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Enough risk appetite for mid, small cap stocks: Amit Rathi

There is enough risk appetite among investors for small and mid cap shares even after the recent rally, feels Amit Rathi, Managing Director, Anand Rathi Securities. His brokerage is holding an investor conference for small and mid-cap companies.

Speaking to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy from the sidelines of the conference, Rathi said these stocks still had enough steam left. That is because while frontline indices like Nifty and Sensex are up 30 percent from their 2008 peaks, the mid-cap index is still flat and the small cap index is 25 percent below its previous peak.

On second line pharma shares, Rathi says the companies would be able to sustain the strong growth in earnings seen in recent quarters. Domestic formulation business is what most investors are bullish on, he said.

According to Rathi, pharma companies are now trading at fair valuations after a spectacular rally over the last year. However, in the defensives space, pharma is still a better bet bet than IT, he feels.

He says a new set of investors are showing interest in mid and small cap stocks. They are not deterred by current high valuations as they are willing to take a 5 and 7 year perspective on these companies.

Rathi says many investors are showing interest in tyre companies and willing to take a long term view.

Below is the transcript of Amit Rathi’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: You must have touched base with a lot of people who are coming for the conference. Are there a lot of foreign investors as well in your conference, what is the mood like?

A: The conference is focused on the small cap and midcap space and we have got the entire community of investors who are focused there. We have got almost 350 investors who are coming to the conference both public market and a fairly good range of even private equity investors who are looking to pipe deals in listed companies.

Latha: What is the mood like, are there any sector favourites, is there a disbelief about the index at 8200 or is there a feeling that you have really not seen at all yet?

A: In a space that we operate and really the small and midcap space while the index – the Sensex and Nifty is up 30 percent from its January 2008 high, the midcap index is still almost just where it is and the small cap index is 25 percent below its peak and this is despite the BSE small cap doubling over the last 12 months. So, still there is a lot of investor appetite, risk appetite remains. We have got almost 3000 meeting requests in these two days. So, clearly there is a lot of interest yet.

Sonia: I was going through the list of companies that you have invited and lots of midcap pharma companies are coming to your conference. What is the sense you are getting about the midcap pharma space and how much potential could be there and the key contributors to this up move?

A: If you look at the entire small and midcap pharma space, we have seen a fair bit of run up. A lot of stocks are up 3-5x in the last one year and yet there is a lot of investor appetite. Earnings growth continues to be strong, the domestic formulations business as well there is a lot of interest. Valuations were very cheap a year back; I would say they are probably fair right now. However, in the defensive space that is an area compared to relative to technology where we are seeing a lot more investor interest right now.  

Latha: The tyre stocks, you think there is more to run?

A: They have done fantastically well in the last two or three years and while I won’t comment on specific stocks, the whole consumer facing industry is something where you are seeing a lot of interest and we have got a whole new set of investors who are coming in into these companies who are taking five to seven year views and this is quasi sort of private equity coming into the public space and they are really not bothered so much about near term valuations which traditionally we see in mutual funds being very cautious about.

However, investors who are coming in saying I don’t mind paying a 20-40 percent premium if can pick up a 5-10 percent in some of these companies because they are really buying a secular growth story over 5-7 year period. So, that is a whole new breed of investors we have seen coming in very actively to the market now and that is sort of sustaining valuations for these companies.

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