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New malls to drive higher-than-historical growth

* During the 10-year period from FY14 to FY24, PHNX’s retail portfolio reported a 12% CAGR in consumption, aided by ~8% like-for-like growth in existing malls and the launch of new malls in Lucknow, Indore, and Ahmedabad. Moreover, the company’s retail rental income also witnessed 12% CAGR over the same period, aligning closely with the growth in consumption.

* We expect the healthy growth momentum to continue at least for a year, largely driven by ramp-up in new malls. As of Mar-24, the leased occupancy at PHNX’s retail portfolio stood at 97%, while trading occupancy stood at 88% with new malls opened in the last 12 months trading at an occupancy of 71%.

* The company’s recently opened malls, Phoenix Palassio (Lucknow) and Phoenix Citadel (Indore) have both achieved 90%+ trading occupancy within five quarters of operation. The company plans to replicate this success in its new malls at Ahmedabad (4QFY23), Pune (2QFY24), and Bengaluru (3QFY24) which will translate into 29% growth in retail rental income for FY25.

* However, with no new malls expected to become operational in FY25/FY26, a large portion of the growth will be driven by organic consumption growth and densification of ~0.5msf space at Palladium, Mumbai, and PMC Bengaluru. Thus, we expect the growth in retail rental income to decelerate to 13% over FY25-27.

Supply Consolidation: Handful of players pouring concrete

* The size of the retail industry stood at INR71t in FY23 and it is anticipated to witness a CAGR of 14%, leading to a projected value of INR121t by FY27, on the back of factors, such as expanding urbanization, rising household income, enhanced connectivity of rural consumers, and a surge in consumer spending.

* However, the supply of Grade A malls is primarily controlled by only 10-12 large developers. These developers possess the capability to build destination malls exceeding 0.8msf+, establish strategic brand partnerships, and have honed their mall management skills over the years. Such expertise is critical for the success of a mall.

* Cumulative annual supply among these developers is expected to increase to ~6-7msf (vs. 5msf in CY23) in line with the absorption. Thus, occupancies for large format malls are expected to remain intact at 90%+, driving rental growth.

* PHNX being the largest player will be among the key beneficiaries of the increasing adoption of organized retail. However, with a portfolio of 14 malls spanning across 10 cities (including upcoming malls), leading to a high base effect, we expect retail rental growth to plateau at 9-10% beyond FY26.

Valuation and view

* We believe the company’s growth trajectory in the near term remains intact, given the ramp-up in new malls and expansion of office portfolio. But the current valuations indicate that near-term growth is priced in.

* Moreover, while the management’s target of adding one new mall every year provides healthy growth visibility, we believe the pace of growth would taper off beyond FY26 as the base effect would kick in.

* We adopt a multiple-based approach, valuing the retail business at a blended EV/EBITDA of 21x (20x for matured malls and 25x for new malls), implying a value of INR513b for the mall portfolio. Our overall SoTP-based TP stands at INR3,220, which indicates 9% upside potential. We reiterate our Neutral rating on the stock.

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