Phoenix Mills: Initiate coverage with ‘buy’ and FV of Rs 960/share

Retail reboot. We initiate coverage on Phoenix Mills with a ‘buy’ rating and fair value estimate of Rs960/share, offering 20% upside to CMP of Rs801/share. PHNX offers investors the opportunity to align with long-term growth in organised retail that will likely benefit from continued urbanisation and rising income levels. In our view, the near-term impact due to Covid-19 is likely transient and will not substantially alter the purchasing habits of the retail consumer in India.

We initiate coverage on Phoenix Mills with a ‘buy’ rating and fair value estimate of Rs960/share. PHNX currently trades at 14X adjusted EV/ebitda and 30X P/E on FY2023E, even as the company will likely grow earnings at 16% CAGR between FY2020 and FY2025E on the back of expansion of retail portfolio to 11 million sq.ft (from 7 million sq. ft currently) and office portfolio to 2.4 million sq. ft (from 1.3 million sq. ft). Our fair value estimate comprises 79% of the value being ascribed to operational projects, 7% value to the under-construction portfolio, while under-development projects comprise the balance 14%. On an asset basis, retail malls account for a bulk of the value (75%) followed by commercial offices (20%), hotels (3%) and residential developments (3%).

In our view, the current lockdown impact on revenues of retail malls is likely transient, and will not have much impact on the longer-term structural growth story for retailing in India, which we expect will grow to $523 billion by FY2030E from $119 billion currently. In our view, retail malls cater to the rising aspirations of an increasingly urbanised India. The top players in India account for 23% of the overall mall capacity (80 million sq. ft), and we expect a few sizeable players to continue to garner a disproportionate share of the increased mall space.

PHNX will likely double its portfolio of operational assets to 13.3 million sq. ft by FY2025E (from 7.2 million sq.ft in FY2020), yielding a 16% CAGR in PAT between FY2020 and FY2025E. PHNX has an outstanding capex plan of Rs19 billion for the increased asset portfolio comprising Rs17 billion towards completion of retail malls and another Rs2 billion for completion of its office portfolio.

A structural shift in the purchasing habits of consumers, and a possible shift towards ‘work- from-home’ for service companies could put to risk demand for retail and commercial space in India, and consequently lead to downward pressure on rentals. Execution slippages could delay aggressive commissioning plans for retail and commercial portfolio.