Infosys Stock Drops Most In Six Years As Brokerages Say Whistleblower Complaints Dampen Sentiment

Shares of Infosys Ltd. dropped the most in more than six years after an anonymous whistleblower letter alleged that its Chief Executive Officer Salil Parekh dressed up the company’s books.

The letter from a group of “Ethical Employees” accusing Parekh of unethical practices in “recent quarters” to boost short-term revenue and profits, according to a copy published by Deccan Herald newspaper on its website. Employees were asked not to fully recognise costs like those for visas of employees to improve profits, according to the letter dated Sept. 20 addressed to the company’s board and the U.S. Securities and Exchange Commission.

An Infosys spokesperson confirmed having received the letter and its contents to BloombergQuint.

Chairman and Co-founder Nandan Nilekani pledged a full investigation, saying the alegations had gone before the company’s Audit Committee. The undated complaint largely deals with allegations relating to the CEO’s international travel to the U.S. and Mumbai, he said in a statement to the exchanges today.

The memo dated Sept. 20 was the latest in a series of whistleblower complaints that wrought havoc at Asia’s second-most valuable IT services firm, triggering the exit of previous CEO Vishal Sikka after a standoff with co-founder Narayana Murthy.

Most analysts turned cautious on the IT firm but awaited more clarity before revising their outlook on the stock.

Any significant change in sales strategy and top management could increase uncertainty around the company’s growth, research firm Macquarie said in a note.

Others concurred. While UBS said the whistleblower allegations are likely to dampen sentiment, Jefferies said the issue raises questions over credibility of the current management.

Infosys’ stock tumbled as much as 16 percent, the most since April 2013, to Rs 645 apiece intra-day compared with a 0.39 percent gain in the benchmark NSE Nifty 50 Index.

Here’s what brokerages have to say…

Macquarie

• Maintains ‘outperform’ with a target price at Rs 830 apiece.
• Investors should watch critically the outcome of the investigations.
• Not changing estimates pending further update on the matter.
• Modelled an EBIT margin of 21.7 percent in FY20 and 22.7 percent in FY21.
• A 100-basis-point change in EBIT margin impacts EPS by around 4 percent.

Morgan Stanley

• Retains ‘equal-weight’ with a target price of Rs 805 apiece.
• Setback for the company; could de-rate multiples until clarity emerges.
• Stock corrected to 11.6 times price-to-earnings in July 2013 when Narayana Murthy led restructuring.
• Stock de-rated from 20 times to 13 times in 2017 surrounding the Panaya acquisition.

Jefferies

• Maintains ‘buy’ with a target price of Rs 915 apiece.
• Whistleblower issue likely to remain an overhang in the near term.
• Wait for further clarification and concrete evidence.

Credit Suisse

• Resignation of deputy chief financial officer will raise questions around the timing.
• Whether proven or not, these allegations will lead to a lot of uncertainty.
• Such issues eat significantly into management bandwidth which may have a bearing in growth and execution.

Wells Fargo

• Maintains ‘market perform’ rating.
• Near-term fundamental risk: delay in final signing of in-process large outsourcing deals.
• Looking back to prior instances, shares faced prolonged pull back.
• Shares bottomed out near forward PE of 12 times.

UBS

• Maintains ‘neutral’ with a target price of Rs 900 a share.
• Whistleblower allegations likely to dampen sentiment.
• Doubts raised on large contracts; management stability concerns rise.
• Prefer to stay on sidelines ahead of slowing demand trends.