Phoenix Mills is riding the urban consumption wave
The erratic performance of Phoenix Mills stock is a mystery, although the net gain of about 7% seems justified in light of better-than-expected results
Shares of Phoenix Mills Ltd fell 3% in the two trading sessions following its March quarter earnings announcement; then it rose 11% in the two sessions that followed. The erratic performance of its stock is a mystery, although the net gain of about 7% seems justified in light of better-than-expected results.
The realty firm stands tall among the listed real estate developers due to lower dependence on the residential market, which has insulated it from the trials and tribulations of compliance with the Real Estate (Regulation and Development) Act.
What impressed investors most is its consolidated Ebitda (earnings before interest, tax, depreciation and amortization) margin of 50%, up 600 basis points year-on-year, and way higher than Bloomberg’s average estimate of 45.8%. A basis point is 0.01%.
That’s not all. Phoenix Mills scores far better than its peers, whose margins range 25-30%.
The company has been riding the consumption wave. Two-thirds of its income accrues from its malls across cities. This segment’s revenue fell short of expectations during the quarter only due to a change in accounting treatment. The Chennai mall was treated as an associate and not as a subsidiary. So, consolidated revenue at Rs436.6 crore, although lower than what the analysts had estimated, did not hurt investor sentiment.
Meanwhile, the firm scored another brownie point as it strived to bring down interest costs. The effective cost of debt fell from 10.2% in FY17 to 8.9% in FY18. Again, its retail asset portfolio comprising malls with rising footfalls and rentals, buttressed cash flows.
That’s not all. Phoenix Mills’ hospitality business, although small, has not been a drain on cash flows. Buoyant occupancy rate of 83% is higher than the industry average.
That said, there are worries about the company’s recent purchase of a large land parcel in Bengaluru to develop retail/commercial segment. The moot question is whether the long gestation period would again spiral interest costs. For now, the stock is on firm ground with interest cover of around 2.2 times.
Investors’ optimism on Phoenix Mills’ prospects is mainly because the company is not swamped with unsold residential units. This explains why it is an outlier, beating returns of the BSE Realty index by a wide margin. A results review by ICICI Securities Ltd talks of a 30% increase in rental income by FY20, driven by renewal of rentals across malls and rising consumption.