Invest in these midcap stocks in IT and other sectors

Mid-cap IT

The mid-cap IT space is also expected to witness action as the stocks offer value, and the valuation between large- and mid-size scrips has widened considerably.

3i Infotech

The company is a leading player in the IT products and services space. The stock provides a huge upside potential as it trades at an attractive valuation of 12.2x and 9.5x for FY07E and FY08E, respectively. Further, its strong order-book position of over Rs 200 crore (Rs 2 billion), increasing share of high margin products and inorganic growth strategy make it an ideal mid-cap IT buy.

Sasken

The company's exclusive focus on the telecom space, a list of elite tier-1 telecom customers such as Nortel, Nokia, Intel and NTT and its strategy of offering both services (embedded R&D outsourcing services) and products (software for mobile phones) augur well for its growth.

Further, Sasken's acquisitions of Botnia Hightech and iSoftTech have enabled it to augment its services and client portfolio. Sasken is a major beneficiary of increased telecom outsourcing to cut costs and its sector-specific technical know-how. The stock trades at 22x and 11x for FY07E and FY08E, respectively.

Ship building

Summet Rohra, analyst with Antique Stock Broking, strongly recommends companies in the ship-building industry such as ABG Shipyard and Bharati  Shipyard, which are trading at P/Es in the range of 10-11 and 7.5-10 for FY07E and FY08E, respectively.

Bharati Shipyard

The interest in private sector ship-building major, Bharati Shipyard, is mainly on account of the company's entry into the oil rigs business, which is in high demand. Offshoring drilling count in India is expected to double in the next five years with more exploration activities opening up.

Also, there are only a handful of shipyards worldwide that can build drilling rigs. The company is the first domestic player to enter the business.

Bharati Shipyard has tied up with a well-known US-based oil manufacturing firm to develop the same in its new site at Mangalore. The company's current order-book position stands close to Rs 1,500 crore (Rs 15 billion), with the unexecuted position at Rs 1,200 crore (Rs 12 billion) (4.5 times the 2005-06 turnover).

ABG Shipyard

The country's largest private sector shipyard, ABG Shipyard, is even larger than Bharati in size and revenues. It mainly caters to manufacturing of vessels for the petroleum industry, the demand for which is likely to remain strong in the near future for many reasons.

A large proportion of global offshore fleet is over 20 years old and is due for replacement. Also, the volatility in crude oil prices has led to increase in oil exploration activity.

Besides existing facilities, the company is building a new shipyard in Gujarat at a cost of Rs 400 crore (Rs 4 billion) to be commissioned in the beginning of FY09. Its order-book position -- to be executed over the next 30-36 months -- remains strong at Rs 1,625 crore (Rs 16.25 billion).

Other stocks

Gateway Distripark

The shipping and logistics industry is thriving on upswing in the country's foreign trade. Also, volume of containerised cargo handled at the ports is increasing.

This is expected to benefit Gateway Distripark (GDL), the country's largest private sector player in handling, transporting and storage of containers, warehousing of cargo and various other value-added services provided in importing and exporting of cargo in containers.

Though GDL's financial performance in Q1FY07 was not very impressive, analysts are bullish on its stock given its strong position in the robust demand for containerised traffic scenario. The stock has underperformed and is trading at 15x and 12x for FY07E and FY08E, respectively.

WS Industries

The valuation of WS Industries, manufacturer of porcelain insulators for use in the transmission of electricity, makes the stock attractive. At Rs 58.5 it trades at 11.7x and 8.4x for FY07E and FY08E, respectively.

However, Sharekhan values its core business at Rs 60 per share and its realty venture at Rs 80 per share.

The company has devised a three-pronged strategy -- expanding the current capacity of hollow core insulators from 5,000 tonne to 6,000 tonne, setting up of a greenfield plant of 8,500 tonne and stabilising the source of rental income through the realty venture. In joint venture with TCG, the company plans to develop 15 lakh sq ft space into a state-of-the-art information technology park.

Indo Tech Transformers

Chennai-based distribution and power transformer manufacturer Indo Tech Transformers is expected to benefit from the immense potential in the sector, believes Suresh Parmar, senior associate - equity, Darashaw Broking & Investment Banking.

It has been projected to grow at a robust rate of 16-18 per cent over the next couple of years. The company raised Rs 51 crore (Rs 510 million) through its initial public offering in February this year to fund the expansion of its distribution and power transformer capacity and set up a new dry-type transformer plant.

The Indo Tech stock has significantly underperformed the Sensex ever since its listing in March this year, and is now trading at 11.3x and 8.6x for FY07E and FY08E, respectively.

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