Phoenix Mills rating: Buy | Consumption above pre-Covid levels

Consumption at Phoenix Mills (PML) malls in Q1FY23 stood at Rs 21.6 bn—this is 121% of the pre-Covid Q1FY20 period (109% on a like-to-like basis). Retail collections during Q1 stood at Rs 5.3 bn (up 10.5% q-o-q). PML is also witnessing strong recovery in occupancy and ARRs in both of its hotels while traction in commercial leasing and residential sales is also on the rise. Consequently, credit ratings for many of the company’s SPVs have been upgraded. Our bullish stance on PML stems from its leadership in malls and an improving consumption trajectory. We maintain ‘BUY’ with a revised TP of Rs 1,456/share (Rs 1,453 earlier).

Retail consumption crosses pre-Covid level: Retail consumption in Q1FY23 was 121% of Q1FY20 levels. Retail collection for the quarter stood at Rs 5.3 bn (up 10.5% q-o-q). The company has added ~1.09msf gross leasable area (GLA) over the last three years. Phoenix Palladium saw addition of ~0.15msf new GLA during the quarter. Many SPVs of the company have witnessed a credit rating upgrade.

Hospitality segment recovers strongly: Strong recovery in occupancy and ARRs lifted Q1 revenue (Rs 772 mn) of the St. Regis hotel to 116% of Q1FY20 levels (Rs 663 mn). ARRs stood at Rs 11,938 (Rs 10,193 in Q1FY20) with an occupancy of 85% (82% in Q1FY20). Occupancy (66%) and ARRs (Rs 3,602) at the Agra hotel are also back to the FY20 levels in Jun-22.

Commercial and residential demand also picking up: Leasing traction in the commercial segment continues to be strong, with Q1FY23 gross leasing at ~0.15msf (highest-ever in any Q1). Gross residential sales during the quarter came in at Rs 704 mn with strong sales velocity seen in the ready-to-move-in inventory. Residential collections stood at Rs 500 mn.

Outlook and valuation: Focus on cash flow: PML’s leadership in retail realty and unique understanding of the Indian consumer’s psyche coupled with the structural story of urban consumption growth has enabled it to weather the Covid-19 storm. Entry in new cities, operationalisation of under construction/ planned assets and normalisation of operations are some of the stock triggers that we expect to play out over the next few years. Revival in consumption in malls and occupancy in hotels, and liquidation of ready inventory in the housing segment are likely to culminate in robust cash flows going ahead. We maintain ‘BUY/SN’ with a revised TP of Rs 1,456 (10% premium to Sep-23E based NAV of Rs 1,323).