>PHOENIX MILLS (RELIGARE SECURITIES)

Phoenix Mills (PML) has posted a net sales growth of 37% YoY to Rs 302mn during Q3FY10, marginally below our estimates. The EBIT margin dropped to 41.2% as against 58.8% in Q2FY10 owing to a sharp rise in SG&A expenses (on festive promotions and one-time repairs), as well as depreciation. The margin squeeze took PAT below our estimates, as it declined 31% YoY and 42% QoQ to Rs 102mn. We expect the commencement of full-scale operations at Palladium (management targets 95% occupancy by March) to drive lease income and profitability going forward. Maintain Buy.

SG&A and depreciation costs crimp PAT

■ Net sales marginally below estimates: PML’s net sales increased 37% YoY and 14% QoQ to Rs 302mn, against our estimate of Rs 316mn. The luxury mall, Palladium, contributed Rs 39mn to the topline after being operational at 28% of its capacity during the quarter.

■ High SG&A expenses dent margins: The EBITDA margin dropped 11 percentage points YoY to 58.7% as SG&A expenses shot up 151% YoY and 62% QoQ to Rs 53mn. The spike in costs arose from a one-time charge of Rs 25mn during the quarter – this included Rs 10mn spent on major repair and maintenance for phase I and phase II of High Street Phoenix which occurs every three years, Rs 5mn spent on promotions during the festive season, and Rs 5mn–6mn incurred towards marketing commission and brokerage. In addition, the company booked 100% of CAM (common area maintenance) expenses in Q3 despite earning only 25–30% of CAM revenues from Palladium.

The EBIT margin declined further to 41.2% as against 60.7% in Q3FY09 and 58.8% in Q2FY10. This stemmed from a spike in depreciation cost to Rs 53mn (up 151% YoY and 98% QoQ), as Palladium charges were expensed out of the profit & loss account as against the practice of capitalisation seen in previous quarters.

■ Palladium to boost lease income: The Palladium mall covers a leasable retail space of 0.3msf. PML has already pre-leased up to 95% of this area, with the mall being 28% operational. The company targets an occupancy level of 95% by March ’10. We expect Palladium to contribute revenues of Rs 110mn and Rs 454mn from Q4FY10 and FY11 onwards at 70% occupancy. Rental revenues for PML are thus projected to expand from Rs 900mn in FY09 to Rs 1.3bn in FY10. This will rise further to Rs 1.7bn in FY11 when the full-year revenue contribution from Palladium starts flowing in.

■ Maintain Buy: With strong prospects from the ramp-up at Palladium, we maintain our Buy rating on the stock with an NAV-based target price of Rs 223.

To read the full report: PHOENIX MILLS