Use the dip in Infosys to buy for the long term: Analysts

See near-term weakness as a buying opportunity

Markets reacted negatively on Thursday to the exit of B G Srinivas, president and board member of Infosys. He was among contenders for chief executive officer (CEO) once S D Shibulal retired in January 2015. But analysts believe such corrections are a good opportunity to buy the stock from a long-term perspective.

The stock opened at Rs 3,040 on the BSE and dipped eight per cent intra-day to Rs 2,926.

Elevated to president in January, Srinivas was responsible for financial services, insurance, manufacturing, engineering services, energy and communications, public services, strategic global sourcing and marketing and alliances verticals. These accounted for 70 per cent of revenue as of March.

What next?
The exit could be a sign the next CEO will be an external candidate. But reports name a few in the company in the race.

Says Shashi Bhusan, an analyst at Prabhudas Lilladher: "The expansion in the list of considered CEO gives more options to the board. Selection from within may trigger few more exits. But there would be no change in the current culture and modus operandi.

"We expect Infosys to follow in the footsteps of Tata Consultancy Services and Cognizant by giving the role to a young leader (mid-40s) with strong credentials. This will mean a longer tenure that will help build long-term strategy."

Govind Agarwal and Arshad Perwez of JM Financial  said in a report, "Infosys has seen significant management churn and we believe the resulting flux will put at risk our thesis of turnround and revenue-growth recovery. The exit at this late stage will create more uncertainty in the short term and impact revenue growth momentum. Revenue under-performance will impact margins and delay margin improvement."

Bhuvnesh Singh, an analyst at Barclays Capital, says the probability of an external candidate may signal the company's problems are more deep-seated than thought: That an outsider is needed to bring big changes in the company.

Stock strategy
Most analysts think uncertainty will continue and the stock will underperforming peers in the medium term, as the company focuses on internal issues than on revenue in a strong demand environment. But they say the fall can be used to buy from a long-term perspective.

Though JM Financial has cut FY15/16 EPS (earnings per share) five per cent/seven per cent and downgraded the stock to hold, the brokerage house feels inexpensive valuations at 15.9x/14.4x FY15/16 EPS would limit the downside.

Nirmal Bang retains buy, but has cut the target to Rs 3,840 (from Rs 4,260). "Our revenue estimates remain unchanged  as we do not expect major client losses, given that over a year, despite a significant number of senior exits, revenue was not impacted significantly."

Bhusan says Infosys is nearing the end of the restructuring process that started a year ago. He sees the near-term weakness as a buying opportunity and retains buy, with a target of Rs 3,920.

Sarabjit Kour Nangra, vice-president of research, Angel Broking, says the company is on a firm footing. She maintains a buy, with a target of Rs 3,640.