Infosys rallied 15% in 1 year, here’s how to trade the stock ahead of Q4FY18 results

The last one year saw India’s second-largest software services exporter Infosys going back to being a stock priced in four digits. As the company is set to declare its earnings for the quarter ended March on Friday, expectations from it and its new CEO Salil Parekh are running high.

Infosys' stock has returned 15 percent since the day it declared its earnings for the third quarter of FY17, which is largely along the lines of benchmark indices' performance.

On the earnings front, most brokerages have been conservative with their estimates, but expect a growth of over 1 percent in constant currency revenue.

"Infosys is likely to post 1.4 percent growth QoQ in constant currency, further aided 100 bps by cross currency (cc) movements, implying 2.4 percent growth in USD terms," Edelweiss Securities said in a report.

"With Salil Parekh completing his first quarter in Infosys, his strategy and vision to drive the company forward will be keenly watched. We expect Infosys to issue a revenue growth guidance of 6.5-8.5 percent and maintain operating margin guidance of 23-25 percent for FY19," the brokerage said.

Anecdotal evidence suggests that Infosys' stock will end either flat or slightly negative on Friday, but is also indicative of an upward momentum on Monday.

After the company's third quarter results, the stock witnessed a sharp rally. Although this failed to sustain, it is still trading above Rs 1,100 and has been in a 100-point range ever since. On the downside, the Rs 1,100 level is acting as a floor, whereas on the higher side, the Rs 1,200 level is acting as a cap.

"Implied volatility of Infosys is at 8 months high at 38 percent and the historical volatility generally quotes below 20 percent. Historical trend for Infosys indicates that the Actual volatility is generally lower than the perceived Implied volatility of result and with technical charts indicating a consolidation," Shubham Agarwal, CEO & Head of Research at Quantsapp, told Moneycontrol.

Technically, the stock is consolidating in a narrow range and the pattern is not mature enough for a breakout. Experts suggested that the Rs 1,080-1,090 level should act as a support for it, and an oscillation between Rs 1,080 and Rs 1,200 should continue for a few weeks.

"The stock has remained muted with a minor negative bias on the previous three quarterly result announcement days making it nonvolatile trading sessions. However, following this negative closings stock has continued to trend higher making higher highs," Aditya Agarwala, Technical Analyst, YES Securities, told Moneycontrol.

Technical Check:

The Infosys stock has seemingly gone through a phase of consolidation since January, after hitting a swing high of Rs 1,220. It has formed a lower top on the charts but with a higher-bottom kind of contracting structure, suggesting that this counter is awaiting a breakout for a directional move, experts said.

"Post Q4 results if Infosys manages to sustain above 1090 levels then eventually it should register an upside breakout which can lead it to test its lifetime highs placed around d 1279 levels registered in June 2016," Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.

"As the entire sector itself is looking very promising one can expect upside breakout in this counter going forward. Hence, positional traders in anticipation of such a breakout should go long for an initial target of Rs1220 and then a higher target of 1279 with new lifetime highs in next 3 – 6 month time period. Bullish outlook shall get negated once it registers a close below 1090 levels," he said.

We have collated inputs from various experts on strategies which could be deployed ahead of results:

Analyst: Aditya Agarwala, Technical Analyst, YES Securities

The stock has entered a consolidation phase and currently, it is oscillating in a Symmetrical Triangle following sharp moves in the previous quarters.

A sustained trade above Rs 1,100 can take it to the upper end of the pattern placed at Rs 1,185. Moreover, a breakout from the pattern on healthy volumes can extend the up move to Rs 1,250.

As the recent trend has reversed and the stock chooses not to act volatile on result announcement days, we recommend a short straddle i.e. selling the Rs 1,160 Call option at Rs 22, and Rs 1,080 Put option at Rs 16, making a total premium inflow of Rs 38.

Analyst: Gaurav Ratnaparkhi, Senior Technical Analyst, Sharekhan by BNP Paribas

Currently, the stock is trading near the lower end of the range and it seems to be gearing up for a fresh rally. A multi-month rising trendline and a crucial weekly moving average are nearby.

Thus this is a high probability level to initiate a fresh long position from trading as well as investment perspective. Investors can continue to hold on to the stock and can even look to add to the position at the current level.

The strategy for traders would be to buy above Rs 1,140 with a stop loss of Rs 1,100 on a closing basis. Initial target on the upside will be Rs 1,200 with the potential to test the all-time high of Rs 1,279.

Analyst: Shubham Agarwal, CEO & Head of Research at Quantsapp Private Limited

Technically, the stock has been in the formation of a consolidation and the pattern is not mature enough for a breakout. The level of Rs 1,080-1,090 should act as a support and an oscillation within the range of Rs 1,080 – 1,200 should continue for weeks to come.

Infosys Short Strangle: Sell Rs 1060 Put option at Rs 9.75, sell Rs 1,200 Call option at Rs 11.10. Target Profit: Rs 8,500 and Stop Loss: Rs 4,000. Tenure: 2 days (Square off post-event on Friday)

Rationale: Volatility may witness a significant correction post results, and a short volatility trade can be profitable. The charts do indicate an oscillation and hence a short strangle can be deployed.