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Normalcy just a vaccine away for malls? HDFC Securities bets on Phoenix Mills to make a cyclical recovery

The brokerage, however, added that the sector will be under pressure for another 12-15 months and well-capitalised organised players will gain the most when normalcy returns.

The complete recovery for the real estate sector, which was already under strong pressure before the COVID-19 pandemic, is still at least a year away. The retail mall segment is just a vaccine away from normalcy, said a report from brokerage firm HDFC Securities.

HDFC Sec's optimism is based on the view that the pandemic shock is a passing phase and consumption will revert to mean once the pandemic wanes.

The brokerage, however, added that the sector will be under pressure for another 12-15 months and well-capitalised organised players will gain the most when normalcy returns.


"We believe consumption will pick up over the next 12-15 months with normalised monthly run-rate by next Diwali 2021 or November 2021. The recovery is just a vaccine away. For well-capitalised organised players, it is a blessing in disguise to be able to build inorganic assets at high cap rates, optimise and relook capital allocation and further gain market share through consolidation," HDFC Securities said.

COVID-19 has been a black swan event, which has hit the retail malls sector hard, both globally and locally. In the near-term, as per HDFC Securities, this has led to asset values correcting 35-40 percent with concerns on the survival of the modern-day consumption format.

HDFC Securities highlighted that the pandemic has cratered the global retail REITs as lockdown has hit consumption and rentals for malls resulting in 20-60 percent corrections in REITs values, making NDCF yield more attractive than reference bonds.

"For Indian real estate stocks, either pure-plays (like Phoenix) or proxies (other players with mall exposures) stories are not too different, with stock prices correcting 35-40 percent. This provides attractive entry for investors on sidelines," HDFC Sec said.

HDFC's study on consumption pattern revealed that the country's aspirational class is moving towards luxury goods and newer experiential services like multiplexes, F&B, luxury watches, departmental stores, beauty & salon, etc.

"We have bucketed these in categories and arrive at 26 percent FY16-19 revenue CAGR and robust profitable growth on the back of urban consumption. Rent as the cost is sizeable but most of the categories have seen profitable growth and rent is not the only determining factor for mall presence," HDFC Securities.

The brokerage is of the view that global brands continue to expand in malls, and global funds are investing capital for this consumption play, such as Blackstone, Xander, GIC, and CPPIB.

HDFC Sec expects more partnering/strategic opportunities emerging for organised mall developers like Phoenix Mills.

Moreover, large organised mall portfolios are rated-A, the brokerage found in its financial assessment of large unlisted and listed malls.

"Overall, 36 percent of the organised malls have A-rating. Credit rating agencies have put the A-rated malls on negative watch due to the pandemic, despite which, the rating width is positive. We believe new supply would be curtailed and completion timelines of under-construction malls could be pushed by 1-2 years," HDFC Securities said.

The brokerage said Phoenix Mills is well-poised make a cyclical recovery.

"Phoenix Mills is a derivate on richly valued underlying consumption real estate play with a vast scope for expansion. In the long run, it holds the potential for significant cash flow distribution and growth. Near-term headwinds remain, but current prices provide ‘quality at a reasonable price," said HDFC Securities.

The brokerage has a 'buy' call on Phoenix Mills with a target price of Rs 828.

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First Published on Aug 24, 2020 01:53 pm