TCS supplants Infosys as options bellwether ahead of quarterly results
Traders shift their wagers, with open interest on TCS options climbing to more than twice the level of Infosys
Mumbai: Tata Consultancy Services Ltd (TCS) is supplanting rival Infosys Ltd as traders’ bellwether for the Indian earnings season, sending the cost of options on the nation’s biggest software company near a three-month high.
While Infosys has traditionally been the first major Indian firm to report quarterly results, TCS is announcing earnings before its competitor on Thursday. That’s spurring traders to shift their wagers, with open interest on TCS options climbing to more than twice the level of Infosys. Implied volatility on the contracts, the key gauge of prices, rose to the highest since 13 January this week.
Kim Eng Securities Pvt and QF Assets Ltd are recommending wagers on TCS that benefit from rising volatility as analysts predict the weakest quarterly earnings growth in six years. Shares of the Mumbai-based company have posted an average one-day move of 3.4% after results since its 2004 initial public offering, according to data compiled by Bloomberg.
“We expect volatility to rise further as traders would like to hedge against a nasty surprise," Mahesh Varma, an assistant vice president at Kim Eng Securities, the brokerage unit of Malaysia’s largest bank by market value, said in a phone interview from Mumbai. “The market will be cued in fully to TCS earnings as it is reporting ahead of Infosys this time."
Currency impact
Fourth-quarter group earnings at TCS probably increased 1.7% from a year earlier to ₹ 5,390 crore, according to the average of 24 analyst estimates compiled by Bloomberg. Infosys will report results for the fiscal year ended 31 March on 24 April, the first annual update under chief executive officer (CEO) Vishal Sikka.
HCL Technologies Ltd, India’s fourth-largest software developer, gave some clues on the industry’s performance this month when it estimated that exchange-rate swings will hurt its quarterly revenue in dollar terms by 2.8 percentage points.
A gauge of Indian technology stocks has gained 0.9% this month, less than the S&P BSE Sensex’s 3% increase, amid expectations for subdued earnings growth after a 6.2% rally in the Bloomberg Dollar Spot Index in the January to March quarter. TCS shares fell 0.6% to ₹ 2,612.25 at 9:30am in Mumbai on Thursday.
Shares have the potential to climb to ₹ 2,740, 4.3% above Wednesday’s closing price, Hemant Thukral, head of derivatives at Aditya Birla Money Ltd, said in an interview with Bloomberg TV India.
Top pick
“TCS is my top pick in the IT pack," Thukral said. “Information technology as a sector is starting to show signs of revival of interest."
Implied volatility for at-the-money options on TCS climbed to 30.71 on Monday and was just below that level as of 4:04pm in Mumbai on Wednesday. The measure will climb as high as 45 before options for the current month expire on 30 April, according to Kim Eng’s Varma. He’s advising clients to buy a so- called strangle on TCS, a combination of options that rises in value as price swings increase.
April 2,500 puts on the stock cost about ₹ 32 while 2,750 calls were priced at ₹ 38, according to data compiled by Bloomberg. A strangle using those contracts would return at least 20% before costs if shares move more than 5% in either direction by expiration, according to data compiled by Bloomberg. Bloomberg
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