>Phoenix Mills Limited (CRISIL)

■ Under penetrated organised retail provides bright industry prospects
Under-penetration of the organised retail market, rising disposable income and favorable demographics buoy India’s retail sector. However, these prospects are partly subdued by the fragmented industry and low entry barriers.

■ Phoenix pioneered an innovative concept of the Market City
Phoenix Mills Limited (Phoenix) pioneered the Market City concept in India. It refers to a multi-use premise for retail, commercial, entertainment as well as hospitality needs. The economic strength of the concept is derived from the inherit nature of business offerings, extensive range of services enabling larger footfalls and higher longevity at the premise.

■ HSP provides revenue stability; expansion will augment steadiness
High Street Phoenix (HSP) contributes nearly 99% of the lease revenues. Out of 0.5 million square feet (msft) leased area; anchor tenants occupy nearly 40% and contribute almost a quarter of revenues. HSP’s revenues are expected to be Rs 2.0 Bn by FY12, translating into a 32% 3-year CAGR, with 0.9 msft of leased area.

■Aggressive plans to launch Market Cities will double revenues
Phoenix plans to launch Market Cities in four major cities in India. With around 7.7 msft of retail and commercial area currently under development and expected to be operational through FY12 and beyond, we expect Phoenix’s revenues to be Rs 3.5 Bn in FY12, translating into a 3-year CAGR of 33%.

■ Phoenix’s financial performance is highly sensitive to occupancy rates
Phoenix’s financial performance is highly sensitive to its occupancy rates at its upcoming Market City projects. We have assumed occupancies in range of 60-75% during the initial few years of the Market Cities becoming operational. However, any change in this underlying assumption will materially impact the overall financial performance as well as valuation of the company.

■ Expansion looks highly aggressive especially looking at the past record
Although the management of the company has done well so far at a single location, viz, HSP, we feel that the ongoing expansion of more than 9 msft (as against the existing 0.9 msft until June 2009) at various market cities pose challenges of scale, complexity and demand risks which are significantly greater than what has been hitherto managed.

■ We assign Phoenix ‘2/5’ on fundamental and ‘3/5’ on valuation
We assign a fundamental grade of ‘2/5’, indicating that its fundamentals are ‘Moderate’ relative to other listed securities. While good industry prospects and expected revenue from upcoming market cities positively influence our grading, limited execution track record of management and aggressive expansion plans weigh down our overall grading. A valuation grade of ‘3/5’ indicates that the current market price is ‘Aligned’ to our fundamental value per share (Fundamental Value of Rs 160 per share).

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