Phoenix Mills - Pioneer in Retail Real Estate


Company Name – Phoenix Mills Limited (Phoenix Mills)


Current Share Price – INR 976 (February 16, 2022)


Market Cap – INR 17,372 cr


 

1. What is interesting about the stock?

One of the biggest indicators of urban development and rise in the general prosperity of any town or city is the presence of a shopping mall. Shopping malls not only highlight the rise of commercial activity in the local region where they are built but also signify the rising purchasing power of the local populace. In this piece, I will be covering a company that has been at the forefront of developing malls in India. This company is Phoenix Mills.

Phoenix Mills started in 1905 as a textile company in Lower Parel, Mumbai. The company entered into the real estate business in 1987 with High Street Phoenix which is still one of the most iconic shopping destinations in the country. High Street Phoenix was the spot for many firsts in India including India’s 1st Bowling Company & Sports Bar in 1996 & India’s 1st hypermarket with Big Bazaar store in 2001.


Phoenix Mills is India’s leading mixed-use real estate developer with a well-diversified portfolio consisting of:

  • Retail Spaces: 7 million sq ft operational (6 million under planning & development)

  • Office Spaces: 2 million sq ft operational (4.2 million under planning & development)

  • Hotel Spaces: 588 rooms operational (300 rooms under planning & development)

  • Residential Spaces: 4 million sq ft operational

The company already has or is developing properties in many major cities like Mumbai, Chennai, Bangalore, Pune, Ahmedabad, Lucknow, Kolkata, Agra & Bareilly. It has 9 malls operational currently with the majority of them being in metro cities of Mumbai, Chennai & Lucknow.

The company operates on a business model which helps address its 4 key business categories in different ways. They are:

  • Retail: Owning, Developing & Managing Retail Assets

  • Commercial: Developing and Owning Commercial Office spaces in Tier 1 cities

  • Hospitality: Owning & Developing Hotels

  • Residential: Developing and Selling Residential units in Tier 1 cities

The company’s made most of its revenues from its retail assets with FY21 EBITDA from retail assets coming in at 77% of EBITDA in FY21 with EBITDA distribution across major properties at:

  • High Street Phoenix & Palladium: 30%

  • Phoenix Market City Mumbai: 13%

  • Phoenix Market City Bengaluru: 17%

  • Phoenix Market City Pune: 17%

Most of the company’s retail assets have come close to generating pre-covid levels of occupancy and income except Phoenix Market City Mumbai which is at 77% of Precovid income.

The company has ambitious plans for expansion in the retail and commercial real estate segments with retail assets expected to grow 1.9x and commercial assets to grow 4.1x in terms of gross leasable area by FY26.

Industry Overview

The real estate sector in India is expected to grow 5 times in the coming decade from a market size of USD 200 billion in 2021 to USD 1 trillion by 2030 according to IBEF. The sector is expected to contribute to 13% of the total GDP of India by 2025.

  • Several factors are expected to facilitate the rise of the industry including:

  • Rising income and favorable demographics

  • Rapid urbanization - Migration to urban areas for employment

  • Access to easy financing

  • Rising investments from both domestic and foreign investors into the sector

The 2 direct listed competitors of Phoenix Mills with a major focus in retail real estate are:

  • DLF

  • Prestige Estates

The biggest competitor for Phoenix Mills in India is Nexus Malls which is the Indian Retail Real Estate arm of The Blackstone Group. The company now operates 16 shopping malls with 9.5 million sq ft area in 12 cities, most of which were acquired by the Blackstone Group.


Key MOATs

  • Operating experience - The biggest advantage for Phoenix Mills is its experience in developing landmark shopping malls like High Street Phoenix and luxury shopping malls like Palladium which acts as a key differentiator for the company vs the rest of the market. This results in a durable brand image and strong asset quality which is evidenced by the fact that occupancy levels in all operational malls are at above 90%.

  • Access to financing - The 2nd advantage is that the company is funding most of its expansion through JVs with external marquee investors like CPPIB & GIC which further signifies the market reputation of the company. It also means that the company can easily raise funds in the future through the JV route whenever required and not resort to debt.

  • Strong brand image - The company’s strong image in the retail and commercial real estate segments has also helped it develop well in the residential real estate segment as well and its hotels business only adds to the overall diversification for the company while highlighting its capability to develop all kinds of real estate projects.

2. Key Historical Financials

In terms of historic performance, the company has seen a 31% sales CAGR from 2010 to 2020 while PAT was at 18% CAGR in the same period. In the past 3 years, however, the sales CAGR was at -13% while the PAT CAGR was down to -39%. This anomaly and the drop in RoE to 1% in FY21 are mainly due to the big impact on the real estate sector especially shopping malls from COVID-19.


3. What is my view on company valuation?


Phoenix Mills has seen a rise in its share price of 168% in the past 5 years vs the NIFTY Realty Index which has risen 140% in the same period.


This shows that the company has outperformed the real estate industry benchmarks and the general market which has grown 96% in the last 5 years.


But its direct rivals DLF & Prestige have also shown good performance in the same period, registering a growth of 158% & 157% respectively in stock price in the last 5 years.


The company currently trades at a P/E of 88.6x vs. 52.1x of DLF & 41.4x of Prestige. It also trades significantly higher than the industry P/E of 35.3 times.


In terms of EV/EBITDA, Phoenix Mills is trading at close to 27.3 times vs 40.8x of DLF & 12.0x of Prestige. In terms of P/B, Phoenix Mills is trading at 3.08 times vs 2.56x of DLF and 2.63x of Prestige.


But using PE and EV/EBITDA may not be entirely relevant here since DLF and Prestige do not have retail income contribution % as high as Phoenix Mills and thus the performance impact of COVID-19 on Phoenix Mills is very different vs its other rivals.


The growth of the company is expected to come steadily as the retail real estate sector performance comes back to pre-covid levels and new projects are completed. Given the strong expansion pipeline, track record of raising external capital, and historical performance in successfully developing malls, Phoenix can be expected to maintain a growth rate of 15-20% CAGR which is better than the projected industry CAGR of 15-17%.


However, based on the current valuation, Phoenix Mills looks expensive for medium/long term. Investors can evaluate the investment opportunity at a lower level.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • A major chunk of the company’s earnings comes from retail real estate and thus the company is vulnerable to general economic shocks where shopping and mall footfall go down in times of economic decline. Events like the pandemic or others which restrict footfall in their properties are also very detrimental to the company’s performance.

  • Phoenix faces tough competition from a few top-level players like DLF, Prestige, and Nexus Malls, all of which have a good track record and have large amounts of capital to develop or acquire new properties. This is especially true for Nexus Malls which has expanded over the years by acquiring over 6 million sq ft of retail real estate since its formation in 2016.

  • The real estate industry has a big payback period and thus large amounts of capital are always stuck in projects for long amounts of time. Any external delays and disruptions can result in the payback period increasing, putting additional strain on the company’s balance sheet.

 

About the Author


I have over 6 years of experience in the Investment sector and have been an active prop trader in European Bond Futures in the past. Currently I am working as head of Research at Smart Sync Services where we are working on simplifying and expanding financial and investment knowledge to make the investment world as accessible for everyday investors as much as possible.


I graduated from the Master of Finance Program from Cambridge University in 2016 after completing my Bachelor of Engineering program from Jadavpur University, Kolkata in 2011.


I am an insignificant public investor & have avid interest in following emerging trends both in technology and other fast evolving sectors. I am also a lifelong learner and relish the chance to learn something new all the time.


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.




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