Shop 24x7 Gives That Much-Needed Edge To The Phoenix Mills
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India’s transition from ‘weekly bazaars’ to highly organised mall culture has paved way for companies like The Phoenix Mills Limited. Growing urban population, increased per capita income and thereby the stronger purchasing power, changing standard of living and rising awareness of brand, demanded for a one-stop-shop coupled with entertainment avenues like movie theatres, gaming zones and food outlets. Moreover, real estate has been a favoured asset class for Indian investors where large chunk of their investments has been in physical real estate properties.
Company Portfolio:
Phoenix Mills deals in development and operation of malls and real-estate properties across Mumbai, Pune, Chennai, Bengaluru, Agra, Bareli and Lucknow, majorly in the tier-I cities. In retail segment it has over seven malls in six cities and two malls under development with Rs 54 billion retail consumption and 7.1 billion rental income in FY16 with retail portfolios ranging from 83-93 per cent occupancy except for Phoenix Paragon Plaza, Mumbai with 24 per cent occupancy and Palladium Chennai with no occupancy so far as it is still not operational. In commercial and hospitality space it has five centres in two cities with 9 billion collective sales in FY16 and two hotel projects. It has about five residential projects under construction having 5.5 million square feet of viable area amounting to 17 billion worth collective sales. Recently in FY 2015, Phoenix launched Courtyard by Marriott at Agra, residential project at Bengaluru and nine Food & Beverage brands across 11 stores including one under fit-out in Mumbai and Pune.
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Government Push:
Union Finance Minister, Arun Jaitley, in the recent Budget had announced possible removal of Dividend Distribution Tax (DDT) on dividend payouts by the special purpose vehicles to the Real Estate Investment Trusts in order to make the yields of the commercial developers like Phoenix more attractive. Moreover, the latest initiatives by the Union Cabinet are likely to aid the company in taking full benefit of the 24x7 Shop Act and the passing of the 7th Pay Commission recommendations. The government approved Model Shop and Establishment Act to permit shopping malls, local markets, eating joints and movie theatres to operate 24x7. This will bridge the gap between online and offline retailers, build higher employment opportunities and all-together contribute to higher revenues and profit margins to the companies operating therein. Moreover, the 7th Pay Commission recommendations’ implementations i.e. a salary hike of nearly 47 lakh central government employees and 53 lakh pensioners will enhance consumption in retail sector and other consumption areas.
In the last couple of years, new launches in realty have gone undelivered that refrained investors from investing more. REITs served as the best alternative wherein you buy realty like any other stock. REITs requires no stamp duty, brokerage like any other stock, sell with high liquidity and no long term capital gain tax. Phoenix Mills remains one of the biggest beneficiaries of REITs. Not near term, but long term benefits are possible only if rents start picking up.
Recently, SEBI has relaxed norms under REITs relating to SPVs for under construction assets. SEBI has lowered minimum size of REIT investment to Rs 500 crore where not less than 80 per cent to be investment in completed and revenue producing projects. REITs would be allowed to invest up to 20 per cent in under construction as against 10 per cent earlier. Going forward lowering of interest rate and passing of GST would be the added advantage for the company.
Phoenix Mills is recently said to has been exploring for mall acquisitions in Mumbai along Blackstone including Coimbatore mall to be bought outright and L&T’s plot that was occupied for metro rail in Hyderabad through subleasing.
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Justifiable Financials:
On the financial front, the March 2016 quarter results witnessed negative headwinds with its consolidated revenues dropping by 5.5 per cent to Rs 467 crores. The year on year revenues growth stood positive by 17.1 per cent. Considering YOY revenues only the commercial space dropped at the rate of 15 per cent.
QOQ EBITDA too dropped by 3.3 per cent to Rs 207 crores though the YOY saw a rise of 30.5 per cent. With the negative exceptional items and reasonably higher interest and tax payment the company saw a net profits again after Q4FY15 to Rs 1.41 crores from net profits of Rs 32.81 crores in Q3FY16. Despite negative results investors made money in the stock of Phoenix Mills with quality management and consistent growth is available for attractive valuations. The mall portfolio growth remains integral with the prime locations of the malls like HSP Mumbai and MarketCity, as the feather in the cap, having occupancy rate of more than 85 per cent.
The yearly financials of Phoenix Mills remain positive with consolidated revenues increasing 7.6 per with strong consumption growth of 10 per cent to Rs 1779 crores in FY2016. The company derived 63 per cent revenues from retail sales, while 15 per cent from residential portfolio and hospitality and commercial together accounted to 22 per cent. Segment wise the company derived 40 per cent revenues from license fees and rental income i.e. Rs 710 crores for FY16. During the year company witnessed residential sales at Rs 460 crores with average sales of Rs 14806/square feet. In hospitality segment St. Regis, Mumbai fetched an Average Room Rate of Rs 9284 while Courtyard fetched ARR of Rs 4509 with 72 and 45 per cent occupancy rate. Company’s five year CAGR from FY2012 stands at 37 per cent which has declined over the prior five year’s CAGR of 51 per cent starting from FY2011.
EBITDA increased marginally by 3.7 per cent to Rs 790 crores from 762 crores in FY2015. EBITDA margin of the company however, stands consistently between 45-55 per cent from last couple of years which is a strengthening indication towards company’s valuations. The company also managed to maintain its bottomline growth in FY2016 to Rs 81.55 crores of net profits compared to Rs 35.43 crores of net profits in FY2015. The negative exceptional items dropped from Rs -93.8 crores to Rs -38.7 crores. The company has witnessed a rise in interest payments and thereby a drop in tax payments.
Oberoi Realty its major peer having market capitalisation twice that of Phoenix Mills at nearly Rs 10200 crores, stands apart from the company in terms of debt/equity. Oberoi’s debt/equity came in at 0.12 as against the highly leveraged Phoenix at 2.08. Interest coverage also came in at 1.83 which is less as compared to 1.93 of FY15.
Phoenix Mills’s debt profile includes lease rental discounting, commercial mortgage backed securities and hotels together accounting for Rs 3597 crores out of total Rs 3878 crores. Meanwhile during the year, the company completed refinancing of the Pallazzio loan with new 15-year loan at interest rate of 11 per cent p.a. Moreover, interest cost on current debt has reduced by nearly 80 bps from 11.8 per cent in FY15.
Company’s P/E is the highest among all peers at 52 which is double that of Oberoi and industry P/E. However, Price to book value stands at 2.8 which is acceptable for the real estate stocks. Return on capital employed (ROCE) stands at 11.51 per cent as against 10.44 per cent in FY15. On the other hand, Oberoi Realty’s ROCE remains at 7.46 per cent as compared to 6.41 per cent in FY15.
Going Forward:
Its highest revenue generator, rental income segment is expecting significant upside with better renewal growth and new deals for higher rental growth in FY17 and FY18. For instance, the company is looking forward to renewal as a percentage of total leasable area at 16 per cent in FY17 for HSP and Palladium property. PMC, Bangalore is said to rise at a rate of 36 per cent in FY17 as against 2 per cent in FY16. PMC, Mumbai renewal is expected to stand at 43 per cent in FY17 against 15 per cent in FY16. On the whole, leaving apart the recent fundamentals, the company has shown improving results in the prior periods and hence considering the pickup in overall realty sector, we recommend BUY in the stock with some more upside of 80-100 points in the first place.