Lodha to follow percentage completion method for revenue recognition

July 28, 2023

Macrotech Developers has decided to recognise revenue on the percentage of completion method rather than the current project completion method, where revenue can be recognised only on the receipt of the occupancy certificate or when the projects are delivered to customers.

In an earnings call on Friday, CEO and MD Abhishek Lodha said that the current revenue recognition method did not fully factor in the operational performance of the company as residential projects have a long gestation period.

In the June quarter, the company reported a 34 per cent fall in net profit to ₹178.4 crore, while revenue was 39.6 per cent lower at ₹1,617.4 crore. Operationally, the company reported pre-sales of ₹3,350 crore in the reporting quarter, up 17 per cent year over year.

Lodha said that revenue recognition for projects that had been launched by March 2023 would follow the project completion method of accounting, while projects launched from the June quarter onwards would be under the percentage completion method.

“It may create some transition challenges, but we will be able to demonstrate a true picture of our performance that will reflect in the profit and loss account.” The company expects the system to stabilise by FY26.

Most companies in the real estate sector have been following the project completion method over the last 4-5 years, leading to a substantial lag in sales of housing units and the recognition of that revenue in the financial statements.

New projects

The company added five new projects in the June quarter with an estimated sales value of ₹12,000 crore, and it launched three projects with a revenue potential of ₹1,510 crore.

For FY24, the company has set a pre-sales target of ₹14,500 crore and has 9.4 million sq ft of launch pipeline spread over 22 projects with an estimated value of ₹12,560 crore.

Lodha said that the company was juggling growth, business development, and the need to keep its debt levels low within its stated targets. In Q1 of FY24, debt levels increased by ₹190 crore to ₹7,260 crore due to lower collections and spending on business development.

The company is aiming for 20 per cent pre-sales growth annually to reach ₹21,000 crore by FY26. It is also targeting a 20 per cent return on equity by the end of the current fiscal year, up from 17 per cent now.

The company is also building up an annuity portfolio with the potential to generate ₹500 crore of income annually by FY26 and ₹1,500 crore by FY31. This includes a pan-India digital infrastructure consisting of warehouses and industrial parks on a platform with Bain Capital and Ivanhoe Cambridge, property management businesses, and select high-quality office and retail portfolios.

It took a 1 per cent average price hike across its projects in the June quarter.

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