Shares of DB Realty soared after top executives of these companies were released on bail in the 2G scam case. DB Realty stock is up 40% while Unitech is up 4%. However, some of the intrinsic issues plaguing these companies, and uncertainty about the outcome of the 2G scam, could prevent a major valuation of the stock.

Demolition of government-involved projects, delayed implementation and difficulties in obtaining approvals for new projects – DB Realty has seen it all. The company launched no new projects in the September quarter and sold approximately 50-75% of its existing seven projects. Even the analyst community has taken the stock off their hands, with most brokers dropping their coverage on the stock.

The company’s net sales for the first half ended September were down 36%, while net profit was down 76% over the same period. However, the company is paying off its debt by selling non-core assets.

At the end of the September quarter, the company managed to reduce its debt from Rs600 crore a year ago to Rs 230 crore. It sits on a substantial stack of TDR (transfer of development rights), which can be realized to further boost the company’s cash flows. However, the outcome of the 2G scam case against its promoters will weigh heavily on the business prospects of the company which has its projects mainly in Mumbai.

Unitech is the second major real estate company to be hit over its top deck’s alleged involvement in the 2G scam. In addition to the problems that all real estate companies face, there are other challenges.

For example, the company was the receiving end of shareholders’ ire at its annual general meeting for refusing to pass a resolution to pay dividends on stock for fiscal 2011. The company’s net sales and profits are decreased by 17% and 45% respectively for the first half of this fiscal year.

However, the business model remains strong. Unitech has a presence in the affordable and middle-income housing segment, enabling it to generate cash flows. It has launched new projects, although the scale of implementation is slow. Despite lower revenue recognition, it has managed to reduce its debt through internal cash reserves.

It has an outstanding net debt of Rs 5,144 crore and a land bank of nearly 7,000 acres with an average purchase price of land of about Rs 250 per square foot. Despite strong fundamentals, the loss of credibility and uncertainty about the 2G probe will limit much of the stock’s advantage. The stock is still trading at a significant discount to its land value which analysts estimate at Rs 60.

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