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We maintain a positive outlook on the future performance of Nexus Select Trust (NXST). Our optimism is driven by several factors including a favourable demand environment, a commendable 9MFY24 performance and a promising pipeline of value-accretive acquisitions. In 9MFY24, NXST has outperformed its peers, achieving a 14% YoY consumption growth. NXST is also on the verge of acquiring a portfolio of 3 Grade-A retail assets in Southern India with a cumulative area of 1msf. The acquisition is likely to be completed in 4QFY24E. Our estimates indicate that the acquisition would be NDCF accretive as the assets reach steady state operations (in 12-15 months). The NDCF of NXST is expected to grow at a CAGR of 17% over FY23-26E. Despite outperforming on key operational parameters, NXST is yet to catch-up in terms of valuation (7% cap rate) compared to its peers (5.7-6.0% cap rate). We re-iterate BUY and maintain a Mar’25 TP of INR 150.

*  Demand for Grade-A space remains robust, supported by strong macros: Retail leasing in CY23 stood at 7.1msf and 1.2msf across tier 1 cities and tier 2 cities respectively (Source: CBRE). In 2HCY23, the absorption of retail spaces in tier 1 cities was up 67% YoY at 4.2msf, which is significantly higher than the 1HCY23 absorption of 2.9msf. According to the latest CBRE’s Asia Pacific Leasing Sentiment Survey, c. 82% of retailers are looking to establish new stores, expand operations or upgrade their existing stores. With limited Grade-A supply, rental rates have continued their upward trajectory. Among high streets and Grade-A spaces, rentals grew by i) 5-7% in Pune, Kolkata and Chennai and ii) 1-5% in Bengaluru, Ahmedabad and Delhi-NCR (Source: CBRE).

*  Minimal vacancy; consumption growth should reflect in higher rentals: In a quarter where the majority of NXST’s occupiers (apparel retailers, QSRs and multiplexes) reported soft growth, NXST reported 8% YoY growth in consumption. The leased and trading occupancies as of 3QFY24 is robust at 97% and 95% respectively. Furthermore, in 9MFY24 NXST leased 0.85msf of area (0.66msf re-leased at 21-26% re-leasing spreads). Consumption for 9MFY24 grew by 14% YoY to INR 92.2bn (INR 33.3bn in 3QFY24; 8% YoY; +13% QoQ) majorly driven by categories like electronics and jewellery.

*  Pursuing bolt-on acquisition opportunities - a prudent strategy; growth concerns overdone: NXST has established a presence in both tier 1 and tier 2 cities, successfully building a substantial portfolio covering nearly 4msf in various tier 2 cities. NXST predominantly employs an acquisitive-led model, thereby avoiding development risks and has the potential to grow faster. We have illustrated the financial impact on NOI and NDCF for a typical representative deal (1msf, INR 90psf rentals, 8% cap rate; Exhibit 2 & 3). We estimate that a 1msf acquisition (if done at the right valuations - 8% cap rate), can be NDCF accretive in a time period of 9-12 months.

*  Maintain BUY with a Mar’25 TP of INR 150: We estimate the NDCF of NXST to grow at 17% CAGR over FY23-26E. We reiterate BUY with a DCF-based Mar’25 TP of INR 150 and expect NXST to distribute INR 8.7 p.u., reflecting a total 1-year return of 23%.

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