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Speaking to CNBC-TV 18, Harit Shah of Angel Broking identified Tanla Solutions, 3i Infotech and Sasken as his favourite midcap picks. He has a target of about Rs 750 on Tanla Solutions. He has a target of about Rs 180 on 3i Infotech. Shah gives a target of about Rs 395 on the Sasken.

Excerpts from CNBC-TV18 ‘s exclusive interview with Harit Shah:

Q: Why do you like Tanla Solutions?

A: If one looks globally, specially in developed telecom markets an increasing use of data services by consumers, as subscriber goods is typically not very strong in these markets. One is going to see a lot of data services growth rather than voice-based growth. Tanla is of course, into aggregation business; they have got some strong relationships with major mobile phone operators like Vodafone and O2. So they are well placed right now to capitalize on the strong growth expected. In fact, Vodafone recently in the latest quarter, managed to get a billion pounds in data revenue. So that trend is very much on.

So definitely with an expansion in newer markets like Singapore, Australia and US, there is a lot of scope for growth in the company and they have got scalable business model of almost 50% EBITDA margin. So going forward, we expect the company to record about 45-50% CAGR in EPS over the next two-three years. So we have a target of about Rs 750 on the stock right now.

Q: We have heard a lot of 3i Infotech because it’s been an acquisition spree across the globe. What is it that you think will benefit it and how soon?

A: One thing is that they have been able to differentiate themselves from an normal midcap software company through these acquisitions. All them have been EPS accretive with about 10-15% net margins. It's helped them to build a good spread of banking products for itself.

Another thing is that they are very strongly present in the domestic market. There is a lot of strong growth expected in this space and more specifically in e-governance space in which they have already won couple of orders from the Government of Gujarat and Government of Harayana. So going forward, we expect this also to drive growth for them and the fact that they are very geographically diverse company not dependent on the US.

Only about 5% of net revenue is exposed to US dollar fluctuation. So to that extent, the currency risk is also not significant for this company. So these are some of the main reasons why we like the stock and we have a target of about Rs 180 on the stock right now.

Q: What about Sasken considering their expertise in the wireless space. What target are you setting?

A: Sasken is unique, interesting story and slightly risky because of the fact that it's focused just on one sector. But going forward, given the fact that with increasing features been used in mobile phones, users demanding much better features on them. The software component in these mobile phones is increasing always and Sasken has got strong relationship particularly with Nokia, which is of course the largest handset vendor in the world - that’s a positive thing and of course a fact that they have products business which as of now is not very significant. But going forward, as and when they are able to get scale in that business, it’s a good lever to protect their margins. We have a target of about Rs 395 on the stock.

Q: Give us an idea of the overall IT domain. The big boys have taken quite a bit of a beating than a lull now, recovery coming into them pre-earnings. In the midcap space where you spoke about the three picks how do expect this entire industry as a whole to perform relative to the markets from hereon and is the differentiator is going to be global dependence on the US. On what parameters would you bet on IT?

A: As of now, in the interim at least, we would like to get some more clarity on how CY08 IT Budget will pan out; as yet there is still some clarity to emerge. So that will be a key factor in the short-term that will determine how it’s going to move. Going forward, we think that as a trend, offshoring will continue regardless of whether or not there is a slowdown in IT spending; still we think that its very much a secular trend over the next few years.

I think it's still a multi-year story; rupee appreciation and wage inflation will impact these companies. But we believe as long as rupee appreciation is gradual, the top tier IT companies at least will be able to manage it. Therefore, we are by and large positive on the top tier IT companies as of now.

As far as midcap space is concerned, one needs to go for a bottom-up approach. They are not very similar in terms of business models, as one would see the top tier companies. So one needs to have a little more bottom up approach on this space and we have already mentioned the stocks that we like in the midcap space.

Disclosure:
I hold Tanla and 3i Infotech.

Source: Moneycontrol.com