NEW DELHI -- Amid the debris of a battered Indian real-estate sector, some analysts say investment bargains may be emerging. Their favorites: blue-chip property companies DLF and Unitech.

This has been a miserable year for Indian property stocks. Rising inflation and interest rates have delivered a double whammy: Capital is more expensive, and consumers are scaling back spending.

"The real-estate sector has been witnessing a cash crunch," says Shaleen Silori, a real-estate associate at ICICI Securities in Mumbai.

As a result, Indian real-estate stocks have taken a bashing. So far in 2008, shares of key players DLF and Unitech have skidded 58% and 61%, respectively. In comparison, India's benchmark index, the Bombay Stock Exchange's Sensex, is down 33%.

Property companies have been hit hard because they are vulnerable to a downturn from two directions. Borrowing is becoming more expensive as interest rates rise. At the same time, raising fresh funds in equity markets isn't easy either: India's market for initial public offerings is lackluster, and both Unitech and DLF have delayed plans to raise money through real-estate-investment-trust issues in Singapore.

More expensive credit can be a particular problem for property companies, because they often borrow a large portion of their land-development outlays up front and depend on advance sales to repay loans.

But on the demand side, rising inflation -- running at an annual rate of 11.89% for the week ended June 28 -- and higher interest rates, which have jumped to 11% from 7.5%-8% three years ago, mean many consumers are putting real-estate purchases on the back burner. A rise in mortgage rates would affect residential-property purchases and lead to delay in some project launches, say analysts at Macquarie in Mumbai.

Meanwhile, costs for steel and cement, two key building materials, have been rising.

Given that gloomy environment, some sector watchers say investors should stick with India's biggest real-estate companies, whose share performance they expect to improve over the longer term.

"DLF is a real-estate company with relatively greater stability," says Deven Choksey, managing director of K.R. Choksey Securities in Mumbai. Delhi-based DLF, India's biggest real-estate company by market capitalization, is well diversified, selling property in the housing, commercial, multiplex and retail sectors, he notes.

The company has steady sales, unlike some of the smaller companies in the sector. DLF is also adequately capitalized, Mr. Choksey says, and "provides a robust business model."

Last week, DLF's board approved an 11 billion rupee ($257 million) share-buyback plan aimed at boosting investor confidence after the stock price fell below its IPO level. The plan involves a buyback of 22 million shares at a maximum price of 600 rupees each. Prior to the board's approval, some investors reacted negatively when Macquarie said in a report that it felt the proposed buyback was negative for DLF's cash flow. On July 3, DLF shares tumbled 9.9%.

To some analysts, DLF shares look attractive after this year's sharp fall. Mr. Choksey, who recommends the stock, has a 12-month target of 800 rupees. He says the price-earnings ratio for the stock for the current year, which ends March 31, 2009, is less than eight, which he calls attractive. Analysts at Citigroup rate Unitech, India's second-biggest real-estate company by revenue, a "buy" too. They cut their 12- to 15-month target for Unitech to 375 rupees from 454 rupees in April. The reduced target is 98% above the level at which Unitech shares closed Friday, 189.15 rupees.

Unitech, based in Gurgaon, reported on June 27 that net profit for the quarter ended March 31 fell 52% from a year earlier, to 3.6 billion rupees. Citigroup estimates Unitech's P/E ratio at 17.6 times for the year ending March 2009 and 12.8 times for the following year, which they consider attractive. Stock analysts say Unitech, which listed earlier than DLF and which publicly sold a larger percentage of its shares, has steadily had a higher P/E ratio than DLF.

In India, there are bears who think things could get even worse for property investments, including stalwarts like DLF and Unitech. Shailesh Kanani, an analyst with Angel Broking in Mumbai, says both stocks should be avoided: "It would not be good to invest in DLF and Unitech at the moment, as an underperformance of this sector is highly likely for the next six to 12 months."

Mr. Kanani says that real-estate companies need to lower the selling prices of homes in order to revive demand. Once they have done that, he contends, the situation for property companies "is likely to become more stable."

Write to Vibhuti Agarwal at vibhuti.agarwal@wsj.com and Jackie Range at jackie.range@wsj.com

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