Sikka’s Exit A Negative For Infosys, Say Brokerages
Brokerages, and at least one big investor, termed Vishal Sikka’s exit as managing director and chief executive officer of Infosys Ltd. midway his tenure as a negative.
While brokerages expect patchy growth numbers and uncertainty, they fear more departures in the coming future as a consequence of Sikka’s departure.
Investors panicked after he resigned on Friday, sending the Bengaluru-based software solutions provider’s shares to their lowest in three years, eroding over Rs 28,000 crore in market value at 1.30 p.m. Infosys’ revenue grew 28 percent in three years that Sikka was at the helm.
“Losing Vishal Sikka is strategically a big loss,” a fund manager at a domestic insurance firm which holds Infosys stock told BloombergQuint requesting anonymity. But from the stock perspective, this is a “neutral event” because Sikka’s tenure didn’t lead the company to great highs either, the fund manager said.
Here’s what brokerages had to say about Sikka’s resignation:
Infosys under Vishal Sikka has been ahead of the curve in battling the challenges currently facing the Indian information technology industry but the individual who was driving this change is now out of the way, said Pramod Gubbi, managing director and head of equities at Ambit Capital.
And with Sikka gone, the outlook for the stock and the company is uncertain, Gubbi told BloombergQuint. The brokerage suspended its ‘Buy’ rating on the stock about four days ago since it could not make an assessment of the business given the lack of disclosures emerging from the current crisis, Gubbi said, adding that Friday’s events only increases the complexity.
This event simply takes that level of uncertainty to a different level and that will clearly weigh down on the stock in terms of its rating and multiples, and will keep its investor and stakeholders in limbo going forward.Pramod Gubbi, MD and Head of Equities, Ambit Capital
This can be avoided through "significantly higher level of disclosures from the board, starting with the findings of the investigation from external agencies", he added.
Gubbi said that Sikka's performance as chief "clearly showed in the industry leading growth and margin expansion". He questioned if not making the disclosures about the Panaya transaction was worth losing Sikka.
Is it worth letting go of someone who is perceived to be delivering the chase that Infosys needed?Pramod Gubbi, MD and Head of Equities, Ambit Capital
Batlivala & Karani Securities
Batlivala & Karani Securities said Sikka’s resignation is highly negative for the stock even though he failed to deliver improvement in absolute terms.
“About 50 percent of time for mission 2020 is over and yet there was no material change beyond the low hanging fruits (like utilisation improvement in line with peers and focus of AI/digital, again like peers),” the brokerage said.
The Bengaluru-based software developer outperformed TCS on revenue growth after Sikka took over, Batlivala & Karani said. However, there has been a deceleration in growth and a decline in margins in absolute terms.
Going ahead, we believe Infosys will find it difficult to attract external talent to replace Vishal Sikka due to the experience of tussle between founders and management. In our view, bringing back Nandan Nilekeni (assuming rumours come true) will provide the stock temporary respite, but it’s unlikely to deliver operational outperformance.Batlivala & Karani Securities
Commenting on the board meeting scheduled for Saturday for buyback of equity shares, B&K said the buyback and dividend will hold the stock for a few days, assuming the board increases the total payout from Rs 13,000 crore to about Rs 20,000 crore.
“Infosys has net cash and equivalent of Rs 33,500 crore as of quarter ended June. Infosys used a total of about Rs 7,000 crore in dividend payout in FY17 and FY16. So, if dividend plus buyback amount is not raised in tomorrow’s board meeting, then the stock may correct further,” B&K said.
As an innovation-led growth manager, Quant said, Sikka was an imperfect fit at a time when the company required efficiency and organisational capabilities, and that his resignation should hardly come as a surprise.
“Sikka’s appointment as vice chairman should not be seen as the proverbial “kick upstairs” for his clear statement on resigning completely from Infosys. Whether he will report to the board with any consequential seriousness is highly doubtful, given the presence of members who have allegedly seen him appropriate as only a CTO (chief technology officer),” Quant said in its research report.
“Narayana Murthy may be (purely speculative on our part here) poised to come back, if not in a full executive or board member capacity, at the very least as a guiding or interventionary outside voice,” Quant said.
Other Highlights From Quant Report
Possible Leadership Scenarios
- Promotion of internal Infoscion.
- External candidate from a competitor firm within the industry.
- External candidate from outside the IT Services industry.
- One of the founders could yet stage a return. Not just Murthy, but even Nandan Nilekani and Mohandas Pai could throw their hats in the ring.
- Infosys Fundamentals
- Over Sikka’s stint, Infosys’ growth and productivity was unremarkable, and could be attributed mostly to operational parameter of utilisation.
- Innovative methods such as Zero Bench and Zero Distance could have contributed to some improvement, but only at the fringes.
- Sikka’s contribution in the areas of machine learning, albeit difficult to quantify, should be viewed a bit more favourably, though.
- Medium-term development on Infosys’ acquisition strategy could be important.
- Infosys has cash and equivalents of $6.09 billion and no debt.
- Recommends ‘Reduce’ with a target price of Rs 975, 16 times its earnings estimate for financial year 2018-19.
- Will revisit and revaluate valuation multiples as material developments take place
- The noise has become incrementally worse and personal over the last five quarters despite improved performance.
- The search for a new CEO is not going to be easy. Infosys is still iconic and is performing well so far but on the negative side, the noise will be a deterrent.
Vishal Sikka’s resignation from Infosys at this crucial stage of business transformation is a significant dent given the differentiated path the CEO led the company in last three years, brokerage Emkay Global said in a note.
Tata Consultancy Services Ltd. and Cognizant will benefit in the near term as clients will move to companies that provide more “continuity of thought” given the current macro and business uncertainty.
Sikka’s exit will also dent Infosys’ financial performance, Emkay said, “Expect this is severe dent in brand reputation, client conversation, investor confidence, employee morale, business transformation which would affect its financial performance in the short-to-medium term.”
- Downgrade stock to ‘Reduce’ from ‘Hold’
- Revises target price to Rs 910, based on 13 times FY19 EPS estimates
- The stock may command lower valuation given the absence of positive triggers and incremental uncertainty in coming period.
- Retains earnings estimates at the moment but may review the same after inputs from management post their client conversations.
The Infosys board citing founders' repeated allegations as the reason behind Sikka's resignation does not hold much ground, said Deutsche Bank in a report on Monday. Infosys will see further attrition following this development and lose market share to competitors, the report added.
Whether the current situation will push the company into a phase of under-performance remains to be seen, Deutsche Bank said.
Deutsche Bank has thus picked Tata Consultancy Services Ltd. and Tech Mahindra Ltd. as its top picks in the Indian information technology space. The brokerage prefers Wipro Ltd. over Infosys.
WIth Sikka's resignation, Infosys is unlikely to face seamless execution as and when the company brings in a new person to fill in the position, IDFC Securities said. The brokerage has, however, identified some scenarios that could work in favour of Infosys.
- Higher cash flow yield
- If Narayana Murthy or Nandan Nilekani take over and work out the transition to a new CEO
- If Sikka decides to stay back and minority shareholders vote against the resignation in the EGM
- If hunt for a new CEO ends with another leader
Impact on employee morale and customer behaviour make up for top concerns for Credit Suisse after Vishal Sikka's resignation, according to Credit Sussie. There can be a period of uncertainty until the choice of CEO is made as an external choice could mean changes in certain aspects of the strategy or even key personnel, the brokerage added.
The current episode is likely to create a period of uncertainty, lack of direction and a void in required leadership, JPMorgan said in a report. In case more departures occur in the future as a consequence of these developments, Infosys’ performance will be affected adversely. Sikka's sudden resignation indicates unfinished business at the company which can break down the achievements of the company, the brokerage added.