Infosys stock likely to see a slew of upgrades after audit all-clear

After an independent probe conducted by Infosys’ Audit Committee gave a clean chit to the company and its top management on the whistleblower allegations, the stock of the IT services firm is likely to receive a slew of upgrades in coming days.

According to market analysts, the investigation was an overhang on the price movement of stock, and the investors will now be more confident in taking position in the firm after the probe found no wrongdoing. They also opined that no restatement of previously announced financial statements owing to whistleblower’s allegations was another significant development favouring the company. “Infosys’ audit committee has found no evidence of financial impropriety or executive misconduct in the allegations. Also, healthy deal wins, digital growth story and upward revision in guidance augur well for the company,” said ICICI Direct in a report. “Hence, we would be revisiting our estimates and target price shortly.”

In a letter dated September 20, 2019, an anonymous group calling itself as “Ethical Employees”, had alleged that Infosys’ current management was taking ‘unethical’ steps to inflate short-term revenue and profit. Subsequently, the Bengaluru-headquartered firm had lost Rs 53,000 crore (close to $7.5 billion) as the stock crashed about 16 per cent in October.

Analysts also believe that after the completion of the probe, the market would take any such anonymous allegations in future with cynicism. “After the detailed report, which Infosys has published, people will not take such kind of allegations seriously at all in the long-term,” said Sandip Agarwal, lead analyst-IT at Edelweiss Securities. Even the financial results of third quarter, with upward revision of revenue guidance for the second time, prompted many brokerage firms to upgrade target price of the stock. “The firm increased its FY20 revenue growth guidance band to 10-10.5 per cent in constant currency term from 9-10 per cent earlier on the back of strong deal wins,” said a Sharekhan report. 

Clean chit

• Overhang on Infosys’ stock due to whistleblower allegations is over after completion of investigation

• Valuation discount seen in Infosys as against TCS is likely to narrow

• Softness in BFSI vertical, margin headwind seen as key risks going ahead

• Double-digit revenue growth projection by Infosys for FY20 augurs well for the share price  

As event risk related to whistleblower allegations reduces, valuation discount with TCS may narrow, said Ambit Capital in a report. Currently, while Tata Consultancy Services (TCS) is trading at more than 25 times of its price to earnings (P/E) ratio, share price of Infosys is trading at just above 20 times.

Infosys, which signed $1.8 billion worth deals in Q3, has more than $7 billion worth contracts in the first nine months of the current financial year. “Our positive outlook is based on greater focus on large deals, which is 56 per cent higher for first nine months of FY20 apart from the pricing lever in digital services revenue,” said HDFC Securities in a note.

Even the aggressive approach of current management in bagging large deals has complete endorsement of the board, which is seen another positive for the company. In the post-earnings analyst call, Infosys Chairman Nandan Nilekani said the strategy followed by current management under CEO Salil Parekh has full-backing of the board. Fall in attrition rates, which reduced 210 basis points on sequential basis in Q3, is another positive sign.

Despite all these positives, headwind faced by the company in maintaining operating margin, contraction of core business, and softness in key financial services and retail verticals are seen as key risks.

“Growth in BFSI (banking, financial services) decelerated to 6.2 per cent in Q3 of FY20 as compared to 10.3 per cent reported in Q2 of this financial year,” said a Sharekhan report. Similarly, though operating margin improved 20 basis points to 21.9 per cent in Q3, it stood at 21.4 per cent for the first nine months of FY20, which is at the lower band of operating margin target of 21-23 per cent given by the company for FY20. 

“Margin performance (QoQ) was a tad disappointing given the forex tailwind from rupee depreciation and favourable cross currency impact. This will likely again raise some concerns on the underlying profitability of the business,” said a CreditSuisse report.