The Phoenix Mills Rating: buy Funds from potential deal may aid growth

The Phoenix Mills (PHNX) has informed exchanges that the listed entity along with a few of its SPVs has signed a non-binding term sheet with GIC Private Equity (PE) for the formation of a retail-led mixed-use platform. The assets include PHNX’s Mumbai (Kurla) and Pune malls and Mumbai (Kurla) offices having a total leasable area of 3.36msf (2.33msf of malls and 1.03msf of offices) that generated FY20 Net Operating Income of Rs 3.7 bn.

The indicative pre-money EV for these assets is Rs 56-57 bn or an equity value of Rs 40-41 bn (debt of Rs 16 bn as of Mar-20). This implies a cap rate of 6.6% at pre-Covid rentals which is commendable given 50% waiver in FY21e mall rentals.

GIC PE has the option to initially acquire an equity stake of 26% in these SPVs and increase it to 35% in another 12 months which implies a potential equity investment of Rs 10-13 bn. We retain our Buy rating with a revised SoTP based TP of Rs 804/share (earlier Rs 780) as we roll forward to FY22e NAV.

Potential fund infusion may usher in growth: The indicated pre-money EV for potential transaction of Rs 56-57 bn implies a cap rate of 6.6% (6.1% for malls and 8.5% for offices). In our view, this is commendable considering that ready Grade A office assets in India command a cap rate of ~8% and is similar to the cap rate of 6.3% which PHNX achieved for the platform deal signed with CPPIB in April 2017.

GIC PE may invest between Rs 10-13 bn in PHNX’s SPVs which may further strengthen PHNX’s balance sheet as it has cash reserves of Rs 18.5 bn as of Sep-20.

Festive season sees surge in consumption: While Q2FY21 consumption was at 40-55% of previous year levels, consumption has picked up in Q3FY21 with the first four weeks of Nov-20 seeing consumption rising to 87% of the same period last year driven by increase in mall operating hours, resumption of F&B and onset of festive season. ~93% of PHNX’s total area across malls is now operational. While rental waivers may result in PHNX incurring a 50% rental loss of Rs 5.0 bn in FY21e, the company expects rentals to revert back to 90% minimum guarantee from Q1FY22 as consumption stabilises.

Estimated rental income CAGR of 13% over FY20-25e: At a portfolio level, PHNX will have ~11msf operational mall space by FY23-24e (6.9msf currently operational including Palassio, Lucknow). After accounting for COVID-19 induced revenue loss of Rs 5.0 bn in FY21, we expect PHNX to achieve a 13% rental income CAGR (ex-CAM) at a portfolio level over FY20-25e which may result in PHNX clocking over Rs 19 bn of rental income in FY25e vs. ~Rs 10 bn in FY20. Of Rs 19.2 bn of estimated gross rental income in FY25e, PHNX share is ~75% or Rs 14.4 bn.