Hemindra Hazari of Karvy Stock Broking discusses three stocks from the smallcap and midcap space that he likes in the current market.

Excerpts from CNBC-TV18's exclusive interview with Hemindra Hazari:

Take us through Zen Technologies [Get Quote], which you like?

Zen Technologies at the moment is our top pick in the small and midcap space. It is a company which is engaged in defence related activities. Essentially it makes simulators both for military and para-military forces. The stock has taken a severe knock and at these levels it is very attractive at about 9 times FY07 earnings.

We are expecting an EPS growth of about 60 per cent in 2007 and another 50 per cent in 2008. The kind of products they are going to come up with are going to be very impressive. They already have a tie up with SAAB and we expect one of the simulators to begin with production this year.

We also see that they have a simulator on the driving training school and we expect that to do well too. On the broader front we are quite positive on the defence sector because of the rising insurgency in India especially from the naxalite movement which is coming right from Nepal down to Andhra Pradesh and even parts of Maharashtra.

There will be increasing focus on para military forces on upgrading their technology as well as their training. In that regard simulators are going to be a very important part and companies like Zen Technologies would be the prime beneficiaries.

The concern on Zen Technologies is the liquidity, since it is a very illiquid stock?

Once one has sufficient interest and bias into the stock, it can become quite liquid. The fundamental reason behind why it trades at such low valuation is that it is a defence stock and this is the case with all defence companies, there tends to be great lumpiness in their orders.

In some quarter one will find that their topline will do extremely well while in other quarters the topline may virtually disappear. That is the case with anyone dealing with the defence sector because it is the sheer lumpiness and the short term visibility of the order flow.

What about Liberty Shoes [Get Quote]?

We are doing cherry picking because we thought that some of these midcaps stocks are unduly punished and therefore we found some of these stocks extremely attractive. Liberty Shoes is an interesting company. It is in the retail space. It is looking at expanding its number of stores as well as the high end shoe range.

In FY07 we are expecting to see a 30 per cent growth in its earnings with an EPS of 14.5. The stock plays at slightly higher than the other stocks at 15 times for 2007. This is really a play on the retail branding story in India and particularly the footwear range as well as some of the high-end stores that they have planned to increase.

Sanghvi Movers [Get Quote] is a stock that you like and it essentially because it is a larger crane service provider?

Sanghvi Movers is a play more on the infrastructure support services. We are seeing a lot of demand coming from the steel sector, oil sector as well as from the windmill sector particularly Suzlon [Get Quote].

All these sectors are currently doing reasonably well and since the construction activity has picked up one will find that this company provides medium to heavy cranes and currently they have 200 cranes.

We expect that some of the end users are doing well and therefore the kind of cranes that they would require will really come from this company. We are expecting a 60 per cent growth in earnings for FY07 and an EPS of about 69, the stock trades at 11 times FY07 PE.

Any disclosures

I do not have holdings in any of these stocks.

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