Extended lockdown, slow recovery to dent Phoenix Mills' revenues

35% correction and long-term growth plans keep brokerages positive

The Phoenix Mills stock fell over 12 per cent in Monday trade on worries that an extended lockdown would dent its revenues in the short term, reduce cash flows, and increase leverage. 

Further, any renegotiations of rentals between the company and tenants could have an adverse impact on the revenue flow in financial year 2020-21 (FY21). Most brokerages have downgraded the stock and cut their operating profit estimates for FY21 by 35 per cent.

The key near-term worry, given the lockdown, is the hit on the rentals for the company, which builds and operates malls, hotels, commercial offices, as well as residential units. 

 

While there had been a loss of revenue towards the end of March, brokerages believe that the June quarter could be a washout as most state governments are expected to extend the lockdown period to the end of April.

For the retail (mall segment) with an area of nearly seven million square feet, analysts expect a fall of 14 per cent in FY21 over the expected revenue of about Rs 1,000 crore for FY20. 

 

 

Adhidev Chattopadhyay of ICICI Securities believes in the worst-case scenario, the company will lose 20-25 per cent of its annual revenue if a rent-free period is given to retailers. Even post the lockdown, the worry is a slow recovery in footfall and a dip in discretionary spends.  

Analysts at Spark Capital believe the hotel segment will be the worst impacted from the slowdown and expect the occupancy level for St Regis in Mumbai to be at 50 per cent in FY21. 

They expect the hotel operating profit (St Regis and Courtyard by Marriot, Agra) to fall by half in FY21 from the estimated FY20 level of Rs 130 crore. Even in the office segment (1.4 million square feet), analysts don’t expect any rental hike and forecast muted occupancies for space to be added in FY21.

While net debt to operating profit is expected to increase to 6.8x, from 4.5 times in FY20, analysts believe the company will have enough capital to meet its debt obligations despite a decline in operating cash flows. 

While the near-term outlook is negative, analysts believe the long-term outlook, given the pipeline of additions, annual cash flows, and valuations (down 35 per cent over the last month), is favourable.