Dow to beat S&P

The Dow is touching new highs and so is S&P.In this rising market it is important to know if the blue chip companies are going to be better or the Mid-caps. In my opinion exports and foriegn operations of compaies is now going to matter. Given the economic conditions where dollar is constantly depreciating companies with higher proportions of income from abroad are going to benefit. Traditionally companies in the Dow make a lot of money outside the country because of their multinational operations.Historically large caps have outperformed S&P by close to 15%. But in the last few years small caps were getting more attractive. This trend is now goin to change with MNC companies of DOW reporting higher earnings from abroad incomes.So in my opinion the Dow should confrotabily beat the S&P, in future at least in earinings.

Now lets get back to Indian Stock Markets.

The heavyweight companies in india are very much dependent on exports. So with current appreciating rupee it is logical to think that their performance will get worse compared to the Mid Caps. But in Indian context, my opinion is that the large caps will outperform the Mid Caps. The reason is that Large caps like TCS which rely heavily on exports are better prepared with hedge positions to protect themselves from adverse currency movements. Majority midcaps which are also into exports don't have highly hedged positions. This means that in the end the Large Caps basically comprising of Nifty (top 50) and Sensex (top 30), could still outperform the Mid caps and Small caps.

The first part of the article was written as comment on "US Market Watch"

Earning Season to Start

Most analys are optimistic about the Q'2 earnings after the sensex gained its grounds in the last three months (up 16% for the quarter). The sensex is very close to the May levels after the decline below 10,000. According to study by Motilal Oswal of 127 companies for the next quarter sales projected to increase by 27%, EBIT by 39% and net profit also by 39%.

This quarter's earning season will start with high expectations from Infosys. Technology sector is expected to grow at about 40%. Infosys as projected by CNBC TV 18, is supposed to increase by 7.59% and revenues by 10.53%. Over the last three months Infosys has performed well with growth in share price from Rs. 1500 level to Rs. 1860 latest closing price. With its long reputation and investor expectations infosys still remains the best buy in the IT sector. Mphasis-BFL is close to its 3 month high of 198.40 from lows of arround Rs 130 to Rs. 120.

Auto and steel still looking promising. Expect Mahindra, Maruti, Cement are still strong in terms of valuation after a good run. The FY07 EPS of sensex is supposed to grow by 31% and FY05 by 14%. With crashing crude oil prices and global stock market boom not just in emerging markets but also in developed markets (Dow Jones US at all time high) the outlook for the markets look positive.

Infosys Beats Expectations

Infosys on 12 th july posted yet another stellar quarter of growth well above the earning guidelines provided by the company. The revenues of the company grew by 14.9% and the profits grew by 18.9%. The only disappointment was the operating margin of below 30%. The hike in the salaries for employees and higher cost for visa were the main reasons for the decline of the operating margin by 4.6%. The depreciation of rupees helped improve the Operating margin by 2.2%.

Another main highlight of this quarter was the increase in the other incomes by 77.8% quarter over quarter. The gains from exchange rate stood at Rs. 530 millions compared against the loss of 10 million last quarter.

The future outlook of Infosys looks very good with expected revenues next year between Rs. 134-135 billion reflecting a year over year growth of 41%-42% and a EPS guidance of around Rs. 124 –Rs. 126 reflecting 38% to 40% growth.

Infosys has a EPS of Rs. 90.65 compared to Rs. 57.65 of Tata Consultancy Services. Also Infosys offers a dividend per share of around Rs. 45. vs. Rs. 13.5 of TCS. The book value of Infy around Rs. 250 is also higher compared to Rs. 140 of TCS (last year’s estimates). This makes Infosys a fundamentally strong company for long to medium term investment.