Why Phoenix Mills is set to shrug off Covid-driven slowdown and get back on growth path

Real estate developer Phoenix Mills Ltd is well placed to tap into growth opportunities as the property market revives and consolidation activity accelerates after the Covid-19 shock, according to a report by IIFL Securities.

The Mumbai-listed developer—like most of its industry peers—had suffered as the lockdowns imposed to control the pandemic last year and earlier this year sapped demand across residential, retail and office segments. However, the sector is coming back on its feet as shopping malls reopen, offices resume and residential sales improve.

IIFL Securities said in its report that 2020-21 and the first half of 2021-22 were “a washout”, but there are high hopes of a recovery. Indeed, the company’s retail revenues contracted 48% in 2020-21, the report noted.

While profitability took a sharp hit due to the waivers offered to tenants, Phoenix Mills focussed on strengthening its balance sheet to tide over any cashflow mismatches during 2021-22 as well as to focus on the next leg of growth. Further, its progress on under-construction malls remains intact and it expects these to come on-stream by 2023-24.

The report said the developer focussed on fortifying its balance sheet through 2020-21, with its core business facing significant headwinds due to Covid-led lockdowns. It added that consumption recovery in coming months would be sharp and that the capital raise of Rs3,000 crore till the first quarter of 2021-22 will help the company take advantage of growth opportunities.

Since the pandemic began, the developer has raised Rs 1,100 crore via an institutional share sale, and formed a joint venture with Singapore sovereign wealth fund GIC for investing Rs 1,100 crore, and sealed a partnership with Canada Pension Plan Investment Board for Rs 800 crore across existing under-construction projects and a Kolkata asset.

As a result, net debt at the end of June 2021 stands at less than Rs 3,000 crore from about Rs 4,000 crore at the end of the fourth quarter of 2019-20 despite operational headwinds.

‘Buy’ call on Phoenix Mills, 24% upside

IIFL Securities reiterated its ‘Buy’ call on Phoenix Mills with a target price of Rs1,060 per share, up 24% from the current market price, for the next one year.

It also said that it expects Phoenix Mills to record 20% annualised growth in earnings over FY20-24,driven by improvement in revenue on the back of rental growth and contribution coming in from completion of under-construction malls in Indore, Ahmedabad and Wakad.

IIFL has built in weak earnings for the current fiscal year, factoring in a 50% waiver in retail rentals, considering that during the first half of the year most malls in Maharashtra remained shut.

The report also said that recovery trends are encouraging and that it expects reversion to the strong trajectory soon.

Already, consumption has recorded a swift recovery after lockdowns opened. This is evident from the trend as consumption reached almost 93% of July 2019 levels – adjusted for non-operating categories –at operational malls in July 2021. Footfalls and four-wheeler traffic reached 83% and 93% of last year’s level, respectively, in January-March 2021, the IIFL report said.

The company operationalized its Lucknow mall and acquired a Kolkata asset during 2020-21. It also aims to double its retail portfolio to about 13 million sq ft by 2025-26 and add about 1 million square feet of retail space annually.