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Consumption recovery firmly on track

The Phoenix Mills (PHNX) has seen Feb’22 mall consumption recovering to 94% of pre-Covid levels on like-to-like (LTL) basis after Jan’22 LTL consumption stood at 70% of Jan’20 levels in spite of Omicron-led disruption during that period (Q3FY22 consumption stood at 89% of Q3FY20 levels). With ~95% of retailers having moved back to pre-Covid minimum guarantee rentals from Jan’22, we expect PHNX to clock Rs8.0bn of FY22E retail rental income (30% LTL loss). We model for FY23E rental income of Rs12.7bn (Rs11.0bn on LTL basis vs. Rs10.2bn in FY20). With Indore and Ahmedabad malls to open in FY23E and Pune (Wakad) and Bengaluru (Hebbal) in FY24E, we expect 14% rental income CAGR over FY20-25E. We reiterate our BUY rating with a revised target price of Rs1,336/share (earlier Rs 1,231) as we roll forward our SoTP valuation to Mar’23E and incorporate the balance 50% stake acquisition in Chennai Market City SPV for Rs9.2bn in FY23E. We ascribe a 15% premium to NAV considering growth opportunities from growth capital raised from GIC PE and CPPIB platform deals. Key risks to our call are a fresh Covid wave impacting mall consumption and fall in mall occupancies and rentals.

Consumption recovery firmly on track: In Q2FY22, consumption across PHNX’s malls stood at Rs10.1bn or 63% of Q2FY20 (pre-Covid) on LTL basis owing to reopening of malls across India in a calibrated manner. This momentum carried forward into Q3FY22 where PHNX has clocked LTL consumption of Rs18.4bn or 89% of Q3FY20 levels. In Jan’22, LTL consumption stood at 70% of Jan’20 levels in spite of Omicron disruption in mall operations for the month, and in Feb’22, consumption levels are back to 94% of pre-Covid levels. As per the company, ~95% of retailers have moved back to pre-Covid minimum guarantee rentals from Jan’22 with fresh waivers unlikely and the company may clock ~Rs8.0bn of FY22E rental income across assets which implies a 30% LTL rental income loss on account of waivers. The company may clock FY23E retail rental income of ~Rs12bn (5% LTL growth vs. pre-Covid rentals) excluding Pallasio, Lucknow which opened in FY21.

Proposed Chennai mall SPV stake acquisition is marginally accretive: As per a company press release, PHNX proposes to acquire the balance 50% equity stake held by its partners in the Classic Mall SPV for Rs9.2bn by Apr’22 which houses the Chennai Market City Mall of 1.0msf (this excludes Palladium Chennai annex of 0.22msf which is housed in a separate SPV). The EV for the Chennai asset acquisition works out to Rs18.9bn (including residual adjustments) which implies an 8.5% cap rate on FY20 asset EBITDA of Rs1.6bn vs. our EV estimate of Rs21.0bn assuming an 8% cap rate on stabilised FY23E rentals

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