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
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.