New Malls And Diversification May Drive Future Growth Despite Market Risks

Key Takeaways

• Phoenix Mills is expanding its retail space and achieving strong revenue growth from new malls, indicating future growth potential.
  
• Strategic debt management and diversification into office and hotel segments drive profitability and provide robust earnings growth prospects.
  
• High competition, economic pressures, and variability in earnings threaten Phoenix Mills' revenue growth and market share, while increased debt may constrain future projects.

Catalysts

Engages in the operation and management of malls, construction of commercial and residential properties, and hotel business in India.

• Phoenix Mills is witnessing strong growth in operating revenue and EBITDA from its newly launched malls, with retail sales up by 24% year-on-year, indicating potential for continued revenue growth as these malls mature and reach full occupancy.
  
• The company is actively expanding its retail portfolio with a robust development pipeline of approximately 3 million square feet of retail space slated for completion by FY '27, expected to significantly increase future revenue and earnings.
  
• Significant progress is being made on the launch of the retail block opposite PVR at Phoenix Palladium, Mumbai, expected to operationalize by the end of 2024, contributing to revenue growth upon completion.
  
• The company has successfully reduced its average cost of debt to 8.67% and maintains a healthy net debt-to-EBITDA ratio, positioning it well to benefit from increased earnings due to lower interest expenses and enhance net margins.
  
• Initiatives in office and hotel segments, including pre-leasing activities for Phoenix Asia Towers in Bangalore and strong performance in the hotel business, indicate diversified growth drivers that contribute positively to future earnings.

Phoenix Mills Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Phoenix Mills's revenue will grow by 14.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.2% today to 35.5% in 3 years time.
• Analysts expect earnings to reach ₹21.4 billion (and earnings per share of ₹52.94) by about December 2027, up from ₹10.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹27.5 billion in earnings, and the most bearish expecting ₹13.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 47.2x on those 2027 earnings, down from 63.0x today. This future PE is greater than the current PE for the IN Real Estate industry at 27.7x.
• Analysts expect the number of shares outstanding to grow by 4.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.27%, as per the Simply Wall St company report.

Phoenix Mills Future Earnings Per Share Growth

Risks

• The marketplace's overall slowdown in urban retail consumption, while Phoenix Mills is experiencing growth, could tighten future revenue growth as external economic pressures persist, impacting expected revenue trends.
  
• A decline in certain key revenue-generating segments, such as multiplexes, due to factors like fewer blockbuster releases, poses risks to overall consumption growth and might negatively affect future earnings.
  
• High competition in planned expansion locations, particularly Thane, could dilute market share and impact rental income, potentially limiting growth in new or existing developments.
  
• Increased net debt from recent land acquisitions, despite being funded through internal accruals, might pressure cash flows, which could constrain capital for future projects or impact margins.
  
• Variability in earnings contributed by businesses like residential sales highlights potential volatility, suggesting that fluctuations in such segments might lead to inconsistent profit margins.

Valuation

• The analysts have a consensus price target of ₹1675.47 for Phoenix Mills based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1975.0, and the most bearish reporting a price target of just ₹1423.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹60.3 billion, earnings will come to ₹21.4 billion, and it would be trading on a PE ratio of 47.2x, assuming you use a discount rate of 14.3%.
• Given the current share price of ₹1862.75, the analyst's price target of ₹1675.47 is 11.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.