Are these smallcap gems in your portfolio?

Head-PCG at Motilal Oswal Securities, Shrinath Mithanthaya discusses these stocks.

Excerpts from CNBC – TV18’s exclusive interview with Shrinath Mithanthaya:

Q: Take us through the kind of expectation you have from the midcap space because today - we have been discussing and touching the point that midcaps are likely to outperform in this year’s market performance.

A: Yes, clearly. As you just mentioned the theme, it is true that growth in midcap stocks is closer to the leading stocks, if not higher, in many cases.

There is a very wide valuation gap and many of our stocks are at least trading at single digit PEs FY08. So sooner or later, we have been maintaining that this gap needs to be breached. But we do see 2007 as the year of midcaps, purely based on growth relative to valuation.

Q: How do you go picking these because it’s a bit of a dangerous ground that we are treading here? Would you, as some analyst have been telling us, first look at the Index midcap before going out to the others?

A: No, not necessarily. We have kind of identified a few longer-term macro trends; for example, infrastructure, total kind of industrial activity which is happening in terms of projects coming up or in terms of retail boom or entertainment or SEZs, which are just taking off.

So these are the four-five macro mega trends that we have identified and are trying to fit in stocks, which are good plays on these trends.

Q: Your first pick - Goldiam International ; how does it fit in your trend as a consumer retail buy?

A: Goldiam International is a play on two themes. One is India’s competitive edge in diamonds and diamond jewellery exports. So that has been on for quite some time in Goldiam and it’s a kind of steady state business, which has helped the company to become a zero-debt, high cash company. But that is not necessarily the next driver of growth here.

What you are looking at is the trend of silver fashion jewellery. Basically with fashion as a mega trend, we expect low-cost jewellery to be the next kind of trend. And Goldiam has recently launched its Ola brand of silver jewellery with American diamonds. It is planning a tie-up with all the malls including the Future Group.

Q: How do you pick this, D'Damas or maybe Rajesh Exports - why would Goldiam stand out amongst the competition?

A: Rajesh Exports is a pure gold jewellery export company, whereas Goldiam is a diamond-studded jewellery export company and has its advantages. India is known for its processing of small diamonds and has an inherent advantage of diamond cutting and polishing.

Q: What about Ratnamani Metals and Tubes ?

A: As we said one of the mega trend that we have identified was an increasing number of industrial activity and Ratnamani Metals is a play on two specific segments; oil and gas and power. Ratnamani is a market leader in stainless steel project pipes and tubes.

At about 1.5% of the project cost, we have estimated about 50 billion of project pipes demand over the next five years or so and as a market leader, we expect Ratnamani to be a major beneficiary.

Q: The only possible concern really is the volumes. Today for instance, it just traded about 100 shares, so is liquidity a problem?

A: Yes, liquidity is a kind of problem, it's 500 crore M-Cap company with 9 crore equity, but we feel that over time, management will take corrective action in terms of liquidity, in terms of either stock spilt or bonuses, etc. And with consistent earnings growth, the demand itself takes care of liquidity; liquidity can be created in various ways.

Q: What are your expected targets on Ratnamani Metals and Era Constructions ?

A: We have been talking of Era for almost a year now. We still feel that our story on which we started, basically a play on construction in more than one segment, in terms of public sector projects, private construction and real estate, all the three are playing out well in Era. So our target for Era is about Rs 600, based on reasonable 12 times FY07 basis. So it’s a very short-term target.

When it comes to Ratnamani, again as I said, these are high growth, low PE stocks and we are looking at about 9.5 times FY08 PE target and a target of about Rs 640 from the current levels of about Rs 470-480.

Q: Any disclosures?

A: Motilal Oswal is actively recommending these stocks to its customers.