- Due to the COVID-19 led crisis, real estate segments such as retail, residential and hospitality faced near-term challenges. However, the commercial segment has shown resilience. Further, the latest directive by the Government of Maharashtra to commence mall operations from the first week of Aug’20 bodes well for Phoenix Mills (PHNX).
- PHNX still remains one of the best proxy plays on India’s consumption story in the medium-to-long term. Maintain Buy due to favorable risk-reward.
COVID-19 led disruption spells short-term uncertainty
– 1QFY21 performance: Revenues declined 78% YoY to INR1,347m (v/s est. INR1,486m). EBITDA margin was up 460bp YoY to 52.2% (v/s est. 40.9%). EBITDA was down 76% YoY to INR703m (v/s est. INR608m). This was largely on account of significantly lower operating costs like power and fuel, raw material and other expenses. Adj. PAT level losses stood at INR424m (v/s est. Adj. PAT level loss of INR12m), against Adj. PAT of INR1,304m.
– Segmental Performance: Retail segment declined 70% YoY to INR885m due to restricted mall operations (3 out of 8 malls remained operational in the last month of 1QFY21). Commercial was up 5% YoY to INR382m, driven by stable occupancy across operational assets. Hospitality plunged 90% YoY to INR80m due to significant impact of the countrywide lockdown. Residential segment remained subdued with no revenue recognition in 1QFY21.
– On consumption and occupancy pattern in operational malls: Occupancy stood at ~90% of permissible area for operational malls. Footfalls and average daily spends is improving consistently in malls that are operational. Consumption was largely driven by pent-up demand in categories like electronics and home accessories.
Highlights from management commentary
– HSP Mumbai, PMC Mumbai and PMC Pune are expected to start operations from 5th Aug’20,
– In 1QFY21, capex stood at INR660m. FY21 capex would largely be on account of 4 under-construction malls and commercial tower Fountain Head 2/3. Management expects an additional capex outlay of ~INR3,000m-INR3,250m for the rest of FY21.
Valuation and view
– Near-term challenges for the company include (a) uncertainty surrounding recommencement of operations in other two malls (Palladium and PMC Chennai), (b) restrictions on Cinemas, F&B and Family Entertainment (~20-25% gross leasable area (GLA) and key footfall drivers) and subdued hospitality segment, and (c) slower-than-expected traction in residential segment. We, thus, have lowered our earnings estimate for FY21 by 9% while broadly maintaining our estimates for FY22E. We value PHNX’s retail assets based on DCF-based NAV approach, assuming a cap rate of 9.5% and discount rate of 13.5%. Maintain Buy with an SOTP-based TP of INR746.