Phoenix Mills Share price: Initiates coverage with a BUY rating and Fair Value estimate of Rs 960/share

Kotak Institutional Equities initiates coverage on Phoenix Mills with a BUY rating and Fair Value estimate of Rs 960/share, offering 20% upside to CMP of Rs 801/share. Phoenix Milla offers investors the opportunity to align with the long-term growth in organized retail that will likely benefit from continued urbanization and rising income levels. In Kotak’s view, the near-term impact due to Covid-19 is likely transient and will not substantially alter the purchasing habits of the retail consumer in India.

Phoenix Mills currently trades at 14X adjusted EV/EBITDA and 30X P/E on FY2023E, even as the company will likely grow earnings at 16% CAGR between FY2020 and FY2025E on the back of expansion of retail portfolio to 11 mn sq. ft (from 7 mn sq. ft currently) and office portfolio to 2.4 mn sq. ft (from 1.3 mn sq. ft). Kotak’s Fair Value estimate comprises 79% of the value being ascribed to operational projects, 7% value to the under-construction portfolio, while under-development projects comprise the balance 14%. On an asset basis, retail malls account for a bulk of the value (75%) followed by commercial offices (20%), hotels (3%) and residential developments (3%).

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Covid-19 impact likely transient, expect a bounce back with increased consolidation:

In Kotak’s view, the current lockdown impact on revenues of retail malls is likely transient, and will not have much impact on the longer-term structural growth story for retailing in India, which we expect will grow to US $523 bn by FY2030E from US $119 bn currently. In Kotak’s view, retail malls cater to the rising aspirations of an increasingly urbanized India. The top players in India account for 23% of the overall mall capacity (80 mn sq. ft), and Kotak expects a few sizable players to continue to garner a disproportionate share of the increased mall space.

Phoenix Mills earnings CAGR of 16% between FY2020 and FY2025E aided by doubling of portfolio:

Phoenix Mills will likely double its portfolio of operational assets to 13.3 mn sq. ft by FY2025E (from 7.2 mn sq.ft in FY2020), yielding a 16% CAGR in PAT between FY2020 and FY2025E. Phoenix Mills has an outstanding capex plan of Rs 19 bn for the increased asset portfolio comprising Rs 17 bn towards completion of retail malls and another Rs 2 bn for completion of its office portfolio.

Structural shift in purchasing habits, lower rentals remain key risk for Phoenix Mills:

A structural shift in the purchasing habits of consumers, and a possible shift towards ‘workfrom-home’ for service companies could put to risk demand for retail and commercial space in India, and consequently lead to downward pressure on rentals. Execution slippages could delay aggressive commissioning plans for retail and commercial portfolio.