenue 17,786 20,326 20,706 22,846 EBITDA 7,900 9,935 11,331 12,503 Depreciation & amortisation -1,773 -1,905 -1,993 -1,994 Operating profit/EBIT 6,128 8,030 9,338 10,510 Net interest -3,993 -3,970 -3,682 -3,323 PBT 1,764 4,061 5,656 7,186 HSBC PBT 1,747 4,061 5,656 7,186 Taxation -746 -1,418 -1,866 -2,371 Net profit 815 2,861 3,633 4,551 HSBC net profit 1,203 2,861 3,633 4,551 Cash flow summary (INRm) Cash flow from operations 506 4,988 5,110 6,420 Capex -3,802 -2,900 -2,000 -2,000 FCF enterprise 1,439 6,058 6,792 7,743 Cash flow from investment -17,386 -2,900 -2,000 -2,000 Dividends -722 -734 -918 -1,102 Change in net debt 495 -2,782 -2,192 -3,318 FCF equity -2,554 2,088 3,11