Rising footfalls following the withdrawal of Covid-19 restrictions is expected to shore up the revenue of mall operators well above the pre-pandemic level this fiscal, compared with ~70% of that mark last fiscal.

The consequent healthy improvement in cash flows and steady debt levels are also likely to improve the average debt service coverage ratio (DSCR¹) to 1.3 times this fiscal from ~1 time last fiscal.

An analysis of India’s top 14 malls² rated by Crisil Ratings indicates as much.

Says Anand Kulkarni, Director, Crisil Ratings, “Malls have seen lesser dent and swifter recovery with each passing Covid-19 wave. In fact, the third wave did not materially impact the sector, as malls were not completely shut. Consequently, retail sales rose to pre-pandemic levels in February 2022. The trajectory has since remained strong, with retail sales already at 120-125% of the pre-pandemic mark in the first quarter of this fiscal. Business traction has helped malls roll back rental waivers offered to tenants. That, and escalations based on contractual terms will drive rental income ~10% above pre-pandemic level this fiscal.”

Mall operators had waived rent during the pandemic, thereby ensuring healthy occupancies at ~90%. Additionally, expected increase in revenue share linked to healthy retail sales has strengthened cash flow visibility of malls. Typically, the revenue share component contributes to 10-15% of the mall operators’ rental income.

The recovery is visible across tenant categories. Grocery, apparel, footwear, cosmetics, electronics, and luxury, which account for 75-80% of mall revenue, had shown near-full recovery by the third quarter of last fiscal, and their performance remains strong. The pace of recovery in laggard categories, such as food and beverage, cinema, and family entertainment centres, has picked up as well.

The strength of the sector also lies in changing consumer preferences. Over the years, malls have become leisure and entertainment destinations, in addition to meeting shopping requirements. Increasing consumerism and a fast-growing urban middle class should continue to support footfalls — a point of view that is reflected in the high investor interest in the sector even at the peak of the pandemic.

For the record, the third wave-led restrictions on malls lasted less than a month, compared with median closures of 13-14 weeks and 7-8 weeks during the first and second waves, respectively. Furthermore, unlike the earlier waves, only capacity or timing restrictions were implemented during the third wave. This limited the impact on credit profiles of mall operators.

Says Saina Kathawala, Associate Director, Crisil Ratings, “The balance sheets of mall operators have remained healthy. Their debt-to-rental ratio is expected to be comfortable at 3.2 times this fiscal, compared with 4.2 times in fiscal 2020. Furthermore, many malls with strong sponsors have raised equity or refinanced debt improving liquidity to 4-5 months of debt-servicing obligations. In fact, this liquidity had protected their credit risk profiles during the peak of the pandemic, when DSCRs had shrunk to below 1 time. With sustained growth in sight, the average DSCR is expected to remain healthy at 1.3 times this fiscal.”

That said, high inflation and rising interest rates will bear watching as these could affect discretionary spends in the near term and dampen retail sales.

¹ DSCR is a measure of sufficiency of cash earnings of a business that is available for debt and interest repayments. Higher the DSCR, stronger the repayment capacity of the business.
² These malls have leasable space of over 10 million sq ft, spread across 10 cities — Ahmedabad, Amritsar, Bengaluru (2), Bareilly, Chandigarh, Chennai (3), Indore, Mumbai (2), Lucknow, and Pune — and have a total debt of ~Rs 6,000 crore.