ICRA Lanka Limited, Subsidiary of ICRA Limited, Group Company of Moody’s Investors Service has assigned the Issuer rating of [SL]A- (pronounced SL A minus1) with Stable outlook for Prime Lands Residencies (Pvt) Limited ("PRIMER”/ “the Company”).

ICRA Lanka has taken a consolidated view of the Prime Group, in assigning the rating, given the operational and financial linkages among them.

The assignment of the rating takes into consideration the longstanding track record and established position of Prime Group as a leading real-estate developer in Sri Lanka.

Prime Group has significant experience in the real-estate sector in Sri Lanka over the past 25 years. The Group’s lands and housing segment being the core business of the Prime Group, has performed well over the past several years amidst the increasing demand from the middle income categories. ICRA Lanka also takes comfort from the positive industry outlook of the real-estate sector in Sri Lanka amidst the recent progressive steps implemented by the Govt in the early CY2020.

The rating also takes into consideration the professional management team of the Company, the healthy relationships with various stakeholders in this industry, the brand equity in the industry and the timely delivery of the projects compared with the industry competitors.

These apart, ICRA Lanka takes comfort from PRIME’s healthy cash collection efficiency amidst the strong presales levels of the Group’s project portfolio that is geographically diversified across the island. Prime Group’s forecasted future cash flow levels, which are characterized by healthy operating profit margins and strong customer advances, provide further comfort to the assigned rating. The Group’s total debt levels currently remain at a moderate level compared to the scale of the ongoing project portfolio as of 31st Dec 2019.

During FY2017, the Company had started an ambitious luxury apartment project (Prime Grand) in Colombo-07. ICRA Lanka will continue to monitor the ability of the management to successfully complete this project within the time and cost targets as envisaged.

During early CY2020, HNB Finance Ltd, an associate company of the Prime Group has successfully gone through an Initial Public Offering (IPO) which resulted in the Company’s market value in HNB Finance Ltd increasing to ~LKR 3.3 Bn, (against the total investment cost of~ LKR 290 Mn). This will provide the Prime Group additional liquidity (financial flexibility) to support its operations going forward. The rating also factors in the susceptibility of the Company’s financial performance to Sri Lanka’s macroeconomic conditions (such as volatile interest rate, depreciation of Sri Lankan rupee and etc) and the Government’s policies on the real-estate industry.

The rating also takes into consideration Prime Group’s likely capital support for its finance subsidiary, Prime Finance PLC, in order to meet its regulatory capital requirements over the medium term.

Outlook: Stable

The Stable outlook reflects ICRA Lanka’s expectations that PRIME would benefit from the recovery of the real-estate sector going forward and the Company’s Prime Grand project being completed within the time and cost targets as envisaged.

Credit strengths

Leading real-estate group in Sri Lanka: Prime Group is a leading real-estate company in Sri Lanka, operating in residential segment of the real-estate industry in the country.

PRIME is a market leader in the affordable luxury apartment segment in Sri Lanka and operates in 18 districts of the island. The Group has been recognized as a leading real–estate developer in Sri Lanka by local and international organizations.

Currently, the Group has ~75,000 Active customer base. Over the past two decades, Prime Lands (Pvt) Ltd has undertaken many property development projects, totalling to ~LKR 52 Bn. Further, the Company currently has a large land bank, amounting to ~LKR 7-8 Bn as unsold stock (at market value) and LKR 4.4 Bn as land project developments in progress (at cost).

Prime Lands Residencies (Pvt) Ltd, a fully owned subsidiary of the Prime Lands (Pvt) Ltd, has carried out 42 apartment projects in Sri Lanka over the past several years and of which, nearly 36 apartment projects have been completed successfully with high capital appreciation in the market values.

Although, in the past, the apartment market in Sri Lanka was largely confined to the Colombo City, the Company has been instrumental in expanding this concept into the suburban towns of Sri Lanka.

Experience of the promoter and the management: The Company and the Group as a whole have been driven by the rich promoter experience and the strong and experienced management team in place, which have guided the Company through several business cycles. Over the past two decades, the Company has grown organically, specializing in the real-estate sector in Sri Lanka. The management is also strategically focused on potential markets in the real-estate sector in Sri Lanka and is conservative in the scale of the business and the increased debt exposures.

Healthy presales and increased cash collection efficiency: Given the strong brand equity of the Prime Group, the presale levels of the Company remain at a heathy level. This has also helped the Company to increase its cash collection efficiency; Prime Lands (Pvt) Ltd and Prime Lands Residencies (Pvt) Ltd have recorded a cumulative cash collection efficiencies of ~80% and~65% respectively as of end Dec 2019. Most projects under Prime Lands (Pvt) Ltd have recorded relatively high presales levels during the first year of the project-launch. The lands & housing segment is generally regarded to have a higher demand (velocity) compared with the apartment segment. With the healthy presales levels, the Company carries out the construction of apartment projects at a minimal debt level. This has not only helped the Company to complete its apartment projects before the scheduled time-lines, but also to offer attractive prices for its customers.

Favourable Industry Outlook: The real-estate sector in Sri Lanka is expected to have a favuorable long-term outlook given the constrained land availability, favourable demographics of the island and the growth in the per capita income levels. The apartment segment is a relatively recent development in the property sector of the country, and the total apartment units in Colombo currently account for only ~3-4% of the total housing units in the City. Going forward, ICRA Lanka expects the apartment segment to witness significant growth, backed by increasing urbanization levels. Over the past three years, Sri Lanka’s real-estate market was negatively affected due to Government’s policy uncertainty on the real-estate sector with respect to the imposition of VAT on the apartment segment in Sri Lanka. However, during early CY2020, the NBT Act has been abolished and VAT exemption has been granted on the sales of condominium apartments. This, together with other tax changes implemented by the new government, is expected to lead to increased demand and cost savings for the real-estate and apartment sector in Sri Lanka over the short to medium term.

Healthy Cash Flow Levels: Although, the company’s revenue generations inherently tend to be volatile because of the accounting standards, during the past four years, Prime Lands (Pvt) Ltd’s revenue has increased by CAGR of ~15%. During FY2019, the Company has recorded a revenue of LKR 4,337Mn, YOY negative ~ 6% growth. However, during FY2019, the Company’s customer advances have increased by a YOY 37% to LKR 9.4 Bn in FY2019 from LKR 6.8 Bn in FY2018. During 9MFY2020, the Company’s customer advances have further increased to LKR 10.84 Bn. The Company has recorded a revenue of LKR 4,904 Mn in 9MFY2020, ~ 50% (annualised) growth during this period. The growth in the Company’s business operations over the past four/five years is attributable to the company’s ongoing expansion/marketing activities. Moreover, the capital appreciation in the property market has also enabled the Company to record healthy cash flows over this period under review. During 9MFY2020, the company’s operating margin has improved mainly on account of cost saving measures.

Prime Lands Residencies (Pvt) Ltd has recorded a revenue of LKR 5,590 Mn in FY2018, as against LKR 6,307 Mn in FY2017 and LKR 2,938 Mn in FY2016. Although, the Company’s customer advances have increased from LKR 3.51 Bn in FY2018 to LKR 4.85 Bn in FY2019, the Company’s revenue level during FY2019 has declined to LKR 3,595 Mn, YOY negative~ 35%. This is largely attributable to the slowdown in the Sri Lanka’s apartment segment amidst the weaker industry outlook that prevailed during this period. However, during 9MFY2020, the Company’s revenue has increased by ~150 %( annualised) to LKR 6,705 Mn. The customer advances during this period have declined to LKR 1.96 Bn. The Company’s overall costs incurred on the ongoing projects against the total cash collections of the same (after adjusted for the total debts), currently stands at ~95%. The same for the Prime Grand project currently remains at~117%, indicating this project (on standalone level) has also reached the breakeven sales levels.

Credit challenges

Macro-economic conditions and the Government’s policies: During CY2018/19, the real estate sector (including the construction and engineering segments) in Sri Lanka has been negatively affected due to weaker macro-economic conditions and Government’s overall policy inconsistency on this industry. During this period, most construction contractors were also affected due to delayed payments from the Government authorities amidst the Government’s increased fiscal constraints. This has not only affected the construction contractors in Sri Lanka, but also the real-estate developers, who are highly dependent on the construction-contractors for the completion of their apartment/housing projects. Although, Sri Lanka’s real-estate sector is expected to recover due to recent progressive steps implemented by the Government, Sri Lanka’s macro-economic conditions such as volatile interest rate, depreciation of Sri Lankan rupee and other policy directives of the government on the construction/real-estate industry would likely have a direct impact on the overall performance of the Company. Given the weaker macro-economic conditions that prevailed in Sri Lanka over the past two/three years, the Company’s overdue payments (from the presales customers) have also increased noticeably. The ability of the management to collect these payments on a timely manner, while achieving its future sale targets as envisaged, remains to be reviewed in the future.

Exposure to adverse variations in raw material costs: The Company generally transfers the construction/procurement risks through the construction-contracts. These contracts are mainly lump-sum contracts and therefore, the contractor’s ability to pass-through cost escalations are limited to a greater extent. However, the Company directly procures certain construction materials/furnishes, which accounts for ~30% of the total construction cost. Thus, these costs are directly exposed to the risk of raw material price fluctuations. However, since most apartment projects (such as Prime Grand) are Board of Investments (BOI)-projects, the Company enjoys duty exemptions for the importation of raw materials/furnishing items. The Company also being a market leader in the affordable luxury housing segment, is in a position to increase its prices, given the favourable market conditions.

Exposed to execution risks inherent in real estate projects: During FY2017, the Company had launched a new larger scale tier-01 apartment project in Colombo-07 (with the total sales value of LKR 30 Bn), targeting the premium market in the country. This project is a 100% residential apartment project, unlike other mixed development projects in the City. PRIMER has currently completed ~60% of this project and is expected to complete it in CY 2021. After adjusting for the debts taken up for the project, this project has currently reached the breakeven sales levels. Going forward, the Company intends to fund the completion of this project from the pending cash collections (of the presales customers) as well as new sales without significant debt facilities. ICRA Lanka would continue to monitor the progress of this project and the ability of the management to successfully achieve its sale and cost targets within the envisaged time-lines would remain as a sensitivity to the assigned rating.