Percentage completion rule to make its impact felt.
Despite a tangible revival in demand in the real estate market, profitability of south-based real estate companies will remain subdued in the next quarter as under-construction projects will take some more time to be recognised in the balancesheet of these companies.
As per accounting principles, revenue of an under-construction project is reflected in the book of a company after a certain degree of completion of the project. Usually, most companies follow the 30 per cent completion trigger to calculate the revenue on their balance sheet.
“Due to the 30 per cent completion norm, profitability is yet to be reflected in the books of the real estate companies,” Venkat K Narayana, chief financial officer of Prestige Developers, said.
He, however, said that as new projects were launched by companies and with the growth in demand, profitability of companies would see a rising trend.
Referring to this matter, N L Vaidyanathan, executive director of Nitesh Estates, said that profitability of real estate companies were subdued during the last quarter due to the percentage completion rule.
As many new projects are launched in this quarter on the back of the revival in demand, this will take another one to two quarters to reflect completely, he added.
Many real estate companies in south India have registered a flat growth or have seen a dip in their net profit during the second quarter of the present financial year. Those companies which have posted higher profitability figures have done so on the back of land monetisation than on higher core earnings.
“During the slowdown, many developers had stopped launching new projects. With the revival in the economy, new projects are being launched and those will take time to reflect in the balancesheet,” an analyst with Mumbai-based brokerage firm said.
He also said that profitability would remain subdued in the near term for the real estate companies.
However, some of the real estate developers have a different view regarding this issue.
“Though the accounting principle plays some role, still companies with robust sales growth have already shown growth in profit in the last quarter,” S Baaskaran, chief financial officer of Sobha Developers said.
He also said that the upcoming quarters would register better revenue and profit growth on the back of robust demand.