Home / Market / Mark-to-market /  Waiting for Infosys

Options traders have started building up positions, as usual, at the Infosys Ltd counter. Open interest on Infosys options rose by 41.5% on Wednesday, two days ahead of the company’s results announcement. The implied volatility based on premiums of near-the-money options was around 60-65%, which implies that traders expect a sharp swing in Infosys shares on Friday. During the past three quarterly results announcements, Infosys shares have risen/fallen by more than 10%; although option premiums are now so high that the stock will have to move by well more than 15% for straddle buyers to profit. In a straddle position, traders buy both a call and a put option, expecting to profit from a sharp move in either direction.

So will Infosys shares swing wildly as in the past many quarters? While it’s unlikely prices will move enough for straddle buyers to profit, there remains a fair bit of uncertainty about the company’s future. There are divergent views among large brokerages about the company’s expected guidance for the next two quarters. Much will depend on whether the company’s guidance and commentary hits a right note with the optimists’ camp or whether it will reinforce the view of the doubters.

One view on the Street is that the demand environment has turned positive and Infosys’s renewed focus on traditional bread-and-butter services will help it return to normal growth. The other view, simply, is that large ships take a relatively long time for a course correction. Analysts at JPMorgan Chase and Co. point out, “Our view is that revenue recovery in large companies is far more gradual and must be granted time. Wipro (Ltd) is a case in point. Unless the demand wave is so very strong that it will pull Infosys up along with it. We are not in that camp. Demand is getting better but we don’t think it is bursting through the seams, so to speak."

Of course, it hardly helps that some key executives have left the company in the past few months. The company’s commentary on this as well as its view about the demand environment will go a long way in helping investors make up their mind. In the last quarter, the company was fairly cautious in its commentary, and if the tone continues, it’ll come as a disappointment, especially with the stock having risen 25% in the past three months.

The company’s view of its near-term fortunes will also be evident from its annual guidance. There is little doubt that the company will raise the lower end of its guidance. Some analysts, such as those at Kotak Institutional Equities, also believe that the company will raise the higher end of its guidance to 11% from 10% currently. This assumes 2.6% growth in the September quarter, followed by growth of 1.5% in the remaining two quarters. On the other hand, for the reasons mentioned above, JPMorgan analysts expect the company to maintain the higher end of the guidance.

Given these divergent views, it’s quite likely that Infosys shares would experience another sharp move on the results day. And considering the rally in the past three months, the risk of a sharp downside seems more likely, if the company continues with its cautious commentary.

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