Capital structure rearranged to continue, value unlocking; TP to Rs 1,250; ‘Buy’ maintained

In the last decade (2011-2021), PML has rearranged the ownership structures of its shopping centers. PML is known in the industry as an active and aggressive mall manager. However, over the past decade it has also created value through active shareholder and capital management. In the first half of the past decade, the malls came into operation with capital contributions from landowners and numerous private equity (PE) players. When the malls were operational for their first five years, PML bought out the interests of these investors at valuations that look cheap in retrospect.

In the second half of the decade, ownership of the same malls diluted, but to stronger sovereign partners with deeper pockets, longer fund life in periods of low interest rates and strong performance. CPPIB joined in 2017 and GIC in 2021. This allowed PML to fund growth for its next range of shopping centers, lower its leverage and unlock value.

The next decade (2022-32) will also continue to see a resurgence that will unlock more value and generate new revenue streams. CPPIB has continued to invest on a project-specific basis beyond its previously defined commitment. GIC will also invest further to increase its stake from 26.44% to c32-36% in the platform, according to a press release. On the other hand, in April 22, PML will acquire a 100% interest in PMC, Chennai from Crest Ventures. It also has a 50% partnership with a local Bsafal group for the upcoming shopping mall in Ahmedabad. In addition, PML continues to look for new greenfield projects. All these constructions will be moved again in the next 10 years in our opinion. GIC will try to monetize its investment within 3-5 years. Furthermore, we believe that PML will also seek to recycle capital as it patiently strives to achieve its vision set in 2007. In addition, these platform deals also generate fee income for PML.

Investment overview and valuation. We believe that PML is now ready to resume its growth trajectory and take advantage. Backed by its strong balance sheet and sovereign funds as partners, we expect PML to capitalize on distressed acquisition opportunities and create a more formidable portfolio, which should increase its bargaining power with retailers, reduce individual asset risk and as such generate more shareholders returns.

We are adjusting our earnings estimates to take into account the Phoenix Hospitality merger with PML, the sale of up to 35.9% stake in Plutocrat and the sale of 26.44% stake in the GIC platform. We use a DCF based SOTP approach to value asset cash flows using a WACC of 10.5% to arrive at our target price of Rs 1,250 (from Rs 1,220).

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