Phoenix Mills rating: Buy; Capital position lends company an edge

Malls were hit hard by COVID-19 as they were made to stop operations. However, all PHNX malls reopened during the June-September period and have started their journey towards normalcy (even though cinemas, food beverage, and entertainment segments, accounting for c25% of area, still remain shut in many malls).

Consumption (adjusted for non-permissible area) has now almost reached c50% of pre-COVID-19 levels.

Strong company and promoter balance sheet provides downside support: PHNX raised Rs 11 bn via sale of c12% of shares to Qualified Institutional investors and the promoter entities further sold 14% of total holdings to raise Rs 8.3 bn. We believe this has sufficiently strengthened the company to tide it over the current weak environment should it last longer into the next two years, or continue with the pace of capital spend. In addition, promoters can further infuse capital if need be. Also, as business for PHNX turns to normalcy, we believe the company can use the funds to add to its portfolio through acquisitions, which might be available at attractive valuations given the current stress in industry.

Tenant negotiation so far most attractive amongst peers: While the actual collection is yet to be seen, negotiations with each tenant vs blanket exemptions given by peers allows it to recover a higher share of contractual rent.

Investment view: We agree that the next few months are likely to be difficult for mall operators, but we believe PHNX will create a safe and convenient environment for shoppers and will likely take market share from the high street.

Valuation and risks: We cut our EPS estimates for FY21e/22e/23e as we assume slower commissioning of its new malls and incorporate the impact of dilution in earnings on account of share sale. With sufficient liquidity, we believe the company deserves a lower cost of equity of 14.9% (previously 15.5%). We use a sum-of-the-parts DCF methodology to value the cash flows from assets and arrive at an end FY21e value of Rs 904 (earlier Rs 900). We discount this back by 6 months to arrive at a TP of Rs 860 (from Rs 850). Our TP implies c46% upside from current levels; accordingly, we rate the stock as Buy.