Buy Phoenix Mills Ltd for the Target Rs. 2,044 by Motilal Oswal Financial Services Ltd
Commissioning of new malls to drive growth beyond FY27
Upcoming malls set to boost growth
* During FY15-25, PHNX’s retail portfolio witnessed an 11% CAGR in consumption, supported by ~7% like-for-like growth in the existing malls and the opening of new malls in Lucknow, Indore, Ahmedabad, Pune, and Bengaluru. Additionally, retail rental income clocked a similar 12% CAGR during this period, mirroring the consumption growth.
* We anticipate this positive growth trend to continue, primarily driven by the ramp-up of new malls. As of 1QFY26, trading occupancy stood at 89%, down from 91% in Mar’25.
* Flat or declining consumption in certain mature assets is linked to ongoing revamps and tenant churn. In Bengaluru, approximately 10% of the leasable area is currently under fit-outs or being repurposed from hypermarkets to high-performing fashion anchors. Pune is undergoing a similar transformation, replacing outdated anchors and restaurants with newer, more relevant offerings. Management remains optimistic about the long-term performance, projecting strong growth from FY27 onward once the revamps are completed.
* The recently commissioned Phoenix Palassio (Lucknow), Phoenix Citadel (Indore), Mall of Millennium, and Palladium Ahmedabad achieved average trading occupancy of 94% within 6-8 quarters of operation. The company aims to sustain this success with its existing malls and replicate it in the upcoming malls in Gujarat and Kolkata.
* Further expansions are underway at Phoenix Palladium (0.35msft), expected to be launched by FY26-27. With the acquisition of 22.1 acres in Coimbatore and Chandigarh Mohali in FY25, PHNX is set to more than double its portfolio by FY30.
* As a result, we estimate a 21% CAGR in retail rental income over FY25-27E to reach INR28b by FY27E and total income to reach INR39b.
Office portfolio to surge 3x!
* After the implementation of the ‘mall of the future’ strategy, PHNX successfully delivered its first asset, Fountainhead (0.8msf), in Pune in 4QFY22. This marked the beginning of a significant expansion of its office portfolio, which now totals 2msf. Despite initial concerns over office demand, the Fountainhead asset has seen a steady rise in occupancy, reaching 65% since its completion, signaling a positive outlook for the office sector within its retail spaces.
* The company continues to diversify and expand its office portfolio within its existing mall properties across key locations. Notable developments include office spaces at malls in Bengaluru (1.2msf), Chennai (0.4msf), and Palladium Mumbai (1.1msf). Additionally, newly launched malls in Pune (1.2msf) and Bengaluru (1.2msf) are also contributing to the growth of PHNX's office segment. These strategic expansions highlight PHNX's commitment to increasing its office presence in high-demand urban areas.
* Looking forward, PHNX's office portfolio is expected to grow significantly over the next few years. By FY27, in a phased completion, the portfolio is projected to increase nearly fourfold, reaching 7.1msf. This growth will boost rental income to INR6b by FY27, representing a 71% CAGR over FY25-27 or a 3x increase, as per the company. This trajectory underscores the company's confidence in the longterm demand for office spaces within its mall-based developments.
Hotel segment to benefit from strong momentum
* PHNX’s flagship hotel, St. Regis, has seen a strong improvement in operations, thanks to demand tailwinds. During 1QFY26, the asset posted an ARR of ~INR16,425 (+13% YoY) and an improved EBITDA margin of ~47%.
* It is currently developing a 400-key premium hotel, Grand Hyatt, at its MarketCity mall in Bengaluru. This is expected to be completed in FY27-28 with an estimated capex of INR10b.
* Phase 3 of PMC Bengaluru will see another hotel with 300 keys, which will soon commence construction. Meanwhile, Phoenix Citadel will see another 300-key hotel, which is currently at the planning stage.
* The company has also acquired an 11-acre land parcel in Thane in FY24 and the project is likely to have another premium hotel.
* This will triple its hospitality portfolio to over ~1,800 keys (588 keys currently operational).
Valuation and view
* While new malls continue to ramp up well, PHNX is implementing measures to accelerate consumption at mature malls. These initiatives, along with a further increase in trading occupancy, will help PHNX sustain healthy traction in consumption.
* The company’s acquisition of the remaining 49% stake in Island Star Mall Developers (ISMDPL) strengthens its high-quality retail asset portfolio, unlocking long-term value. The transaction is expected to be earnings-accretive from year one with significant upside as rental income stabilizes and the 2.71msf incremental FSI potential is developed over the medium term. Staggered payments over three years will keep the net debt-to-equity ratio below 0.4x for the next two years.
* We upgrade our rating to BUY with a revised TP of INR2,044 (earlier INR1,673), implying upside potential of 35%.
Residential segment contributes marginally to overall growth
* PHNX has three projects with a total saleable potential of 4.48msf of the residential portfolio. One Bangalore West and Kessaku are ongoing projects (partially completed), wherein the company has already sold 89% of the launched inventory (of 2.82msf), while the remaining is progressing well.
* The company would launch another project in Kolkata with the codename ‘One Belvedere’ with 1msf of saleable potential in 1QFY26.
* PHNX is not expanding its residential primarily but will keep on doing it opportunistically as a part of mixed development.
* We have discounted the cash flow from the residential segment and arrived at a value of INR17b with the current potential.
Acquisition of the remaining 49% stake in ISMDPL to boost growth
* PHNX has announced its board's approval to acquire the remaining 49% stake held by CPP Investments in ISMDPL, thereby increasing its ownership to 100%, subject to shareholder and regulatory approvals.
* The total consideration of ~INR54.5b will be paid over 36 months in four tranches through a mix of buyback, capital reduction, dividend payout, and/or secondary purchase.
* With 4.4msf of operational retail space generating EBITDA of over INR6.2b in FY25, the platform is expected to grow to over 5.2msf of retail, 4msf of office, and 1,000 hotel keys over the next few years. The platform currently has net debt of INR5.96b, while gross debt is INR9.5b.
* PHNX expects strong EBITDA growth and cash flow from this platform, with new assets becoming operational between FY26 and FY27, while continuing its ongoing joint ventures with CPP Investments in other projects.
* The consideration will be paid in four tranches: 1st tranche of INR12.6b in FY26 to be paid within 30 days of date of receipt of all requisite approval.
* 2nd tranche of INR13.7b in FY27.
* 3rd tranche of INR13.6b in FY28.
* 4th tranche of INR14.7b in FY29.
* The tranche-based transaction structure is designed to preserve PHNX's liquidity, enabling it to continue pursuing its planned growth initiatives while offering flexibility for asset-level monetization within ISMDPL and its subsidiaries.
* Expansions planned over the ISMDPL deal:
* PMC Bangalore is currently expanding from 1msf to a super campus of 4msf+. It is planning retail and office expansion in phase 2 of total 0.57msf and building Grand Hyatt Hotel of 400 keys (to be completed by 2027 with capex of INR10b).
* Phase 3 of PMC Bangalore will include retail and office expansion of 1.8msf and a hotel with 300 keys (0.4msf). Phase 3 construction to commence soon.
* Phoenix Citadel is also to see an upcoming Hotel with 300 keys which is currently under planning stage.
* Other than the above, PHNX has a balance FSI potential of 2.71msf with 0.88msf in Phoenix Citadel, Indore, 0.67msf in Phoenix Mall of Millenium, Pune, and 1.16msf in Phoenix Mall of Asia, Bengaluru.
* These developments, in turn, increase our retail valuation by INR113b to INR648b (from INR535b), office valuation by INR17b to INR59b (from INR42b), and hospitality valuation by INR12b to INR43b (from INR31b).
Stable cash flows; P&L to remain steady until new malls develop
* Net debt stood at INR26.6b in 1QFY26. The company is estimated to reduce its debt to INR23b in spite of the ongoing expansions.
* We estimate a 17% CAGR in revenue over FY25-27 as the upcoming malls will be completed only by FY27-28. Thus, revenue is expected to be INR52b in FY27.
* EBITDA/PAT are likely to register 27%/50% CAGR over FY25-27E to reach INR35b/INR22b, with an average EBITDA margin of 67% and adjusted profit margin of 43%.
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