Ripe for consumption
COVID-19 has been a black swan event, which has hit the retail malls sector hard, both globally and locally. In the near term, this has led to asset values correcting 35-40% with concerns on survival of the modern-day consumption format. But consumption in the system remains subdued due to regulatory restrictions and personal safety preferences. We believe we are a vaccine away from normalcy, and it will be a hard road over the next 12-15 months. For well-capitalized organized players, it is a blessing in disguise to be able to (1) build inorganic assets at high cap rates (2) optimize/relook capital allocation, and (3) further gain market share through consolidation.
* COVID-19–a great leveler–hits global REITs hard: The pandemic has cratered the global retail REITs as lockdown has hit consumption and rentals for malls resulting in 20-60% corrections in REITs values, making NDCF yield more attractive than reference bonds. For Indian real estate stocks, either pure-plays (like Phoenix) or proxies (other players with mall exposures) stories are not too different, with stock prices correcting 35-40%. This provides attractive entry for investors on sidelines. We believe consumption will pick up over the next 12-15 months with normalized monthly run-rate by next Diwali 2021 or Nov 2021. The recovery is just a vaccine away.
* India malls story mirrors global picture, reinvents, and builds on: We have done detailed 10-yr study of growth matrices of over 50+ large mall brands/stores listed in various Indian malls. India has seen sharp changes in consumption patterns with aspirational class moving towards luxury goods and newer experiential services like multiplexes, F&B, luxury watches, departmental stores, beauty & salon, etc. We have bucketed these in categories and arrive at 26% FY16-19 revenue CAGR and robust profitable growth on the back of urban consumption. Rent as cost is sizeable but most of the categories have seen profitable growth and rent is not the only determining factor for mall presence.
* Global capital chasing scarce high quality mall assets: In the near term, the pandemic shock is a passing phase and consumption will revert to mean once the pandemic wanes. Global brands continue to expand in malls, and global funds are investing capital for this consumption play, viz., Blackstone, Xander, GIC, and CPPIB. We see more partnering/strategic opportunities emerging for organized mall developers like Phoenix Mills Ltd (PML).
* Large organized mall portfolio rated-A, Capex could be deferred to tackle balance sheet woes: We have carried out a detailed financial assessment of large unlisted and listed malls. Studying their credit rating reports, we find that, overall, 36% of the organized malls have A-rating. Credit rating agencies have put the A-rated malls on negative watch due to the pandemic, despite which, the rating width is positive. We believe new supply would be curtailed and completion timelines of under-construction malls could be pushed by 1-2 years.
* Initiate coverage on Phoenix Mills (PML) with SOTP of Rs 828/sh: We believe, with strong balance sheet and marquee assets position, PML is well-poised to ride the cyclical recovery (at present, restrictions on mall’s operations and COVID-led fears have curtailed the underlying demand). PML is a derivate on richly valued underlying consumption real estate play with a vast scope for expansion. In the long run, it holds the potential for significant cash flow distribution and growth. Near-term headwinds remain, but current prices provide ‘quality at reasonable price.
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