After an over 30% rise since March, MOSL downgrades Phoenix Mills to ‘neutral’; here's why

After an around 32 percent rise in 5 months since March, brokerage house Motilal Oswal downgraded real estate firm Phoenix Mills to ‘neutral’ from ‘buy’ but raised its target price of ₹1,845, indicating an upside of around 11 percent.

"We initiated coverage on Phoenix Mills in March 2023 with a positive view on the back of a healthy ramp-up in new malls in Indore and Ahmedabad and the scheduled completion of malls in Pune and Bengaluru (est 34 percent EBITDA CAGR over FY23-25). The company has progressed well on ramping up occupancy in Indore and Ahmedabad and is on track to deliver Pune and Bengaluru malls in 2QFY24. Thus, we continue to estimate a 31 percent EBITDA CAGR over FY23-25E. However, with a 30 percent runup in the stock price since our initiation, we believe a large part of earnings growth over the next two years is already priced in and see limited upside potential in the near term. Hence, we downgrade Phoenix to Neutral," explained the brokerage.

Earnings

In Q1FY24, the company reported a revenue of ₹810 crore, up 41 percent YoY and 11 percent QoQ. Growth was driven by strong performances in the retail and hospitality verticals.

EBITDA grew by 52 percent YoY to ₹490 crore (9 percent beat), which was higher than revenue growth as the margin expanded by 450 bp YoY and 170 bps QoQ to 60.7 percent. PAT was up 50 percent YoY at ₹240 crore (20 percent above estimate) with a margin of 30 percent, up 150 bps YoY.

Phoenix generated OCF (post interest) of ₹450 crore and incurred ₹340 crore in capex. The gross debt remained flat at ₹4,000 crore, while net debt (PHNX share) declined by ₹150 crore to ₹1630 crore.

Stock Price Trend

The stock has gained 32 percent in the last 1 year and over 20 percent in 2023 YTD. The stock has given positive returns in 3 of the 8 months so far in the current calendar year.

The stock rose the most in April, over 11 percent and shed the most in March, 6 percent.

In the long term, 3 years, the stock has given multibagger returns, soaring 177 percent.

Investment Rationale

Consumption in retail portfolio jumps: The brokerage informed that consumption across the Phoenix mall portfolio increased by 18 percent YoY to ₹2,570 crore. Excluding the contribution from recently opened malls in Indore and Ahmedabad, consumption was up 9 percent YoY. In July 2023 it was up 6 percent YoY at ₹930 crore, noted the brokerage. MOSL further mentioned that the retail income growth was in line with consumption growth at 17 percent YoY to ₹380 crore. Trading occupancy also increased by 200 bps for the portfolio to 89 percent while Retail EBITDA came in at ₹390 crore, up 19 percent YoY, at a margin of 75 percent over total income. The company is on track to deliver new malls in Wakad, Pune, and Hebbal, Bengaluru, in Q2FY24. With 60-65 percent of area already under fit-out, MOSL believes a faster pick-up in trading occupancy of these new malls will lead to a 30 percent CAGR in retail rentals to ₹2,200 crore by FY25E.

Strong hospitality performance: As per the brokerage, the overall revenue of the firm increased 34 percent to ₹120 crore. It informed that St. Regis continued to clock over 80 percent of occupancy for the fifth quarter in a row, with Q1FY24 occupancy of 82 percent. For Marriott Agra, occupancy was down 700 bps QoQ but up 10 percentage points YoY at 72 percent. Meanwhile, ARR (average room revenue) for St. Regis was up 38 percent YoY at ₹16,500, while ARR for Marriott Agra grew 18 percent YoY. Also, EBITDA for St. Regis stood at ₹48 crore, with 43 percent margin, added the report.

Commercial performance: Phoenix reported gross leasing of 0.18msf and net leasing of 0.03msf during the quarter. Total income and EBITDA from the office portfolio grew 11 percent YoY to ₹44.9 crore and ₹26.1 crore, respectively, stated MOSL.

Valuation and View

As per the brokerage, Phoenix delivered a better-than-expected revenue performance in Q1FY24, which led to a beat across the parameters. The brokerage raised its FY24E/FY25E PAT by 4 percent on the back of higher rentals and better margins.

It believes that the company’s growth trajectory remains intact, but current valuations indicate that near-term growth is priced in. Hence, the brokerage downgraded the stock to Neutral.

While near-term growth is priced in, the company’s upcoming mall portfolio provides strong growth visibility over the next 3-4 years.

"Hence, if we push up the valuation base to the end of FY27 (two-year return), taking into account a stabilized rental run rate for the upcoming malls and no pending capex, then our valuation for the retail segment increases to ₹31,500 crore from ₹26,000 crore in the base case. Accordingly, our target increases to ₹2,150, indicating a two-year return potential of 28 percent," it said.