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Strong growth aided by opening of new malls

Beat on revenue led by the residential segment; EBITDA/PAT in line

* Phoenix Mills (PHNX) reported revenue of INR13.1b, up 79%/32% YoY/ QoQ, which was 20% ahead of our estimate due to a higher contribution from the residential segment as Tower 7 of its project in One Bangalore West received OC. During FY24, its revenue jumped 51% YoY to INR39.7b.

* However, on account of a higher residential mix, the EBITDA margin contracted 11pp to 48%. As a result, EBITDA growth was restricted to 46% YoY at INR6.3b (in line). Adj. PAT rose 59% YoY to INR3.3b (in line). During FY24, Adj. PAT stood at INR11b, up 37% YoY.

* PHNX generated an OCF (post-interest) of INR17.8b (up 27% YoY) and incurred a capex of INR16.7b. Its gross debt was flat QoQ at INR43.7b; however, net debt declined INR1b to INR15.6b.  

New malls drive strong consumption and rental growth

* Consumption across PHNX’s mall portfolio was up 28% YoY to INR28b in 4QFY24 and it rose 23% YoY in FY24 to INR113.4b, marginally ahead of its guidance of INR110b. On a like-for-like basis, consumption grew 10% YoY for 4Q and 8% YoY for FY24.

* Retail rental income increased 31% YoY to INR4.5b, and EBITDA was up 28% YoY to INR4.5b with a margin of 74% (down 200bp). FY24 retail rental income grew 27% YoY (in line with consumption growth) to INR16.6b as new malls contributed 18% to the overall revenue.

* Trading occupancy stood at 88% in Mar’24, while leased occupancy was 97%. Management expects to reach a trading occupancy of >95% by the end of FY25, which will drive 30% increase in retail rental income in FY25. However, with no new malls getting commissioned over the next two years, we expect rental CAGR to subside to 15% over FY25-27.  

Strong show by the hotel segment; office rentals to scale-up from FY25

* Hospitality: Occupancy improved 200bp/400bp QoQ to 88% each for St. Regis and Marriott Agra. ARR was up 10% YoY at St. Regis to ~INR21,200, and it rose 11% YoY at Marriott Agra to INR6,350. Total income grew 11% YoY to INR1.6b, and EBITDA was up 15% YoY to INR0.75b in 4QFY24.

* Commercial performance: Occupancy improved 700bp YoY to 70%. Total income was INR480m (+22% YoY), while EBITDA rose 14% YoY to INR300m.

* PHNX is likely to deliver 1.6msf of office assets across Bengaluru, Pune, and Chennai over the next 6-9 months. Thus, we expect its office rental income to report a CAGR of 39% to reach INR4.7b over FY24-FY27.  

Highlights from the management commentary

* LFL consumption growth: Most of the Marketcity malls are at the fag end of anchor tenures. In PHNX Bengaluru and Pune, 52% of the space is occupied by anchors, which the company intends to utilize in an efficient manner. The company utilized the space successfully at PMC Mumbai. Over the next 3-5 year period, the consumption CAGR will be 11-12%.  

* Business development: Last quarter, management indicated about 3-4 deals that were expected to be concluded within the next 18-24 months. It has already completed one in Bengaluru. Two more are in the advance stages and are likely to be closed by the end of FY25. PHNX is well on track to deliver 1msf each year. It is in a sweet spot, as the size of one of its malls has increased to 1.5msf.  

* Status of the key upcoming assets: Thane – Management needs 2-3 months to freeze the development mix, but it will be a large mixed-use development with some retail and hotel components. Management is also evaluating residential development. Kolkata residential – It is aiming for a launch in the next 6-8 months. It has circled down on configuration. The micro-market is doing well, with realizations trending at INR15,000/sqft. Bengaluru new land: PHNX acquired 6.6 acres of land for INR2.3b. The acquisition window was short, and hence, it did a broad calculation and went ahead. This will provide an opportunity to add at least 1.3-1.4msf and enhance the quality of the existing asset. Management can evaluate residential development too, with a realization of INR15,000/sf.

 Valuation and view

* PHNX continues to deliver strong operational and financial performance, driven by the commencement of new malls. As the trading occupancy ramps up further, we expect the growth momentum to continue. However, in the absence of the completion of any major new mall, we anticipate its growth to taper down in FY26-27.

* That said, we remain confident in the longer-term consumption growth trend, which can sustain at least 7-8%. Considering that, we recently moved to (report link) a multiple-based valuation from cap rate-based valuation for retail assets, where we value matured malls at 20x EV/EBITDA and new malls at 25x EV/EBITDA. Thus, we arrive at a fair value of INR3,220/share, indicating an upside potential of 3%. We reiterate our Neutral rating on the stock. New land acquisitions will be an upside risk to our estimates and valuation. 

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