Morgan Stanley initiates coverage on Phoenix Mills with ‘buy’, sees 32% upside; here's why

Phoenix Mills has a portfolio of well-located, mixed-use destination malls, and is set to benefit from India's consumption growth, global brokerage house Morgan Stanley said in a recent note.

The brokerage initiated coverage on the stock with a ‘buy’ call and a target price of ₹1,700, indicating an upside of 32 percent from the current market price of ₹1,289.65, as on March 28, 2023.

"Our rating is based on the firm's portfolio of high-quality destination malls in top metros and the planned expansion of rental assets from 9 million square feet (msf) in FY22 to 21 msf in FY27, 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," explained the brokerage.

It also added that the firm is in an expansion phase and aims to more than double its rental portfolio over the next 3-4 years.

The brokerage expects the firm to report a 34 percent CAGR in its commercial (retail + Office) EBITDA, driven by a recovery in leasing in existing assets and the commencement of rentals from new assets. In fact, the company’s upcoming retail assets are 90 percent leased out, MS pointed out.

The brokerage noted that Phoenix is India's most prominent mall developer and is expanding its portfolio as well as diversifying into the office and other property verticals. Its balance sheet is strong with a ₹1,500 crore net debt as of Dec 2022, implying 20 percent net gearing and the valuations appear inexpensive at a 31 percent discount to the forward NAV estimate, it observed.

It further pointed out that the firm is already planning for the next phase of growth beyond the announced projects. It targets to enter under penetrated cities such as Jaipur, Chandigarh, Hyderabad, NCR, Thane, Navi Mumbai, Goa, and Vizag. Plus, it is evaluating projects in the untapped micro markets in the top metros where it is already present. The company aims to add 1msf+ of new assets per annum. In view of the upcoming growth in free cash flow and the PE partnership model, the brokerage believes the company will have sufficient funds to finance the next phase of growth.

In the base case scenario, which has a target price of ₹1,700; the brokerage has assumed a consumption growth led by improving macro levers, translating into higher rental income, timely completion of under-development projects, narrowing of gap between committed and trading occupancy, project pipeline expansion through organic/inorganic means, and a higher rental income to EBITDA conversion (95-100 percent).

It has a target price of ₹2,329 in its bull case scenario, indicating an upside of over 80 percent. In this case, the brokerage assumes a higher consumption growth than the base case, an interest rate downcycle and new project additions.

In its bear case scenario, the brokerage has a target price of ₹1,054 for the stock, indicating a downside of 18 percent. This scenario assumes delays in completions/pre-leasing, high leverage and rising interest rates.

The stock has advanced 25 percent in the last 1 year but is down around 7 percent in 2023 YTD.

In the December quarter, the company's net profit more than doubled, up 107.71 percent to ₹212.4 crore versus ₹102.2 crore in the year-ago period. Meanwhile, its revenue jumped 60.90 percent to ₹683.85 crore in the quarter under review as against ₹425.01 crore reported in the corresponding quarter last year.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.