Buy The Phoenix Mills Ltd For Target Rs. 1,026 - ICICI Securities
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Building a war chest for growth
The Phoenix Mills (PHNX) has informed exchanges that the company along with few of its SPVs has executed definitive documents with GIC Private Equity (PE) for the formation of a retail-led mixed-use platform at a pre-money EV of Rs55bn for specific assets. These assets include PHNX’s Mumbai (Kurla) and Pune malls and Mumbai (Kurla) offices that generated FY20 NOI of Rs3.7bn. GIC PE will initially get a 26.4% equity stake in these SPVs through fund infusion of Rs11.1bn with an option to invest a further Rs4bn to take its stake to between 33-36%. With Mar’21 liquidity of Rs10.3bn and potential fund infusion of Rs15.1bn from GIC PE and Rs9.6bn from CPPIB, PHNX is building a war chest for growth. We retain our BUY rating with an unchanged Mar-22 SoTP based target price of Rs1,026/share incorporating first tranche of GIC PE fund infusion. Key risks are the second Covid wave impacting mall consumption and fall in occupancies and rentals.
GIC PE fund infusion to provide ammunition for growth:
The indicated premoney EV of for the GIC PE platform transaction of Rs55bn (Isec EV of Rs52bn) implies a cap rate of 6.5% (6.1% for malls and 8.5% for offices) based on combined pre-Covid FY20 Net Operating Income (NOI) of Rs3.7bn. 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. With the first tranche of fund infusion of Rs11.1bn in FY22E (Rs8.3bn will flow to PHNX standalone balance sheet while Rs2.8bn will be retained at the SPV level), GIC PE will hold 26.4% equity stake in the identified asset SPVs which may rise to 33-36% within next 12 months.
PHNX to have a potential war chest of over Rs30bn to fuel growth:
As of Mar’21, PHNX had consolidated gross debt of Rs44.7bn along with cash/liquid investments of Rs10.3bn. With the first tranche of GIC PE fund infusion of Rs11.1bn and expected CPPIB fund infusion of Rs3.84bn in two tranches in Kolkata Mall SPV, PHNX may have ~Rs25bn of liquidity in H1FY22. Apart from this, including balance potential fund infusion by GIC PE of Rs4bn and balance CPPIB fund infusion of Rs1.8bn in Kolkata Mall SPV and Rs4bn in Island Star SPV, PHNX has access to additional funds of Rs10bn for deployment in standalone business and mall SPVs.
Estimated rental income CAGR of 14% over FY20-25E:
At a portfolio level, PHNX will have ~11msf operational mall space by FY23-24E (6.9msf currently operational including Palassio, Lucknow). We expect PHNX to achieve a 14% rental income CAGR (ex-new Kolkata asset) at a portfolio level over FY20-25E which may result in PHNX clocking Rs19.5bn of rental income in FY25E vs. ~Rs10bn in FY20. Of the Rs19.5bn of gross rental income in FY25E, PHNX share is ~70% or Rs13.8bn.
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