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Friday, January 05, 2007

2007 would be a year of small-caps and mid-caps


I feel the markets would trade flat for a couple of trading sessions. The Sensex is trading at a really high valuation of 23 – 24 times trailing twelve months earnings. The commensurate number, if one were to take estimated FY 2007 earnings, would be 18 to 19 times. Even this is quite on the higher side compared to the earnings multiple of other emerging markets. I would say the year 2007 would be the year for mid caps and small caps. But when I say that, one should be extremely selective when picking up stocks in these segments. I see some IT mid caps making for good buys at their current price levels and valuations.

Cement and metal stocks have seen technical correction in the past couple of sessions. Cement stocks would certainly strike back considering that the Q3 results that are to come out would be exceptionally good. There was a 2% appreciation in cement prices during the quarter gone by and this would be reflected in their quarterly numbers. A further Rs.3 to Rs.5 hike in cement prices is expected. There is no doubt that cement would continue to do well. I however wouldn’t hold the same for metal stocks. There has been a sharp correction in individual metal prices, say zinc, copper, lead etc. Copper for instance is trading at 8 month low. The sector I feel will take some time to recover.

I would suggest that investors be very selective in stock picking. We would see substantial growth now only in 8 to 10 percent of the companies listed on the bourses. The growth otherwise across the board would be nominal and in line of standard market returns.

- Nehal Shah, Research Analyst, Ventura Securities