Stocks of DB Realty and Unitech have risen after the top executives of these companies were granted bail in the 2G scandal case. DB Realty stocks rose 40%, while Unitech rose 4%. However, there are some internal issues that plague these companies, and uncertainty over the outcome of the 2G scandal may prevent any major valuation of the stock.
Canceling government-involved projects, delays in implementation, and difficulty getting approval for new projects – DB Real has seen it all. The company did not launch any new projects in the September quarter and sold about 50-75% of its existing seven projects. Even the analyst community has washed their hands of most brokerage stocks by closing their coverage.
The company’s net sales fell 36% for the first half ending September, while its net profit fell 76% over the same period. However, the company is repaying the loan by selling non-core assets.
At the end of the September quarter, the company was able to reduce its debt to Rs 230 crore from Rs 600 crore a year ago. It sits on a significant pileup of TDR (Transfer of Development Rights), which can be realized to further increase the company’s cash flow. However, the outcome of the 2G scandal lawsuit against its promoters will weigh heavily on the business potential of the company whose projects are mainly based in Mumbai.
Unitech is the second largest real estate company to be affected by its top deck involvement in the 2G scandal. In addition to the problems associated with all real estate companies, there are other challenges.
The company, for example, was at the final stage of its shareholders’ anger at its annual general meeting because it refused to approve a resolution to pay dividends on equity shares for fiscal year 2011. The company’s net sales and revenue fell 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 that enables it to generate cash flow. It is launching new projects, although the scale of implementation is slow. Despite low revenue recognition, it has managed to reduce its debt through internal cash collection.
It has an outstanding net loan of Rs 5,144 crore and a land bank of about 7,000 acres of land at an average cost of around Rs 250 per sq ft. Despite the strong fundamentals, the loss of credibility and uncertainty over the 2G probe will limit any major rise in stock. The stock continues to trade at a significant discount to its land price, which analysts estimate at Rs 60.