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Riding the consumption wave

* Phoenix Mills (PHNX), a leading retail-led mixed use asset developer, operates 11 malls across eight cities in India and three new malls are currently under construction including one in Kolkata (ninth city). The company also operates few Grade-A standalone offices in Mumbai and Pune and is aiming to build offices on top of/adjacent to its malls to improve the yield on land. PHNX has also built one hotel each in Mumbai and Agra and residential projects in Bengaluru and Chennai.

* Post the second wave of Covid, consumption across PHNX’s retail portfolio has been reporting a steady recovery, apart from a minor blip in Jan’22 (third wave), and is YTD 27% higher than pre-covid levels. As per Knight Frank, consumption in malls across the top eight cities is expected to register a CAGR of 29% over FY23-28.

* PHNX’s mall portfolio is expected to increase to 14msf by FY27 from ~9msf as of Mar’23 and its presence would expand to six out of the top eight cities. Hence, the company is likely to be the biggest beneficiary of consumption boom in India. PHNX retail portfolio is expected to report a 32% CAGR in rental over FY23-25.

* PHNX has a long-term growth vision in place with an aim to deliver at least 1msf of retail asset every year and is evaluating nine more markets in India. In CPPIB and GIC, PHNX has got the backing from the partners aligned with its growth vision.

* Under its mixed-use strategy, it is building offices on top of/adjacent to its existing or upcoming malls, leading to ~4x rise in portfolio to 7msf. Overall, we expect the company to deliver 34% CAGR in EBITDA of rental portfolio over FY23-25. Our SoTPbased TP of INR1,700 indicates an upside potential of 31%. We re-initiate coverage on the stock with a BUY rating

Consumption growth back on track; penetration to rise further

* Consumption across PHNX’s mall portfolio reported a steady recovery post the second wave of Covid until Jan’22, which was affected due to a minor scare of a Covid third wave. Since Mar’22, the growth is back on track with consumption consistently being 20-25% higher than pre-covid levels.

* As organized retail penetration increases further due to higher disposable income, shopping malls are likely to benefit the most from this shift. As a result, consumption in malls across top eight cities is expected to report a 29% CAGR over FY23-28, as per Knight Frank.

Retail portfolio to grow to 14msf by FY27; expect 32% CAGR in rentals

* As of Mar’23, PHNX has 11 operational malls with a total leasable area of ~9msf, including the recently completed Phoenix Citadel, Indore (1.0msf) and Phoenix Palladium, Ahmedabad (0.8msf).

* With three more malls (Pune, Bengaluru, and Kolkata) under construction, its leasable area is expected to increase to 13msf by FY25. The company recently (Dec’22) acquired a land for developing a 1-msf mall in Surat by FY27.

* With this expansion, the company will have presence in six out of top eight cities and three tier-two cities, and will be a big beneficiary of consumption boom.

* The company has reported a healthy pre-leasing of ~90% for its malls which are expected to be delivered in FY24, and as these malls turn operational, the rental income is expected to report a 32% CAGR over FY23-25 to INR22b

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