The Phoenix Mills rating – Buy: the capital position is a bulwark in difficult times

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The company expects retail rentals to return to pre-Covid levels at S2FY22 assuming there is no third wave of Covid.

Phoenix Mills (PHNX) operations FY21 and Q1FY22 have been affected by shopping center closures due to successive waves of Covid. For FY21, shopping center consumption of Rs 33.3 billion was at 69% of FY20 levels while rental income of Rs 5.6 billion was at 55% of FY20 levels. To overcome the disruption, PHNX raised around Rs 26 billion of equity through the QIP channel and the dilution of the SPV level stake between August 20 and June 21 and has access to an additional funding pool of Rs 10 billion. rupees. We assume a 30% LTL rental income loss for FY22 due to expected rent waivers in S1FY22 and hold our estimates for FY23 as we believe the long-term growth story of category shopping centers A in India remains intact.

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We reiterate our buy note with an unchanged TP based on the March 22 SoTP of Rs 1,231 / share which includes the Phoenix Rise office and retail project of 1.3msf and keep our 10% premium on the net asset value taking into account the growth opportunities of the growth capital raised from GIC PE and CPPIB platform offers. The main risks are a second prolonged wave of Covid impacting consumption in shopping centers and a drop in occupancy and rentals in shopping centers.

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Covid impacts FY21 consumption and rentals, upturn on cards: company expects retail rentals to return to pre-Covid levels in FY 22 in assuming there is no third wave of Covid.

Estimated CAGR rental income of 14% on FY20-25e: PHNX will have ~ 13msf of operational retail space by FY26e (6.9msf currently operational). We expect PHNX to reach a rental income CAGR of 14% (former Kolkata asset) on FY20-25e, which will translate to Rs 19.5 billion in rental income in FY25e versus ~ Rs 10 billion in FY20 . Of this amount, PHNX’s share is about 70% or Rs 13.8 billion.

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