Infy to open with deep cuts as ADR down 10% after poor Q4

The subdued sentiment was most evident in Infosys, HCL Tech, TCS, Wipro, and Tech Mahindra ahead of Infosys’ quarterly earnings on Thursday. This could affect the bellwether Nifty index in which IT holds a weightage of 14.11%, second only to the financial services sector’s 37.72% weightage.

The creation of shorts was indicated by the most active futures contract open interest (OI)—outstanding buy-sell positions—across these firms, except Tech M, rising even as the price of the contract fell, signalling a bearish market.

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Infosys’ contracts saw OI jump 8.3% from the previous session as the price slipped 2.7% Thursday. HCL Tech, the best performing large cap IT stock in the last one year, saw contract OI increase 5.2% overnight as contract price fell 2% amid the resignation of Anand Birje, the company’s digital services business head.

TCS was next with OI up 4.8% and price down 1.6%. Wipro saw generic contact OI rise 2.2% as price corrected 1%. Tech M was only stock that saw OI reduce a tad while the price corrected, underscoring long unwinding. Outstanding positions fell 0.6% as price fell 2% .

Infosys could open with deep cuts on Monday given that its ADR plunged 9.78% at $15.56 apiece on Thursday after the company missed the Street’s revenue and profit expectations for the March quarter and traders mounted bearish bets on the counter prior to the result announcement. Though the Q4 results were issued post market hours in India, the stock closed 2.74% lower at ₹1,389.20 as if traders anticipated a weak result. This was evident in the huge short build up on Infosys’ futures and options counter.

The first generic futures contract witnessed OI—outstanding positions—jump to 88,168 contracts (400 shares make one contract) at close on Thursday from 81,385 contracts previous session. The contract also shed 3% from the previous session.

A rise in OI accompanied by a fall in contract price highlights a bearish formation.

“This indicates heavy short build up, which will weigh on the opening price on Monday,” said Rajesh Palviya, VP (technicals and derivatives), Axis Securities.

“I think the price could test the immediate support of ₹1,300.” Palviya’s immediate forecast implies a 6% correction from Thursday’s level.

He expects the stock to trend lower over the next few quarters but added that long term investors could use the correction to accumulate the stock.

Brokerage Motilal Oswal while reiterating a buy target on the stock also expects short term weakness on the counter citing possibility of low double digit correction . “We expect the big revenue miss and elevated uncertainty to adversely impact the stock’s short term performance, resulting in a negative reaction from high single to low double digit, on account of the disappointment.”