STOCKS WITH GREAT RETURNS

The year 2007 is likely to be remembered for providing great returns in the stock market. The BSE Sensex has gained 43 per cent so far this year, and the recent rally, where the Sensex made a new milestone crossing 20,000 levels, has added a lot of wealth to those who are invested in large-cap stocks.

However, many analysts describe the current market rally as one driven by momentum, powered by heavy net foreign inflows into equities, most of it in large-cap stocks.

There is an increasing belief among market experts that valuations of many large-cap stocks appear stretched today � the BSE Sensex trades at a twelve-month forward earnings of 20 times as compared with about 17.7 times a month back.

While most of the gains have been captured by the large-cap stocks, many mid-cap companies have remained out of investors' focus. Though the mid-cap indices have gained more than the Sensex since the beginning of 2007, their valuations are still low at about 15 times forward earnings.

"The recent rally has created a significant divergence between the valuations of large-cap stocks and the mid- and small-cap stocks. The divergence should shrink as many of the mid-cap stocks are trading at attractive levels," says Ajay Bodke, senior fund manager - equity, Standard Chartered Mutual Fund. Fund managers believe there is significant value left in select mid-cap stocks.

"Over the last few months we have seen a significant rally in the large cap stocks and most of these stocks are expensive in terms of valuations. This is the right time to enter into some select mid cap stocks," says, Satish Ramanathan, head-equities, Sundaram BNP Paribas Mutual Fund.

What is a mid-cap? There is no clear definition for this, but Sundaram Mutual Fund calls a stock a mid-cap if it is not among the top 50 shares listed on NSE in terms of market capitalisation.

For DSP Merrill Lynch, it begins from the 101st company. On November 17, the 51st company had a market cap of Rs 25,000 crore (Rs 250 billion) and the 101st company Rs 9,538 crore (Rs 95.38 billion).

Here, we have a list of some select small- and mid-cap companies that have a strong business model and operate in an emerging or growing industry. We have looked at companies with a market capitalisation of around Rs 5,000 crore (Rs 50 billion) with just one exception (Indian Overseas Bank [Get Quote]).

These companies are expected to grow at a faster rate over a longer period due to the inherent advantages. Also, along with the long-term earnings visibility, these companies are trading at attractive valuations.