Traders add bearish IT bets; stocks could decline 5-6%

Mumbai: Traders are building fresh bearish derivative bets on information technology (IT) stocks as they sense the possibility of at least a 5-6% decline in share prices from the current levels. HCL Technologies' cautious earnings guidance late last week pushed traders to cut their bullish wagers on the sector, where stocks were riding an optimistic wave ahead of the December quarter results scheduled next month.

On Monday, Infosys shares declined 1.5%, extending the fall to the second consecutive session. Net open interest, the total number of outstanding positions, in Infosys' December futures contracts, increased by 28 lakh or roughly 11% on Monday, provisional data showed. In the January series, open interest also spiked some 15-16%.

Country's largest IT services exporter Tata Consultancy Services declined for the seventh straight day. Provisional data showed a marginal increase in net open interest in December as well as January contracts.


"Long aggression was visible in IT stocks at the start of the December series, but that enthusiasm quickly faded off after the HCL Tech commentary," said Abhilash Pagaria, head, alternative and quantitative research, Nuvama Institutional Equities. "Overall, we believe IT stocks can lose another 5-6% on an average in the near-term before forming some short-term bottom." said Pagaria.

Since the lows in September, some of the frontline IT stocks rose in the range of 10-25%, shrugging off concerns over the looming recession in the US and Europe. Market participants felt there was room for some upside in IT stocks on account of reshuffling of trading portfolios. HCL Technologies' warning of potential growth pangs and pricing pressures, which sent the stock down 7% on Friday, dashed these hopes.

"We will see some more weakness in IT stocks in the near term as the confidence levels seem to have taken a beating," said Sriram Velayudhan, head, IIFL Alternative Research. "IT stocks were poised to do well because the index had given a double bottom breakout. But, I will recommend buying into this weakness because the index is unlikely to breach this year's lows."

Extending its losing run to the seventh straight session, the Nifty IT index fell 0.4% to 29,050 on Monday- adding to Friday's 3% losses. The Nifty IT index is down 7% in December so far and more than 26% since touching 52-week highs of 39,446 in January this year. Between October 3 and December 1, the Nifty IT index had risen 16.43%.

"IT stocks have been witnessing a consolidation since May this year," said Viraj Vyas, derivatives and technical analyst - institutional equities, Ashika Group. "However, a combination of unfavorable local and global factors have not resulted in a strong breakout above 30, 200 levels for the Nifty IT index," said Vyas.

In the mid-cap IT stocks, L&T Technology Services and LTI Mindtree have seen bearish bets grow 40% and 10%, respectively, in the past five sessions. Bearish bets on Persistent Systems have risen 15%, data showed.