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Long term growth story remains intact

The Phoenix Mills (PHNX) Q1FY22 operations were impacted by mall shutdowns across India owing to second Covid wave. While Mumbai/Pune malls are yet to reopen, consumption across balance operational malls in Jul’21 has been encouraging at Rs2.0bn or 93% of Jul’19 levels. We assume a 30% LTL rental income loss for FY22E owing to expected rental waivers in H1FY22 and retain our FY23E estimates as we believe that the long-term growth story for Grade A malls in India remains intact.

PHNX has also commenced work on Project Rise at HSP, Mumbai during the quarter. We retain our BUY rating with a revised Mar-22 SoTP based target price of Rs1,231/share (earlier Rs1,026) as we incorporate Phoenix Rise office and retail project of 1.3msf and retain our 10% premium to NAV considering growth opportunities from growth capital raised from GIC PE and CPPIB platform deals. Key risks to our call are an extended second Covid wave impacting mall consumption and fall in mall occupancies and rentals.

* Q1FY22 retail performance muted owing to second Covid wave: Along expected lines, mall shutdowns across India owing to second Covid wave impacted PHNX’s operations. Q1FY22 billings (including CAM) of 2.3bn were higher than Q1FY21 levels of Rs1.2bn with few malls (ex-Mumbai/Pune) re-opening in Jun’21 vs. a complete shutdown in the previous year. While Mumbai/Pune malls are yet to reopen, consumption across balance operational malls in Jul’21 has been encouraging at Rs2.0bn or 93% of Jul’19 levels. While rental waivers are likely again in H1FY22, company expects retail rentals to revert to pre-Covid levels in H2FY22 assuming no third wave of Covid. We build in a 30% rental loss in FY22E. PHNX has also received the first tranche of GIC PE investment of Rs11bn in Q1FY22.

* Construction on Project Rise at HSP commences, to be operational by FY26: PHNX has commenced construction on Project Rise at High Street Phoenix (HSP) at Lower Parel, Mumbai comprising of 1.0msf of offices and 0.3msf of retail. As per company, the project has a total estimated cost of Rs10.0bn and Rs2.8bn of FSI premium and Rs0.7bn of approval costs have been paid in Jun’21 to kickstart construction. The project is estimated to be completed in FY25E and have first full year of operations in FY26E. We estimate over Rs3bn of rental NOI in FY26E from this asset and value this project at an EV of Rs26.0bn adjusting for FY22 capex.

* Estimated rental income CAGR of 14% over FY20-25E: PHNX will have ~11msf operational mall space by FY24E (6.9msf currently operational). We expect PHNX to achieve a 14% rental income CAGR (ex-new Kolkata asset) over FY20-25E resulting in 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.

Valuations & views

* We like PHNX because: (1) it has a strong brand recall and the market leader in malls across India (2) it has strong pipeline of projects and (3) it is a derivative play on the Indian consumption story.

* We have valued PHNX on SoTP basis with a combination of DCF-based NAV on FY20E basis assuming a cap rate of 8% for rental assets.

* We retain our BUY rating with a revised Mar-22 SoTP based target price of Rs1,231/share (earlier Rs1,026) as we incorporate Phoenix Rise office and retail project of 1.3msf at High Street Phoenix and assume 30% like-to-like retail rental income loss in FY22E as compared to FY20 and incorporate first tranche of GIC fund infusion of Rs11.1bn in the identified asset SPVs. We retain our 10% premium to NAV considering growth opportunities from growth capital raised from GIC PE and CPPIB platform deals.

* Key risks to our call are an extended second Covid wave impacting mall consumption and fall in mall occupancies and rentals.

* Our NAV factors in a one-time like-for-like loss of Rs3.0bn of rental income in FY22E across existing malls and 6-9 months delay in under construction assets.

* Key upside risks are: Higher than expected rental income growth across operational malls and under-construction malls achieving higher than estimated rental income on commencement of operations.

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