The recent developments also led to three US-based law firms – Bronstein, Gewirtz & Grossman, Pomerantz Law Firm, and Rosen Law Firm – initiate investigation against the company, on whether the company’s directors are engaged in securities fraud or other unlawful activities, reports suggest.
We expect Infosys’ differentiation strategy to be under serious threat of unravelling. Besides likely loss of revenue from existing clients, there could also be significantly lower win rates and continued pressure on realisation, as price cuts could remain the only tactic left to win deals. Despite near-term support from the company’s buyback plan, we do not see this bolstering investor confidence.
We believe FY18 guidance is now at risk, given likely client backlash. We cut our revenue estimates by 0.5% for FY18, 2.9% for FY19 and 6.1% for FY20. We also lower our profit after tax (PAT) estimates by 1.3% for FY18, 8.0% for FY19 and 16.6% for FY20, expecting a dip in realisation. Our new target price of Rs 960 from Rs 1,250 is based on 15x (from 19x) June 2018E P/E. We downgrade our rating to ‘Reduce’ from ‘Buy’ and recommend switching to HCL Technologies, Wipro and TCS (in that order of preference).
We were encouraged by the board’s unambiguous endorsement of the current strategy with the founders also suggesting little friction here. This should continue to aid momentum in the medium term while Infosys
addresses the leadership vacuum where a bench of internal candidates could help speed up the process. With valuations near five-year low after the 10% stock price correction, we maintain BUY with a Rs 1100 price targer (15x FY19E P/E). Risks: Weak macro, higher competition, stronger rupee.
The key question long-term investors need to ask about Infosys
is whether Dr. Vishal Sikka’s resignation is a setback to its plan to become a next generation IT services company which is so critical to creating value. We believe it is. We therefore maintain our Sell rating and cut our March 2018 target price on Infosys
from Rs846 to Rs794
We believe this (Vishal Sikka's exit) is severe dent in brand reputation, client conversation, investor confidence, employee morale, business transformation that would affect Infosys' financial performance in the short-to-medium term. The stock may command lower valuation given the absence of positive triggers and incremental uncertainty going ahead. While we retain our earnings estimates at the moment we may review the same as we get input from management post their client conversations in further communication. We cut our rating from REDUCE (HOLD earlier) with revised target price of Rs 910 (based on 13x FY19E EPS).
Also Read: Infosys: Vishal Sikka's exit no surprise, says Erin Green
We believe, a spate of resignations over the past three years has created a significant leadership vacuum in Infosys’ management. We cut target multiple to 14x to factor in the leadership vacuum and possibility of execution faltering. At the current price, the stock is trading at 12.8x FY19E EPS. We downgrade to ‘HOLD’ from ‘BUY’ with target price of Rs 1,010. The proposed buyback will provide downside support to the stock, while swift appointment of new CEO will be an upside risk.
We believe that the development is negative for Infosys
and comes at a time when it is gearing up to get back to industry-leading growth amid sector’s transition to new technologies. We cut our FY18/19 revenue forecast by 1.1%/3.6% and earnings per share (EPS) forecast by 2.8%/8.8%. We now value the stock at 13x FY19E (vs. 16x earlier) which at the lower end of the one-year forward price-earnings ratio (PER) band of 13.4x-18.4x in the last three years. We downgrade the stock to HOLD with a new target price of Rs 887.
Also Read: After Sikka's exit, Infosys stock makes it to LIC 'buy list'
The last thing we want to do is to sell in a panic. The company, whatever one might say, remains one with a strong balance sheet and a healthy cash surplus. It does have managerial talent (although the talent may be experiencing varying degrees of disgust right now). All said and done, a company like this, quoting at a 1-year forward PE of less than 14, is not something one should sell in a hurry.
Given the current ugly tussle between the board members and founding members, primarily led by Narayana Murthy, it will be a colossal task for the board to find a better replacement for Dr. Sikka in the next seven months (till March 2018). Given the uncertainties, we maintain our Hold rating on the stock, keeping our price target under review