Phoenix Mills by Motilal Oswal Institutional Equities

Phoenix Mills

CMP: INR584, TP: INR792(+36%), Buy

Earnings disappoint; Near-term outlook challenging

·         The near-term uncertainty in PHNX’s business, especially retail malls (one of the worst hit businesses due to COVID-19), remains a challenge. However, in the medium-to-long term, PHNX still remains one of the best proxy plays on India’s consumption story.

·         Reiterate Buy on account of favorable risk-reward.

COVID-19 led disruption spells short-term uncertainty

·         4QFY20 performance: Revenue declined 45% YoY to INR3,992m (v/s est. INR4,971m) in 4QFY20. EBITDA margin declined 100bp YoY to 51.2% (in line with est. 51.1%). EBITDA stood at INR2,043m (v/s est. INR2,538m), down 46% YoY. Adj. PAT declined 75% YoY to INR467m (v/s est. INR644m).

·         Segmental Performance: Retail revenue declined 7% YoY to INR2,705m, largely impacted by COVID-19 led countrywide lockdowns in the second half of Mar’20. Commercial revenue was up 19% YoY to INR290m while Hospitality revenue declined 14% YoY to INR867m, impacted by lower occupancy at St. Regis (-1,800bp YoY to 69%) and Courtyard (-2,300bp YoY to 60%).

·         Unlock 1.0 and resumption of mall business: According to the Indian government’s latest directive to restart the economy, malls were allowed to open from 8th June in few states. PMC – Bangalore and PHNX's malls in UP (Lucknow and Barelli) have started operations. ~80% of the stores have opened up, barring few businesses like family entertainment and multiplexes (~20-25% of leasable space).

Highlights from management commentary

·         Three of the eight operational malls in Bengaluru, Bareilly and Lucknow have started operations with ~80% of the permissible operational area active across assets.

·         As a relief to retail tenants, PHNX has offered 3 months moratorium on renegotiated rentals – ~50% waiver in minimum guarantee (MG) portion of the rental income – for the lockdown period.

Valuation and view

·         PHNX’s 4QFY20 results highlight near-term headwinds in two of its key business segments viz. Retail and Hospitality. However, the company’s existing liquidity position and plan to raise additional capital (up to INR12b) as a conservative measure to withstand the challenging business environment makes it a preferred play in the real estate space. Nevertheless, we cut our earnings estimate for FY21/FY22E by 31%/12% given the extended lockdown and uncertainty surrounding the commencement of operations at its key retail assets in Maharashtra (HSP Mumbai, PMC Kurla and PMC Pune, which contributes ~60% of the rental income). We value PHNX’s retail assets using DCF-based NAV approach, assuming cap rate of 9.5% and discount rate of 13.5%. Maintain Buy with an SOTP-based TP of INR792/share.