Industry

‘Infosys fundamentals intact, though IT faces headwinds’

Analysts say proposed buyback may help ward off further declines in the stock

The sudden resignation of CEO Vishal Sikka and the ensuing exchange of allegations between the board of directors and co-founder N.R. Narayana Murthy may have cost Infosys’s shareholders a whopping ₹22,520 crore on Friday, but analysts said that it was too early to downgrade the stock. The proposed buyback could be the panacea that the technology major needs at this juncture, they said.

“Even after a steep decline in the stock price and an upcoming buyback program, it appears difficult, and unclear, to take a constructive call on the company,” said Sanjeev Hota of Sharekhan, which is now a subsidiary of BNP Paribas. “We maintain our hold recommendation.”

The Infosys board is scheduled to meet on Saturday to consider a proposal for buyback of its equity shares. In April, the company had said that it had identified an amount of up to ₹13,000 crore to be paid to shareholders in the form of dividend and/or share buyback in the financial year 2017-18.

Earlier this year, TCS announced the biggest buyback till date by proposing to acquire a maximum of 5.61 crore equity shares at a price not exceeding ₹2,850 per share pegging the offer size at ₹16,000 crore.

Mr. Sikka’s announcement on Friday sent Infosys shares plummeting as much as almost 14% to to an intra-day low of ₹884.40, as trading volume surged sixfold. The stock closed at ₹923.10, after shedding 9.6%. This was the stock’s biggest single-day fall since April 12, 2013.

‘CEO had enough time’

V.K. Sharma, head, Private Client Group at HDFC Securities, said Mr. Sikka’s exit had brought a long-drawn boardroom battle to a close.

“While the company did better than [the rest of] the industry during Sikka’s tenure, it was nowhere near achieving Sikka’s own $20 billion target by 2020... Sikka’s allegation that he was continuously being distracted does not wash as he had long enough a honeymoon period to make his mark,” said Mr. Sharma.

Infosys shares had climbed about 21% during Mr. Sikka’s term up to Thursday’s close, outperforming the 4.8% increase in the broader Nifty IT index during the same period.

“It is too early to decide on the investment as MFs typically look at the long-term prospects,” a senior fund manager with a domestic mutual fund owning Infosys shares, who did not wish to be identified, said. “The fundamentals are still intact though the overall headwinds related to IT sector are applicable to Infosys as well,” he said.

Angel Broking maintained its ‘buy’ rating on the stock arguing that the strength of the company’s board would help Infosys overcome the near-term setback posed by Mr. Sikka’s exit.

According to Bloomberg, a total of 34 analysts had a ‘buy’ rating on Infosys as against 10 ‘sell’ recommendations. On Friday, Dolat Capital Market revised its rating on Infosys from ‘accumulate’ to ‘sell’ while Emkay Share & Stock Brokers downgraded it to ‘reduce’ from ‘hold’. Credit Suisse and SBICAP Securities retained their ‘buy’ ratings on Friday.

A favourite with MFs

Mutual funds, which collectively hold 8.95% stake in the technology major, would also keep a close watch on the company’s moves in the coming days. HDFC Mutual Fund, ICICI Prudential Mutual Fund and Reliance Mutual Fund are among the largest shareholders from this category of investors.

According to Morningstar, a U.S.-headquartered investment research firm, MFs held Infosys shares worth a total of ₹21,094 crore as on July 31.

While the overall exposure of MFs to the technology sector has dropped to 8% from 9.75% over the last one year, Infosys accounts for about 40% of the mutual fund industry’s overall technology sector allocations, said Kaustubh Belapurkar, director, Fund Research, Morningstar.

‘Shareholders paid price’

Proxy advisory firms questioned Mr. Murthy’s approach to the board and the management, especially Mr. Sikka.

“While Narayana Murthy no doubt has a larger-than-life presence, he must know that with great power comes great responsibility. And therefore, power must be wielded judiciously.

“He may find solace in Vishal Sikka’s resignation, but shareholders have paid the price,” said Institutional Investor Advisory Services India (IiAS).

J.N. Gupta, MD, Stakeholders Empowerment Services, said while he agreed with Mr. Murthy that Infosys should make public the probe report on the Panaya acquisition, the founder ought to come out in the open and take control if he doubted the current management and the board.

“Such fights should not be fought in the shadows. If Mr. Murthy can gather 10% voting rights, then he can approach the company law board or else nominate himself for directorship wherein the shareholders will have the final say,” said Mr. Gupta, a former ED at SEBI.

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Printable version | Jul 14, 2020 9:31:11 AM | https://www.thehindu.com/business/Industry/too-early-to-downgrade-infosys-more-clarity-needed/article19519543.ece

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