NXST helps you piggyback India’s rising consumption by enabling exposure to solid Retail operating assets
NXST helps you piggyback India’s rising consumption by enabling exposure to solid Retail operating assets
Being the largest UCC platform in India, NXST seems ideally positioned to capitalize upon the country's consumption growth. Strong financials further strengthen the long run growth story. We are LONG.
Nexus Select Trust (NSE: NXST – RR) is India’s first retail listed REIT and a leading Urban Consumption Centre (UCC) platform, covering 9.8msf of retail area spread across 17 Grade A UCCs strategically located across 14 cities, comprising c. 30% of the country’s discretionary retail spend. Nexus also has 2 complimentary hotel assets and 3 office assets with a cumulative area of 1.3msf.
Wynford Investments Limited, a portfolio company of Blackstone real estate fund, is the REIT sponsor, while Nexus Select Mall Management Private Limited stands as its manager.
Broader macro tailwinds present a favorable long run growth story
India is largely a “consumption” economy comprising c. 60% of GDP in FY22. Consumption is expected to grow by 9% CAGR in FY22-25P. Number of middle-class households which grew by 15% annually in FY10-20 account for 73% of total households, expected to reach 79% by FY30E.
Median age in India is 28.7 years in 2022 vs 38.4 years in China, 38.5 years in US and 40.6 years in UK. Younger population implies a higher inclination towards latest trends and higher consumption. As against this, organized retail is highly under-penetrated, comprising only 13% of total retail vs. 42% in China, 86% in US, and 81% in UK. Further, the broader industry is highly fragmented with 35% Grade A UCCs owned by independent developers. Close comps Phoenix Mills and DLF hold 6.9 and 4msf of completed area spread across 9 and 6 UCCs, respectively.
Favorable operating metrics and decent visibility around future rentals gives comfort
Nexus has a diversified tenant base comprising 1,044 domestic and international brands with 2,983 stores. No single asset and tenant constitute more than c. 18% and 3% respectively of the overall gross rental pie.
Portfolio is highly stabilized with a committed occupancy of 96% and Weighted Average Lease Expiry (WALE) of 5.7 years. Non-occupancy risk seems low with same store committed occupancy of c. 94% as at Q1 2022. Over the last 3 years and 9 months, Nexus has achieved average re-leasing spreads of 19.2% on c. 2.9msf of re-leased space. This implies a lower Rollover lease risk.
Revenue from operations during 9MFY23 was INR1,463cr, 11% higher than full year FY22 revenue of INR1,318cr. Operating margin has improved from 66% in FY22 to 71% in Q3FY23, while EBITDA margin has slightly declined from 65% to 64% due to c. 20% higher operating and maintenance costs. Primary revenue drivers for c. 80% projected increase in operating income in the form of contractual escalations, tenant sales-linked rental growth, incremental NOI from hospitality business, and leasing of existing vacancy are already in place, which gives comfort around forward-looking performance.
A premium valuation vs. comps is justifiable, though not being an apple-to-apple comparison
NXST’s P/E ratio is currently not determinable on account of non-availability of LTM EPS numbers. On the basis of extrapolated numbers for FY23 and, assuming constant margins, the stock appears to be trading at a P/E of c. 48x. Being the only listed retail REIT, there are no direct comps available. Other listed commercial REIT include Embassy (NSE - RR: EMBASSY) trade at P/E of 56.6x, Mindspace Business Park (NSE - RR: Mindspace) at 55.3x, and Brookfield India (NSE - RR: BIRET) at 68.7x. Unprecedented decline in footfall across UCCs, adverse conditions affecting tenants are potential risk factors.
Our Position
India is one of the fastest growing economies in the world with consumption being a key driver, accounting for c. 60% of India’s GDP. Consumption is further expected to increase in coming years. Being the largest UCC platform in India, NXST seems ideally positioned to capitalize on this story. Favorable operating metrics, and comfort around forward-looking performance further strengthen the long run growth story. We are LONG.
Disclaimer: The views expressed here are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read here. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.