Morgan Stanley initiates coverage on Phoenix Mills; increases target price by 31%

Markets

Brokerage house Morgan Stanley has initiated coverage on The Phoenix Mills Ltd (PML) with a buy rating and increased its target by 31 percent to Rs 1,700 from the current market price.

"Our rating is based on PML's portfolio of high-quality destination malls in top metros and the planned expansion of rental assets from 9msf in F22 to 21msf in F27, which should drive an F24-25 EBITDA CAGR of 27 percent. It also features a capital-efficient business model, strong balance sheet and inexpensive valuations", Morgan said in its report. In the bull case scenario, the brokerage house expects the stock target price at Rs 2329 a share, up 23 percent.

The stock is currently trading at a 31 percent discount to NAV, which we believe is inexpensive in view of its stable rental income, high-quality assets, embedded growth, upcoming expansion, and strong balance sheet. On an EV/EBITDA basis, the stock is trading at 18x and 14.5x F24 and F25 EBITDA, respectively, Morgan Stanley report said.

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.

PML has a diverse real estate portfolio consisting of large-format retail malls (8msf), offices (2msf), hotels (588 keys), and residential properties (0.91msf). PML is currently undertaking construction projects to expand its retail and office portfolios to 14msf and 7msf, respectively, by FY27. PML's malls are strategically located in top metros such as Mumbai, Bangalore, Pune, and Chennai, as well as state capitals like Ahmedabad and Lucknow. These malls occupy prime locations in affluent areas and are leaders in their respective micro markets. To partially fund these assets at the SPV level, PML has partnered with private equity players CPPIB and GIC, who have taken minority equity stakes, Morgan report added.

"We estimate Phoenix's economic share at 9msf in malls and 5msf in offices. It has thus far spent Rs5700 crore on these projects, with Rs4900 crore of pending capex that will be funded through internal accruals, its PE partners, and some debt. We expect roughly Rs900 crore of surplus cash to be generated from operations in F23, and this should double over the next 3-4 years", said Morgan Stanley in its report.

To capitalize on the India consumption growth story and leverage its cash flows, Phoenix is planning the next leg of growth for F28-32 by entering new cities such as Jaipur, Chandigarh, Hyderabad, National Capital Region (NCR) and Mumbai Metropolitan Region (MMR). The company aims to add 1msf+ of new assets per annum.

"In view of the upcoming growth in FCF and the PE partnership model, we believe the company will have sufficient funds to finance the next phase of growth," the Morgan report added.

Last week, Motilal Oswal Securities gave a buy rating on the stock and increased its target price to Rs 1700 a share. Currently, the stock has 16 buy, 1 hold and 1 sell rating, according to Bloomberg.

According to Motilal Oswal Securities, 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.