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Investments in shares of mall companies aren’t for the faint-hearted or for those with relatively short investment horizons (PTI)
Investments in shares of mall companies aren’t for the faint-hearted or for those with relatively short investment horizons (PTI)

We’re all at home, but this mall stock is in huge demand

  • it was interesting that a qualified institutional placement (QIP) by Phoenix Mills Ltd was lapped up by investors.
  • The 1,100 crore issue received bids for five times the number of shares on offer

When Canadian actor Cobie Smulders sang the covid-19 version of the hit, Let’s Go To The Mall, it was glumly titled, Let’s All Stay At Home. It was just another reminder that mall visits will be the last thing on anyone’s mind for a long time.

Indeed, a survey by KPMG in India to analyse the change in consumer sentiment owing to the pandemic showed that preference for online shopping has increased materially. Within the set of customers willing to brave physical stores, 67% of those surveyed said they prefer standalone stores to malls.

Against this grim backdrop, it was interesting that a qualified institutional placement (QIP) by Phoenix Mills Ltd was lapped up by investors. The 1,100 crore issue received bids for five times the number of shares on offer. Promoters took advantage of the pent-up demand and sold shares worth 833 crore at an over 10% premium to the QIP price. What explains the rush for shares of a mall at a time when social distancing has become the norm?

Gradual road to recovery
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Gradual road to recovery

“The macro view is India is underserved from a formal retail perspective and quality realty-led retail will see upsides as the consumption story unfolds," says Rachit Mathur, managing director and partner at Boston Consulting Group.

Indeed, the government of Singapore, which was the largest investor in the QIP, and other institutional investors, bought Phoenix Mills shares at a 35% discount to its pre-covid highs.

“Investors will focus on potential, and not just current scenario. Malls are a big draw in a country that lacks most other means of entertainment that many developed countries take for granted," says Anuj Puri, chairman, ANAROCK Property Consultants. “Global capital wants to have a pie in this consumption growth story—either directly or through partners," says Parikshit D. Kandpal, an analyst at HDFC Securities Ltd.

In Phoenix’s case, its prime property in central Mumbai is a clear draw. While malls, in general, will face challenges, those present in certain key locations and with a proven proposition are expected to do better. “Malls with quality real estate, a strong traffic base, consumer experience and upkeep orientation will be at an advantage," says BCG’s Mathur. And the fundraising will help fund cash burn for several quarters—cash burn was estimated at 65 crore in the June quarter.

But clearly, investments in shares of mall companies aren’t for the faint-hearted or for those with relatively short investment horizons. In the near term, there is expected to be considerable pain. Mall owners have a battle on their hands on two fronts. On the one hand, the fear of the virus is keeping shoppers away; on the other, a drop in income levels and the increased uncertainty is resulting in a drop in discretionary spending.

As a result, mall rentals have practically evaporated and the pace of recovery is slow. And given the current financial situation of retailers, the component of fixed rentals is expected to reduce with a shift towards revenue-sharing. “With profitability under pressure and real estate rentals being a significant cost of sales, most brands and tenants will look to variabilize this cost head to manage their P&L," says Mathur. “As long as there is a cap on the profitability of retailers, rentals will remain under pressure," says Puri.

At its June quarter earnings announcement, multiplex firm Inox Leisure Ltd said that once operations start, it is looking to negotiate a revenue share model instead of a fixed rent.

Also note that mall revenues were under pressure even before the pandemic, with the increasing penetration of e-commerce in the country. This trend has picked up in the past five months. “The pandemic has provided motivation for consumers to engage in online shopping, (with) safety and hygiene being a non-negotiable requirement," a note authored by Harsha Razdan, partner and head, consumer markets and retail at KPMG in India said.

The meaningful correction of over 30% in the Phoenix Mills stock suggests investors are still wary and are not convinced about the expected post-covid consumption boom; the stock sale by the company’s promoters is a bit of an eyesore, too.

But for long-term investors, this may well be an opportunity to lock into quality real estate at affordable prices. As Mark Twain famously said, “Buy land, they are not making it anymore."

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