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DD Sharma of Anand Rathi Securities’ midcap stock picks are RayBan Sun Optics, Sujana Towers and Amar Remedies.

The fundamentals of RayBan Optics are very strong and the demand for its products are growing very fast, said Sharma.

Sujana Towers is also a pick because the margins in the telecom business are quite healthy and there is a sustained demand in the towers, for telecom and power transmission.

According to DD Sharma, Amar Remedies is an attractive pick because as an FMGC company, it is available at a very attractive discounting.

Excerpts from CNBC-TV18’s exclusive interview with DD Sharma:

Q: Your first choice is RayBan Sun Optics. What is the kind of escalation or appreciation you expect in the share price from here?

A: This stock is quite steady since the last six months or so. It is moving in the range of Rs 87 to Rs 96-97. But the fundamentals of the company are quite strong. It is into lifestyle products. Typically, 80-85% of the revenue comes from goggles and frames. So, the demand for such products is growing very fast.

Apart from that, the company is a 70% subsidiary of Luxottica, which is a dominant global player in these kind of products and has 5,500 stores across the globe. They have very good brands under its portfolio. Gradually, they are launching these premium brands in the domestic markets. With the launching of those brands, the margins of the company will go up significantly.

From January 2007, they have launched two premium brands worth Rs 12,500 and Rs 10,000. They offered the biggest margins in this business. So, in the current year, for December 2007-end, the company could report EPS of around Rs 8 or so. That is discounted by 12 times the latest earnings or current year earnings. That is quite attractive for a multinational company in lifestyle products. Typically, lifestyle and retail are having discount of 20-25-30 times. So, in that way it looks very attractive to me.

Q: How much appreciation it would have?

A: I think it would appreciate by atleast 50%, in the next 6-12 months.

Q: The other pick that you have is Sujana Towers. Apparently, it is in the ancillary space to telecom. Financially, however, the company has not done well in Q2. Their margins jumped up from about 13-18%. What are you buying in the company?

A: I think this company is into the tower business. Almost 60% capacity is meant for power transmission towers and 40% is for the telecom towers. Actually, it is not into the project business. So, it supplies towers to either the telecom companies or to those companies, which are engaged in the project implementation for power transmission.

Margins in this business are quite healthy, because there is a huge and sustained demand in the towers, for telecom as well as for power transmission. The company has expanded the capacity of the tower, in the last 12-15 months, from 28,000 metric tonne to 1,28,000 metric tonne. It is now further expanding the capacity from 1,28,000 to 2,28,000, which is a significantly large capacity.

The margins are still healthy and therefore, we expect the earnings for the company in the current year, will be close to around Rs 15. The current price is discounting this Rs 15 earning by only ten times and that is very attractive. No other power transmission company or telecom tower transmission company is available at 10 P/E.

Q: What would be a fair valuation of this stock?

A: Most of the peers are discounted at 20-25 times.

Q: Amar Remedies have just taken an approval of around Rs 150 crore. They are into healthcare and dental care. What is it about the company that is worth investing?

A: This company is mainly into the toothpaste business and mainly 85% of the revenue comes from toothpaste and the toothbrushes business. These are ayurvedic toothpaste and not the general kind of toothpaste. The demand for these kind of natural or ayurvedic products is rising, not only in the rural areas, but also in the urban areas.

So, the demand is pretty good. The problem, so far, with this company was that it has one plant in Uttaranchal. The new plant was ready since the last six months, but it was not operational because of the environment clearance that was pending.

Now, the company got the environment clearance from the Centre and they hope to get it from the state. So, this investment in the new plant, which was so far useless, will now start giving results from December ‘07.

They hope to start this plant, which is in the tax free area or tax exempt area. So, the margin of the company’s products from those plants will be very good. Since, the last two years, the company is not showing any growth. Due to this new capacity, the growth will come. So, in the current year, the company can show earnings of around Rs 9 or so and next year, by ’09, it could be around Rs 13-14. Going by that, as an FMGC company, this is again available at a very attractive discounting.

Source: Moneycontrol.com