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Strong consumption flows through to rentals

The Phoenix Mills’ (PHNX) saw Oct’22 like-to-like (LTL) consumption across malls at Rs8.7bn or 118% of Oct’19 levels and mirrors the Q2FY23 LTL consumption growth which was at 118% of Q2FY20 levels. In Q1FY23 (Apr-Jun’22), LTL consumption growth across malls stood at 111% of Apr-Jun’19 (Q1FY20) levels which translated into Q1FY23 retail LTL EBITDA of Rs2.9bn or 115% of Q1FY20 levels. Similarly, in Q2FY23, LTL consumption growth stood at 118% of Q2FY20 levels which resulted in Q2FY23 retail LTL EBITDA of Rs2.9bn or 117% of Q2FY20 levels. Owing to continued consumption strength, we model for FY23E rental income of Rs13.7bn (Rs12.2bn on LTL basis vs. Rs10.3bn in FY20). With Indore and Ahmedabad malls to open in Dec’22/Jan’23 respectively and Pune (Wakad) and Bengaluru (Hebbal) in FY24E, we expect 17% rental income CAGR over FY20- 25E. While we remain constructive on the stock, we downgrade our rating to ADD from BUY post the 17% appreciation in stock price over the last three months with an unchanged target price of Rs1,638/share based on 20% premium to our Mar’23E NAV of Rs1,365/share. 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 Q3FY22, LTL consumption across PHNX’s malls stood at 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 were back to 94% of pre-Covid levels. In Mar’22, consumption across malls stood at Rs5.6bn or 105% of Mar’19 levels on LTL basis (Mar’20 saw mall shutdowns hence not comparable) while Q4FY22 consumption of Rs14.8bn stood at 91% of Q4FY19 levels on LTL basis. This momentum carried forward into Q1FY23 (Apr-Jun’22) with LTL consumption across malls at Rs19.8bn or 111% of Apr-Jun’19 (Q1FY20) levels and has continued in Q2FY23 (Jul-Sep’22) with LTL consumption of Rs19.9bn or 118% of Jul-Sep’19 (Q2FY20) levels. With a strong bounce back in consumption across categories in H1FY23, retail rental income (excluding CAM) stood at Rs6.4bn. While the consumption base for FY23E is expected to see a one-time reset in consumption/rentals at ~15% over pre-Covid levels (~5% CAGR over FY20-23E), we model for 5% LTL rental CAGR from FY24E and new malls becoming operational should drive rental growth along with increase in area at High Street Phoenix asset over FY24-25E.

* Estimated rental income CAGR of 17% over FY20-25E: PHNX will have ~13msf operational mall space by FY26 (6.9msf currently operational). We expect PHNX to achieve a 17% rental income CAGR (ex-new Kolkata asset) over FY20-25E, resulting in Rs22.4bn of rental income in FY25E vs. ~Rs10.3bn in FY20. Of the Rs22.4bn of gross rental income in FY25E, PHNX’s share is ~77% or Rs17.3bn.

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