Business analysis - 1QFY18. Business momentum on the retail side remainedstrong for Phoenix Mills’ main malls with overall consumption growing by 19% (partlybenefiting from pre-GST sales) and rental income by 17%. Its malls in Kurla, Puneand Bangalore recorded 24-36%yoy consumption growth which fueled rental growthof 16-28%. Its Chennai mall and High Street Phoenix were relatively weak with 8-9%rental income growth as these malls were churning tenants during the quarter andthus had slower growth in trading density. Its residential portfolio remaineddisappointing as premium residential real estate market in Bangalore remainedsluggish and company didn’t participate in discounts in line with industry. Its officespace in Kurla and luxury mall in Chennai still await commercialisation.    Next leg of growth has begun. After having announced in the last quarter thatcompany won an under-construction mall at auction for INR2.34bn, Phoenix alsoannounced it acquired 1.6msf of developable area for INR1.61bn for premium retaildevelopment in Pune. Both of these investments will be under its newly createdplatform with the Canadian Pension Board (CPPIB) where CPPIB has alreadyinvested INR7.3bn and has further promised to infuse cINR16bn in the entity.    Investment View and valuation. India’s retail sector is ripe to see strong increase indemand driven by urbanisation, liberalisation of the sector and strong demographicswhich is attracting leading brands to enter and expand in India. We believe PML’smalls are one of the preferred destinations for new brands entering India. In thisbackdrop and with c40% of its portfolio up for renewal, we expect rental growthCAGR of 12.6% over FY17-20e. This should drive c30%+ earnings CAGR.    Valuation and risk. We cut our FY18-19e EPS by 12-13% largely on almost completeslowdown in residential sales of its premium properties and higher debt as company isdeploying signficant capital for new investments. However, our FY20 estimates increaseby 5% on stronger rentals and deferment of sales from FY18/19e to FY20e. Our SOTPDCF-based NAV of company’s malls, office space and residential property businessincreases as we factor in 2 new malls in its existing portfolio of seven retail assets,purchase of stakes in its own mall at attractive valuation, roll forward to FY19e forecasts(earlier FY18e) and roll forward our fair value TP as of June’17 (earlier Mar’17) toINR580 (earlier INR530). Our TP implies 12.5% upside and we rate the stock Buy as weexpect strong rental growth. Downside risks: economic slowdown, loss of majorcustomers, and competition from new malls.

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