Picks from the small cap, midcap space: Jigar Shah

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Tata Motors BSE | NSE 01/06/12 Are Mutual Funds betting on Tata Motors? Other Stocks in this news Rain Calcining | Denso India | Gujarat Narmada Valley Fertilizers Company | Automotive Stampings and Assemblies | Narmada Chematur Petrochemicals |

Jigar Shah of KR Choksey Securities gives his picks in the small cap and midcap space. He gives his views on Narmada Chematur, Denso India, Automotive Stampings and Rain Calcining.

He feels that these stocks still have value in them and investors should be looking at them.

Excerpts from CNBC - TV18's exclusive interview with Jigar Shah:

Q: You like Narmada Chematur , why is it a favourite for you?

A: Narmada Chematur is merging with Gujarat Narmada Fertilizers Company, GNFC, and the ratio has already come. Gujarat Narmada Fertilizers is doing very well as a company and given the valuation and the performance of Narmada Chematur, the shareholders will only benefit due to this integration.

If you look at the state government companies, the Gujarat state government companies have been the most dynamic and they have been doing very well. The debt is very low and the growth prospects are very good, the synergies of the merger are also quite good. So there is no apparent benefit from the current merger ratios.

But I feel that there is a significant overall value to be derived from this acquisition or investment at the moment for investors because in the long run, the GNFC stock should get re-rated significantly.

Q: Do you see it as a good price entry into GNFC then, or do you like the company on its standalone fundamentals?

A: You said it rightly, I am more confident entering Narmada Chematur and that way entering the Gujarat Narmada Fertilizers. So I think it is an indirect entry into GNFC and that is why I like it more.

Q: The other stock that you have been looking at is Denso India , what is the story with that?

A: Denso India belongs to Denso Corporation, which is one of the world's biggest auto component companies. Denso India has done pretty well; it is in the auto electrical segment. Its turnover is very huge and its market capitalisation is quite low. It has been consistently generating a good ROCE, Return On Capital Employed, and a good RONW, Return On Net Worth.

But due to its conservative policies, this stock has not got so much amount of attention and is still lying low at about Rs 80-Rs 82. I think there is a substantial scope of re-rating, because the market cap to sales ratio remains quite low, given the valuation of other companies in the similar space.

Denso is a very good performer with good free cash flow and a solid business model. Denso looks very attractive for the future for the domestic auto component industry.

Q: What about Automotive Stampings , yet another one of your picks?

A: Automotive Stampings also is a very interesting company, which has a majority shareholding from TACO Tata Autocomp Systems, a  Tata Motors subsidiary. It is into the business of sheet metal stampings and stamping of skin parts, which is a very high valued activity. It has got very good infrastructure at three locations and is also already into exports to UK and USA.

The benefits of its capital expenditure incurred over the last two to three years should now start coming in. The turnover of the company is very good, but the margins have been bad over the last one-and-a-half to two years. But I think this is at the bottom and they should improve now and the company is available below a Rs 100 crore market capitalisation, with a turnover in excess of Rs 250 crore, with aggressive expansion plans.

I think, since the company is belonging to the Tata Group, its fortunes should be linked directly to the group's automotive expansion as well as the export potential of the auto component companies. I think it is a very good buy, given that kind of low market cap to sales ratio for the company.

Q: There is a fairly well known story of Rain Calcining , but why would you buy it at this price?

A; I think the commodity space should continue to do well. That is my major driver for getting into this kind of a company, and they have worked on the Calcined Petroleum Coke, CPC, side quite well for a long time.

They have not really shown the kind of desired performance for all this while. I think the time has come when they should deliver better performance. I am confident that with the greater efficiencies and expansion plans that they have undertaken, the performance in the next one year would be better. That is why I feel it is a good entry at this point in time

Q: These are all small cap and midcap stocks. Do you have any positions, or do your clients have any interest that you would want to disclose on these recommendations?

A: Personally, I don't have any positions in any of the stocks, but definitely our customers have got recommendations on many of these stocks from our side in the past.