A midcap week in the offing

With the market at a historic high, investors are bracing for a volatile week ahead of them. On a trailing basis, the Sensex price to earnings multiples may be lower than what it was when the index was at 14000. Still, investors may not be holding a big shopping list as far as frontline shares are concerned, since key stocks have risen sharply over the past few months. Buyers may instead look for bargains and value among mid-cap and small-cap shares.

Should there be a correction, sellers are likely to target banking and capital goods shares as these have gained the most in the past couple of months.

Shares of software exporters will be in focus this week, with Infosys Technologies reporting its April-June (Q1) quarter earnings on Wednesday. While it is widely expected that Infosys’ Q1 results may just meet or even fall below their guidance and market consensus estimate, analysts would watch out for the company’s earnings expectations for the rest of 2007-08. Analysts are also keen to know about measures that Infosys has adopted to minimise the impact of the rising rupee against the dollar.

Merrill Lynch, in its pre-earnings note, said, “While the demand environment remains strong, we expect the US dollar revenue growth guidance to be raised only marginally as companies would be cautious in giving revenue guidance early in the year. The EPS (earnings per share) guidance in both dollar and rupee terms is likely to be impacted at least 3 to 5% due to the steep rupee/dollar appreciation of over 5% since Infosys gave the guidance.”

Market participants believe that the recent weakness in Infosys shares has factored the expectations of a likely downgrade in its earnings guidance (in rupee terms) for 2007-08. Infosys shares have fallen 6% in the past three months against the Sensex’s rise of 20%. They advise investors to buy Infosys shares on further weakness as its operating environment is expected to remain robust.

Positive surprise from Infosys on its outlook will give a boost to all top software companies and in turn the Sensex (top 4 software companies comprise 17% of the index).

On technical charts, analysts see the Sensex facing strong resistance around the 15000-level. Networth Stockbroking’s head of technical and derivatives research Viral Doshi said, “Upside resistance exists around15100 and 15200-mark, whereas (a) breach of 14800 would trigger a downside correction.”

Many in the market advice against major fresh buying in index shares as they are likely to post limited gains in the coming months and that this phase of the bull run belongs to mid-caps.

Analysts expect a 40-60% rise in mid-caps over the next 4-5 months after their underperformance vis-a-vis their frontline counterparts in the past 12-15 months.

Shares of oil marketing companies would remain under pressure on news the government is unlikely to hike prices of petroleum products in the near future despite global oil prices hitting a near 10-month high.

On Friday, crude oil futures gained $1, or 1.4%, to close at $72.81 a barrel on the New York Mercantile Exchange after touching a high of $72.92 in the session, its strongest intra-day level since September 7, 2006.