Allegations to remain pain point for Infosys stock in near term: Brokerages

Brokerages are not reading too much into whistle-blower allegations of Infosys’ lower margins on large deals and higher unbilled revenue. Whistle-blowers have alleged the CEO and CFO indulged in unethical practices on recent deal wins with negligible margins. 

Further, revenue and cost recognition have not adhered to accounting norms and have been done to improve short-term profitability. Girish Pai and Seema Nayak at Nirmal Bang believe low profitability in large deals in the initial phase is a standard. 

“Industry, because of its hyper competitive nature, has been giving customers concessions, in which some of the costs are front-loaded and margins tend to be either very low or even negative in the initial phase. This is in the hope that margins will be recovered subsequently during the life of the contract,” they add.

In addition to aggressive accounting, whistle-blowers also allege that the CEO and CFO circumvented reviews and approvals in case of large deals, critical information was deliberately hidden from auditors and the board, as the treasury function took higher risk to boost other income.

Analysts at Edelweiss Research, while indicating that the allegations are serious, believe they will not directly impact the business as they don’t include charges related to violation of law in client markets or data security issues, which could have serious impact on business. 

The charges are more on conservative versus aggressive accounting approaches, and involve subjectivity, they add.

While the company has received the complaint and an audit committee comprising independent members is looking into it, the Street is awaiting clarity from the management and more evidence from whistle blowers. Arya Sen and Ankur Pant of Jefferies believe the issue is likely to remain an overhang on the stock in the near term, given it raises questions over the credibility of the current management. 

While a 100-bp lower Ebit margin impacts earnings growth by 4 per cent, the analysts believe a P/E derating could be the bigger risk. 

Sustainable growth outperformance under a new management, had led to a rerating. Analysts at Elara Capital believe anticipated a soft Q3 show due to seasonality and weakness in FSI and retail verticals could create an overhang in the near term.