Godrej Properties, one of the few real estate companies that have taken the market slowdown in its stride, reported better profits for the quarter ended September even as sales fell sharply.
The company’s profit before tax zoomed to Rs 72.88 cr from Rs 3.56 cr for the same quarter last year, despite revenue from its operations falling sharply to Rs 260 cr from Rs 393 cr over the same period.
“The overall environment in the real estate sector remains challenging. This provides Godrej Properties with tremendous opportunity to drive market share growth in residential real estate. We expect strong momentum in both portfolio project additions and new project launches in H2 FY20.”
Unlike other companies, real estate firms can recognize the value of a property they have sold only if they have completed at least 25% of the construction of the overall project. This accounting rule often leads to a mismatch between bookings and the reported revenue.
For the September quarter, the company was able to enter into agreements with customers to sell property worth Rs 1,446 cr, up from Rs 897 cr in the June quarter. In the March quarter, it was able to enter into booking agreements for properties worth Rs 2,161 cr.
The above figure — called booking value — does not mean that the company was able to collect that much amount of cash, as customers do not have to pay the full 100% to book a property.
It can be recognized as revenue only if a) the flat/villa has been completed and handed over, and b) at least 25% of the total project has been constructed.
Total operating cash inflow — which is a better indicator of the actual cash that flowed in — was at Rs 859 cr during the September quarter, compared to Rs 885 cr in the June quarter and Rs 1,225 cr in the March quarter. In the same quarter of last year, the company’s total operating cash inflow was Rs 1,110 cr.
As for the company’s profits, the improvement in its margins was the result of two factors — a higher non-operating income and lower expenses by way of inventory liquidation.
Nevertheless, profit before tax nearly were almost half of the Rs 140 cr that it posted in the previous, June 2019 quarter. In the June quarter, revenue were also considerably higher at Rs 636 cr.
Non operating revenue, also known as ‘other income’ or non-business income, rose to Rs 135 cr from Rs 94 cr last year and Rs 78 cr in the June quarter.
The second biggest contributor to heightened profits this year was a much lower inventory liquidation expense at Rs 41 cr versus Rs 216 cr last year.
Whenever an item — which was produced in one of the previous quarters and added to the inventory — is taken out from the inventory and sold in a particular quarter, the original cost of producing that item is recognized as part of the cost of production for the present quarter.
On the other hand, whenever an item is produced in a particular quarter, but is not sold — and is instead added to the inventory stock — the cost of producing that item written back as inventory gain — to be recognized later.
Inventory expenses tend to be quite significant for real estate firms, as they are often not able to sell their completed goods in the same quarter as they completed it.
In the previous, June quarter, for example, Godrej Properties consumed raw materials worth Rs 766.50 cr, but generated only 636 cr in revenue. This was because it was not able to sell everything it produced. The value of the items that were not sold, but were added to the inventory, was Rs 354 cr during the June quarter, and were not considered as part of the expenses for the quarter.
During the latest, September quarter, the company generated Rs 260 cr of revenue from its business, consumed Rs 92 cr worth of material goods and liquidated (reclaimed) Rs 41 cr worth of finished products from inventory.
In the same quarter last year, it had been able to liquidate Rs 216 cr worth of finished goods from its inventory, suggesting some pressure on sales in the latest quarter.
The real estate sector saw a sharp fall in sales during the July-September quarter, according to numbers from consultant Anarock.