JULY 3, 2017

Economy News Equity  The monsoon advanced over the NCR and most parts of J&K and other % Chg Himalayan states. It is expected to cover the rest of the country in the 30 Jun 17 1 Day 1 Mth 3 Mths next two weeks. According to IMD data, the country has recorded 6% above normal rain since June 1. (ET) Indian Indices SENSEX Index 30,922 0.2 (1.1) 3.4  Banks have shortlisted nine coal-based power projects and are evaluating NIFTY Index 9,521 0.2 (1.4) 3.1 them for equity purchase and for NTPC to likely operate them BANKEX Index 26,278 0.0 (0.8) 6.9 subsequently.(BS) SPBSITIP Index 9,833 0.6 (4.1) (4.3) BSETCG INDEX 17,076 0.1 (3.8) 0.3  Senior Union ministers Nitin Gadkari, Suresh Prabhu, Piyush Goyal and BSEOIL INDEX 13,203 (0.1) (5.5) (3.4) Ashok Gajapathi Raju will be part of a five-member ministerial panel CNXMcap Index 17,730 0.7 (0.2) 2.3 headed by finance minister Arun Jaitley tasked with deciding the process SPBSSIP Index 15,411 0.7 0.6 5.4 of privatising Air , which may start by December. (ET) World Indices  Handset makers and contract manufacturers are set to fast track their Dow Jones 21,350 0.3 0.7 3.4 investments into Make in India, after the government imposed a 10% Nasdaq 6,140 (0.1) (2.6) 4.2 basic customs duty (BCD) on smartphones, ensuring continuation of FTSE 7,313 (0.5) (3.1) 0.4 incentives for local manufacturing that would boost investment into NIKKEI 20,033 (0.9) (0.6) 5.7 developing component manufacturing ecosystem in the country. (ET) HANGSENG 25,765 (0.8) (0.8) 6.0  The Union cabinet may take up for approval this month the hydropower Value traded (Rs cr) policy which aims to provide Rs167.09 bn support for stalled 40 hydel 30 Jun 17 % Chg - Day projects, entailing 11,639 megawatt (MW) capacity, and to classify all such Cash BSE 2,803 (26.2) ventures as renewable energy.(MINT) Cash NSE 23,336 (21.4)  The government is considering raising import duty on sugar to 60 per cent Derivatives 312,502 (77.3) from the current 40 per cent to restrict cheap shipments and maintain Net inflows (Rs cr) domestic prices.(FC) 29 Jun 17 % Chg MTD YTD  Registration of 1 lakh cos cancelled, 37,000 shell firms identified.(ET) FII (732) 102 2,485 54,454  Housing sales fell by 41 per cent during January-May period of 2017 at Mutual Fund 21 (90) 6,954 36,995 1.10 lakh units across 42 major cities as property demand continued to be sluggish post demonetization.(BS) FII open interest (Rs cr) 29 Jun 17 % Chg

Corporate News FII Index Futures 19,866 7.3 FII Index Options 50,403 10.4  The UK government is reportedly considering a law change to plug a FII Stock Futures 68,820 1.4 loophole in its pension laws to help Indian steel gaint save jobs FII Stock Options 1,818 2,494.1 at its Port Talbot plant in south Wales.(ET) Advances / Declines (BSE)  JSW Steel has won five iron ore mines in with an estimated 30 Jun 17 A B T Total % total reserve of 111 million tonnes. The steel major has also secured Moitra coking coal mine through an auction in Jharkhand. The mine has total Advances 178 556 60 794 100 extractable coal reserve of around 30 MT.(MINT) Declines 118 571 41 730 92 Unchanged 2 25 7 34 4  PE firms, lenders may take stake in Bhushan Power & Steel as part of revamp, the firm, with debt over Rs 400 bn, is facing proceedings under Commodity % Chg Insolvency and Bankruptcy Code.(BS) 30 Jun 17 1 Day 1 Mth 3 Mths

 PNB to block all Maestro debit cards from July 31.The bank will not Crude (US$/BBL) 46.3 0.5 (2.9) (7.9) charge anything for the replacement and it will be provided free of Gold (US$/OZ) 1,242.4 (0.3) (3.0) (1.2) cost.(ET) Silver (US$/OZ) 16.6 (0.3) (5.2) (8.8)

 The country's largest two-wheeler maker Hero MotoCorp has reduced Debt / forex market prices of its mass selling models by up to Rs 1,800 to pass on GST benefits 30 Jun 17 1 Day 1 Mth 3 Mths to its customers. (ET) 10 yr G-Sec yield % 6.5 6.5 6.7 6.7  Inox Leisure turns the spotlight on premium multiplex market. Re/US$ 64.6 64.6 64.5 64.9 Expansion plan here over 18 months, while keeping the aim of expanding beyond the metros.(BS) Sensex  The shipping ministry has strongly opposed strategic sale in Shipping 31,400 Corporation of India (SCI) and some ports under its watch, joining a 29,663 number of other ministries that are not keen on selling state-run enterprises that they govern. This follows the government's recent 'in- 27,925 principle' approval for stake sale in Air India. (ET) 26,188

24,450 Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, IE = Indian Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Express, BL = , ToI: Times of India, BSE = MORNING INSIGHT July 3, 2017

MANAGEMENT MEET UPDATE THE PHOENIX MILLS LTD (PML) Teena Virmani [email protected] +91 22 6218 6432 PRICE: RS.456 RECOMMENDATION: ACCUMULATE TARGET PRICE: RS.481 FY19E P/E: 23.3X We recently met the management of Phoenix mills and following are the key takeaways from the same:  Investment of Rs 7.24 bn received from CPPIB and funds likely to be de- ployed for acquiring stakes in mall or purchase of land in next 1-2 quar- ters. Further fund infusion is likely to scale up no. of malls in next 4-5 years.  Rental revenues for HSP and other market cities to grow on lease re- newals  Residential segment is currently witnessing slowdown and hence sales Summary table booking are likely to remain near FY17 levels (Rs mn) FY17 FY18E FY19E  Hospitality is witnessing improvement in occupancy levels and margins Sales 18,246 21,428 22,296 Growth (%) 3 17 4  We continue to remain positive on the company as we believe that EBITDA 8,469 9,729 9,966 company is likely to benefit from improved rentals in its market cities, EBITDA margin (%) 46.4 45.4 44.7 PBT 2,758 4,102 4,551 lower interest rates as well as reduction in leverage going forward. Net profit 1,910 2,690 3,000 Stock has moved up since our last BUY recommendation given at Rs EPS (Rs) 12.5 17.6 19.6 411, we now downgrade the stock to ACCUMULATE and advise inves- Growth (%) 128 41 12 tors to buy the stock on declines with a price target of Rs 481 (Rs.477 CEPS (Rs) 25.2 30.5 32.7 earlier) on FY19 estimates. BVPS (Rs) 132.0 146.9 163.9 DPS (Rs) 2.2 2.2 2.2 ROE (%) 9.8 12.6 12.6 Key highlights about the company ROCE (%) 11.3 13.3 13.5 Net debt 34,224 32,278 28,475 CPPIB investments to scale up the rental assets portfolio NW capital (Days) 225.1 225.1 225.1 P/E (x) 36.5 25.9 23.3 PML and Canada Pension Plan Investment Board (CPPIB) have signed definitive P/BV (x) 3.5 3.1 2.8 agreement to develop, own and operate retail-led mixed-use developments EV/Sales (x) 5.6 4.7 4.3 across India. CPPIB has made an initial investment of Rs 7.24 bn into Island Star EV/EBITDA (x) 12.1 10.3 9.7 Mall Developers which has already come to the company and now owns 30% of Source: Company, Kotak Securities - Pri- the platform. It would then invest Rs 9 bn for buying the additional stake to take vate Client Research stake to 49%. The entire amount of Rs 16 bn will come into Island Star Mall De- velopers which would be utilized for creating leadership assets across the coun- try. They can either buy existing operating assets and ramp them up to the stan- dards of PML or can buy the land, develop and operate the malls. Island Star Mall Developers ( East market city) was chosen as an in- vestment vehicle since PML holds 100% stake in it while in the other market cities, the stake increase process is on and company would be putting in close to Rs 2.5 bn to increase stake in other market cities (except ). Investment avenues considered by CPPIB and PML are -  Phoenix Market city Bangalore has a gross leasable area of 1 mn sq ft and is centrally located in Whitefield. The company has mentioned that this retail asset still has 2 mn sq ft of additional development potential and the com- pany would intend to expand the size of the mall by 0.25-3 mn sq ft in the first phase.  It bought an under-construction mall in Indore's MR 10 area for Rs 2.35 bn which was earlier with EWDL. The mall currently has only one level of con- struction of 6 lakh sq ft and has an estimated potential of 1.8 mn sq ft with a retail rental potential of 1 mn sq ft. Island Star along with CPPIB will be investing further Rs 3.5-4 bn for expanding the total area for this asset.

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the Disclosure/Disclaimer on the last page For Private Circulation 2 MORNING INSIGHT July 3, 2017

 The company is also evaluating opportunities in Pune West as it already has a strong presence in Pune East. It may consider buying land in Pune and further develop it as a mall. Estimated investment can be in the range of Rs 7-8.5 bn including land cost and cost of construction.  The company is also evaluating buying land in , although it is still in early stages. Investment of Rs 7.24 bn has already come into Island Star and once 80% of this amount is deployed then remaining Rs 9 bn will also come. Hence with total Rs 16.24 bn investment, company can leverage upto 1.5x and have a total invest- ment worth Rs 40 bn (including debt and equity) and can add nearly 4-5 malls in its overall rental assets portfolio in next 4-5 years.

Performance of various assets - During FY17, high Street Phoenix has registered 28% YoY improvement average rentals which stood at nearly Rs 311 per sq ft per month vs Rs 289 per sq ft per month during FY16. This was largely led by lease renewals as well as higher revenue share. With Big Bazaar and Pantaloons mov- ing out, company expects further improvement in rentals going forward as the new lease deals have significantly higher minimum guarantee than the current mall average. High Street Phoenix and Palladium has 13%/18%/23% renewals expected in FY18/19/20 respectively. Market cities - During FY17, Chennai market city revenues grew by 3%YoY and were led by 10% YoY improvement in rentals which stood at Rs 121 per sq ft as compared to Rs 109 per sq ft. Palladium is also coming up in Chennai with a to- tal area of 2,20,000 sq ft which would have average rentals of Rs 150-160 per sq ft. For Chennai market city, lease renewals of 46% are likely to come during FY18 thereby aiding healthy revenue growth. Pune market city has seen 10% improvement in revenues led by 16% improve- ment in rental income. Rentals for the year were up by 13% YoY and stood at Rs 99 per sq ft per month. The area of Reliance Mart in Pune market city has been reduced which would now be leased out at higher rentals. The residential sales from Pune Fountainhead project didn't pick up and hence the company is decid- ing to change it to commercial project for an area of nearly 2,50,000 sq ft which would be leased out. Pune market city is likely to see 4%/15% lease renewals during FY18/19 respectively. Bangalore market city has seen 12% improvement in revenues led by 14% im- provement in rental income. Rentals for the year were up by 12% YoY and stood at Rs 102 per sq ft per month. Company would intend to expand the size of the mall by 0.25-3 mn sq ft in the first phase. Bangalore market city lease renewals for nearly 8%/3% of the area are likely to come during FY18/FY19 respectively. Kurla market city revenues were largely flat and rentals had also declined during FY17. But management has mentioned that consumption has now started im- proving with most of the new leading brands occupying the space. Kurla market city is likely to see 9%/10% lease renewals during Fy18/19 respectively. These renewals are likely to aid rental growth for the company. Residential - Residential sales were lower than our estimates and were im- pacted by slowdown as well as demonetization. For One-Bangalore West, it commenced hand over for flats for Towers 1-5 while for Kessaku project, con- struction pace is maintained. For project Crest in Chennai, only 15% of the area is left to be sold. We believe that continued slowdown in real estate is likely to impact residential revenues from the pending area yet to be sold. Hospitality - FY17 room occupancy at St Regis, Mumbai stood at 72% at an ARR of Rs. 10594, up by 14% YoY while room occupancy for the full year at Courtyard by Marriott, Agra stood at 57%. Company expects the occupancies to move up further going forward based on advance bookings done so far.

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Going ahead, the focus of the company will be on new investments post funding by CPPIB along with debt reduction. Renegotiation of rentals across malls, debt reduction coupled with lower interest rates is likely to aid net profit growth go- ing forward.

Financial outlook  With rentals getting renewed in most of the market cities, we expect con- solidated revenues to grow at a CAGR of 10.5% between FY17-19. Retail revenues would continue to form more than 60% of the total consolidated revenues going forward.  Operating margins are expected to dip slightly in comparison with FY17 due to decline expected in residential revenue booking. We expect margins of 45.4%/44.7% for FY18/19 respectively.  Net profits are expected to grow at a CAGR of 25.4% between FY17-19 led by healthy revenue growth and lower interest expenses.

Valuation and recommendation At current price of Rs 456, stock is trading at 25.9x and 23.3x P/E and 10.3x and 9.7x EV/EBITDA on FY18 and FY19 consolidated estimates. We continue to re- We recommend ACCUMULATE main positive on the company as we believe that company is likely to benefit on The Phoenix Mills Ltd with from improved rentals in its market cities, lower interest rates as well as reduc- a price target of Rs.481 tion in leverage going forward. We believe that residential segment may con- tinue to see subdued demand which can also impact further launches of the company. Stock has moved up since our last BUY recommendation given at Rs 411, we now downgrade the stock to ACCUMULATE and advise investors to buy the stock on declines.

Sum of the parts valuation Phnx Stake Area Avg rent Value Per share (mn sq ft) (Rs/sq ft/m) (Rs mn) or rate per sq ft

High Street Phoenix 100% 0.9 335 40457 264 Phase IV @ HSP 100% 0.25 7000 46 Market cities Pune 87.00% 1.13 100 5732 37 Kurla 75.00% 1.11 88 2006 13 Bangalore(East) 100.0% 0.98 107 6782 44 Chennai 50.01% 1 127 6280 41 Bangalore(W)-Residential 100% 1.8 9300 1793 12 Big Apple 74% 35-40 884 6 Hospitality 53% 2705 18 Total 481

Source: Kotak Securities - Private Client Research

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Bulk deals Trade details of bulk deals Date Scrip name Name of client Buy/ Quantity Avg. Sell of shares price (Rs)

30-Jun BLOIN Kamal Kumar Chaudhary Huf S 150,000 4.6 30-Jun BLOIN Akash Gupta B 75,000 4.5 30-Jun BLOIN Vikash Gupta B 50,000 4.7 30-Jun DION Joseph Leslie Nash B 389,000 60.4 30-Jun DION Albula Investment Fund Ltd S 389,000 60.4 30-Jun ESCORP Sumana Paruchuri S 40,000 15.5 30-Jun GAGANPO Sanjay R Maheshwari(Huf) S 62,450 2.6 30-Jun GUJFOIL Avs Equinvest Llp S 47,912 10.8 30-Jun KDML Gryffin Advisory Services Pvt Ltd B 2,000,400 113.0 30-Jun KDML Vijaykumar Khemani S 2,000,400 113.0 30-Jun KESORAMIND Indusind Bank Ltd S 7,500,000 137.0 30-Jun KESORAMIND Highgate Industries Ltd B 7,500,000 137.0 30-Jun LALPATHLAB Wagner Limited S 900,000 780.3 30-Jun MNIL Faithful Vanijya Pvt Ltd B 45,000 97.3 30-Jun OPCHAINS Girraj Kishor Agarwal (Huf) B 40,000 17.0 30-Jun OPCHAINS Hem Sec Ltd S 40,000 17.0 30-Jun RCSL Shalu S Rana B 40,025 30.0 30-Jun RELCHEMQ Dipak Kanayalal Shah B 30,000 82.5 30-Jun SFLINTER Goldmine Barter Pvt Ltd S 83,975 18.8 30-Jun SFLINTER Dhansagar Vintrade Pvt Ltd S 137,400 18.8 30-Jun SFLINTER Deepak Parsharam Salvi S 50,000 18.8 30-Jun SHAILJA Hasmukh Dayalal Shah S 26,977 13.0 30-Jun SHAILJA Manisha Hasmukh Shah S 21,123 13.0 30-Jun SHIVACEM Jsw Cement Limited B 2,400,000 22.9 30-Jun SHIVAEXPO Girish M Shah B 100,000 11.1 30-Jun STELLAR Autolite Agencies Pvt Ltd S 144,000 5.9 30-Jun SUCHITRA Sheelu Inani S 58,000 18.7 30-Jun SUCHITRA L L Soni (Huf) B 50,000 18.8 30-Jun SUCHITRA Ladu Lal Soni B 55,000 18.5 30-Jun VOL Rakshit Mahendra Shah B 24,000 45.1 30-Jun VOL Nareshkumar Jayantibhai Prajapati S 36,000 45.1

Source: bseindia.com

Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn)

Gainers 162 4.0 NA 13.7 ITC Ltd 324 3.9 NA 23.2 556 3.5 NA 6.6 Losers - 263 (1.9) NA 2.1 Indiabulls Housing 1,076 (1.8) NA 1.1 382 (1.8) NA 2.4

Source: Bloomberg

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RATING SCALE Definitions of ratings BUY – We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE – We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE – We expect the stock to deliver 0% - 5% returns over the next 9 months SELL – We expect the stock to deliver negative returns over the next 9 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a suffi- cient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA – Not Available or Not Applicable. The information is not available for display or is not applicable NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark.

Fundamental Research Team Sanjeev Zarbade Ritwik Rai Pankaj Kumar Capital Goods, Engineering FMCG, Media Midcap [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6426 +91 22 6218 6434 Teena Virmani Sumit Pokharna Nipun Gupta Construction, Cement Oil and Gas Information Technology [email protected] [email protected] [email protected] +91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6433 Arun Agarwal Amit Agarwal Jayesh Kumar Auto & Auto Ancillary Logistics, Paints, Transportation Economy [email protected] [email protected] [email protected] +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 5373 Ruchir Khare Jatin Damania K. Kathirvelu Capital Goods, Engineering Metals & Mining Production [email protected] [email protected] [email protected] +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6427

Technical Research Team Shrikant Chouhan Amol Athawale [email protected] [email protected] 91 22 6218 5408 +91 20 6620 3350

Derivatives Research Team Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

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