Infy’s Strong Q3, Buy­back Likely to Trip Short Sell­ers

Com­pany ADRs gained more than 5% on NYSE on Fri­day; An­a­lysts see .₹ 702 as the break­out level

The Economic Times - - Disruption: Startups & Tech - Sanam.Mir­chan­[email protected] times­group.com

Mum­bai: Short sell­ers in In­fosys are likely to be squeezed on Mon­day morn­ing if the cheer­ful re­ac­tion of its Amer­i­can De­pos­i­tory Re­ceipts to the com­pany’s re­sults are any­thing to go by. The tech­nol­ogy bell­wether’s third-quar­ter rev­enue beat an­a­lysts’ es­ti­mates and the com­pany un­ex­pect­edly an­nounced a buy­back, catch­ing those who were bet­ting on a fall in the stock after the re­sults by sur­prise. Bear­ish traders were ex­pect­ing the com­pany to cut mar­gins, which would weigh down the stock.

Fol­low­ing the re­sult an­nounce­ment post In­dian mar­ket hours on Fri­day, the ADR of In­fosys ended up 5.4% on the NYSE later in the night.

“Sen­ti­ment was neg­a­tive for both In­fosys and TCS be­fore their re­sults as there were ex­pec­ta­tions of a sea­son­ally weak quar­ter. Shorts are there in In­fosys for two se­ries now. Those who have shorted near ₹ 700 and if the stock goes above that level and they have not booked prof­its, they will get stuck,” said Amit Gupta, head of de­riv­a­tives at ICICIdi­rect.

Shares of In­fosys ended up 0.6% at ₹ 683.70 on the BSE on Fri­day.

Short sell­ers who had an­tic­i­pated a sea­son­ally weak quar­ter and had been car­ry­ing for­ward short po­si­tions for the last two se­ries, may be forced to cover their po­si­tions if the stock sus­tains above the .₹ 700-720 level, said de­riv­a­tive an­a­lysts.

Gupta said if the stock goes above .₹ 720, short cov­er­ing is likely to get trig­gered, which may take the stock to .₹ 780.

“.`702 is the break­out level for the stock. In Oc­to­ber and Novem­ber, stock fell sharply from .₹ 750 to .₹ 630 wherein ma­jor shorts were cre­ated in the .₹ 690 to .₹ 600 range,” said Jay Puro­hit, tech­ni­cal and de­riv­a­tive an­a­lyst at Cen­trum Broking. “The stock has not been sus­tain­ing above .₹ 700 since then; but if it sus­tains above .₹ 700 in the com­ing days then short sell­ers will run to exit their po­si­tions,” said Puro­hit.

Some traders had al­ready cov­ered short po­si­tions with open in­ter­est in the stock down 7% so far in Jan­uary fu­tures and op­tions se­ries along with 4% gain in the stock.

A SHORT SQUEEZE?

Brokerages have largely main­tained bullish view and tar­get prices on In­fosys fol­low­ing its re­sult. Moti­lal Oswal, HDFC Se­cu­ri­ties, Phillip Cap­i­tal, Jef­feries and Cen­trum have main­tained ‘buy’ rat­ings, while No­mura and Emkay have re­tained ‘re­duce’ rat­ing.

“The mo­men­tum in rev­enue is more at­trib­uted to the way In­fosys has exe- cuted on large deals on the back of their in­vest­ments in the last year or so. Mar­gins are un­der pres­sure thanks to nec­es­sary in­vest­ments, sec­u­lar con­cerns across the in­dus­try. Pric­ing has been stable,” said Ashish Cho­pra, an­a­lyst - tech­nol­ogy, staffing and ex­changes at Moti­lal Oswal.

“The rev­enue growth catch-up with lead­ing peers such as TCS will weigh favourably. Buy­back through open mar­ket route than ten­der route was a sur­prise, and it will mean slightly lesser net di­lu­tion on EPS,” said Cho­pra.

Ko­tak In­sti­tu­tional Equities said In­fosys has im­pressed with strong rev­enue growth, large deal sign­ings and stable client met­rics but the rev­enue out­look im­prove­ment has come at a cost. The bro­ker­age re­duced mar­gin es­ti­mates by 5090 ba­sis points and it sees fair value for In­fosys at .₹ 760 against .₹ 780 ear­lier.

San­jiv Bhasin, ex­ec­u­tive VP-mar­kets and cor­po­rate af­fairs at IIFL, be­lieves while In­fosys could see a slight gap-up at mar­ket open on Mon­day, it will see sell­ing at higher lev­els.

“The best of the tech story is over as the ru­pee which was a tail­wind has now be­come a head­wind. Lower mar­gins are clearly in­dica­tive of higher costs which may con­tinue,” said Bhasin.

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