Brokerage firm Motilal Oswal Securities has given the 'buy' rating to The Phoenix Mills India Ltd and increased its target price to Rs 1,700 a share, up 31 percent from its current market price.
Phoenix Mills, a prominent developer of retail-led mixed-use assets, manages 11 malls across eight cities in India. With three more malls under construction, including one in Kolkata, the company is set to expand to its ninth city.
Phoenix operates Grade-A standalone offices in Mumbai and Pune and aims to enhance land yields by constructing offices on top of or adjacent to its malls. In addition to its mall portfolio, Phoenix has built one hotel each in Mumbai and Agra, and residential projects in Bengaluru and Chennai.
In February 2023, Phoenix opened its 11th mall in Ahmedabad, and is expected to deliver the Pune and Bengaluru malls in the first quarter of FY24, according to Motilal Oswal report. With a pre-leasing rate of approximately 90 percent, the company's commercial EBITDA (office plus retail) is projected to show a compound annual growth rate of 34 percent from FY23 to FY25, the Motilal Oswal report added.
Despite a minor setback during the third wave of Covid in January 2022, consumption across Phoenix's retail portfolio has been showing a steady recovery since the second wave. In fact, as of year-to-date, consumption is 27% higher than pre-Covid levels. According to Knight Frank, consumption in malls across the top eight cities is predicted to exhibit a compound annual growth rate of 29 percent from FY23 to FY28.
"Our valuation methodology for Phoenix comprises the following: (i) for operational retail and office assets, we use a cap rate of 7-9 percent, and for upcoming assets, we utilise a discounted cash flow model with a terminal value calculated on steady-state rentals, discounting back to September 2024 at a weighted average cost of capital (WACC) of 11.7 percent; (ii) hotel assets are valued at 15-17.5 times September 2024 estimated earnings before interest, taxes, depreciation, and amortisation (EBITDA); and (iii) residential segment is valued on net present value (NPV) basis," Motilal Oswal said.
"Based on our sum-of-the-parts (SoTP) analysis, we value Phoenix at Rs 292 billion, netting off Rs 13 billion of debt, which translates to a per-share price of Rs 1,700, representing a potential upside of 31 percent. We are initiating coverage on the stock with a 'buy' rating," the report said.
According to Motilal Oswal, by FY27, Phoenix's mall portfolio is expected to increase to 14 million square feet from 9 million square feet as of March 2023, with its presence expanding to six out of the top eight cities in India. As a result, the company is likely to be the biggest beneficiary of the consumption boom in the country. Phoenix 's retail portfolio is expected to report a 32 percent compound annual growth rate (CAGR) in rental over FY23-25.
The company has reported a healthy pre-leasing rate of approximately 90 percent for its upcoming malls, which are expected to be operational in FY24. This, in turn, is expected to contribute to a 32 percent CAGR in rental income over FY23-25, which is estimated to reach Rs22 billion, it added.
"Due to the healthy pre-leasing of its upcoming malls, Phoenix has a strong near-term visibility on rental growth. Therefore, assuming a stabilised rental run-rate for the upcoming malls and no pending capital expenditures, we could potentially increase the valuation base for the retail segment to Rs290 billion at the end of FY25, resulting in a valuation increase from Rs239 billion in the base case scenario," Motilal said.