Why Phoenix Mills investors are in wait-and-watch mode

The opening of four new malls pushed The Phoenix Mills Ltd’s consolidated revenue up 44% year-on-year in the December quarter (Q3FY24). Mint
The opening of four new malls pushed The Phoenix Mills Ltd’s consolidated revenue up 44% year-on-year in the December quarter (Q3FY24). Mint

Summary

As the company aggressively pursues completion of new retail assets and expansion of its commercial portfolio, it expects to incur capex of around 2,500 crore each in FY24 and FY25.

The opening of four new malls pushed The Phoenix Mills Ltd’s consolidated revenue up 44% year-on-year in the December quarter (Q3FY24). Consumption, a key metric for the mall developer and operator, rose 24% at 3,296 crore. Like-to-like consumption was softer, up 5%. This can be partially due to the usual quarterly shift in the festive season. Like-to-like growth is adjusted for Phoenix Citadel, Phoenix Palladium Ahmedabad, Phoenix Mall of the Millennium and Phoenix Mall of Asia, which opened in December 2022, February 2023, September 2023 and October 2023, respectively, and the impact from closure of Lifestyle block for renovation at Phoenix Palladium Mumbai.

During the nine-month ended December, consumption stood at 8,500 crore. In an earnings call, the management said that retail consumption stays robust and expects to end FY24 with a consumption of around 11,300 crore to 11,500 crore. It anticipates the measure to grow at acompound annual growth rate, or CAGR, of 15% over the next five years. In-line with this, around 2.65 million square feet of new retail assets would come online by end-CY27.

 

Phoenix Mills is witnessing better traction in the office leasing segment, which translated into higher occupancy in Q3FY24. Office assets in Hebbal, Whitefield (Bengaluru), Wakad (Pune) and Chennai are likely to become progressively operational between FY24 and FY27.

As the company aggressively pursues completion of new retail assets and expansion of its commercial portfolio, it expects to incur capital expenditure (capex) of around 2,500 crore each in FY24 and FY25.

As of December 2023, Phoenix Mill’s net debt stands at 1,634 crore. With a strong pipeline of assets, management expects debt to rise a bit, although the operational cash flows should suffice to cover the capex plans.

Despite the management’s confidence, investors should remember that Phoenix Mills stock remains a play on consumption trends. “The consumption trajectory in retail assets and occupancy in office and hotel assets are intrinsically linked to economic growth. A slowdown in economic growth can adversely impact the performance of these assets," said a Nuvama Research report.

Plus, valuations are hardly enticing as potential benefits of expansion thrust seem to be factored-in, especially after the stock’s sharp 96% rally in the last one year.

“The commissioning of four new malls in the past twelve months should aid earnings growth in the near-term, while a strong pipeline of retail and commercial assets should support medium-term growth," said analysts at Kotak Institutional Equities. However, valuations at 17x attributable EV/Ebitda on FY26 estimates appear full, according to Kotak.

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