Infosys rally likely to be short-lived; tender shares in buyback: analysts

Another reason, analysts say, why the cheer may just be short-lived is the buyback offer. For Infosys to get back the trust of long-term investors, they will have to enunciate a business strategy soon

Infosys rallied 3% to Rs 988 levels on the Bombay Stock Exchange (BSE) in intra-day trade on Monday, after the its board appointed Salil S. Parekh as its chief executive officer and managing director (CEO & MD) for a period of five years effective January 2, 2018.

While markets gave a thumbs-up to the development, analysts say Infosys still has a long road to recovery. Parekh, they say, has his task cut out in terms of turning around the business at a time when the information technology (IT) sector is undergoing a transformation. That said, the appointment does end the market’s anxiety as to who the new CEO, but the strategies he adopts will take time to reflect on the financials, they say.

“The markets will heave a sigh of relief that the wait for a new CEO has not been too long. The overhang for the stock as regards this concern will be over. Going ahead, one needs to understand the business strategy that the new incumbent will unveil to put Infosys back to industry growth rates before taking a long-term view on the stock,” says Ajay Bodke, CEO and chief portfolio manager (PMS) at Prabhudas Lilladher.

Bengaluru headquartered Infosys had reported a 3.2% year-on-year (y-o-y) rise in its September 2017 quarter net profit to Rs 3,726 crore, but cut its FY18 growth guidance in constant currency terms to 5.5 – 6.5% from the earlier forecast of 6.5 – 8.5%.

 

Analysts at Antique Stock Broking, too, believe with the announcement, things will return to normalcy for Infosys and the focus will be back on growth. Infosys needs stable leadership with steady growth trajectory to bridge the almost 20 – 25% price-to-earnings (P/E) valuation discount with TCS, it says.

“Though Infosys may still have to manage with some leadership churn with the CEO appointment, we believe Mr. Parekh's appointment will bring an end to the feud between the founders and the board and the subsequent changes,” analysts at Antique said in company update note. 

Going ahead, some of the key monitorables, according to Nomura, will be: a) whether the company sees a similar escalation in attrition, as what was seen post Dr. Vishal Sikka joining in August 2014 given that Parekh is an external candidate; b) what is the approach to the software & platform based strategy that the previous CEO had put together; c) how soon can the new CEO hit the ground running and help Infosys regain the growth momentum; and d) will Nandan Nilekani’s association as the non-executive chairman of the company continue or is Salil given a free hand to run the company and shape its strategy.

BUYBACK OFFER

Another reason, analysts say, why the cheer may just be short-lived is the Rs 13,000 crore buyback offer. For the company to get back the trust of long-term investors, they will have to enunciate a strategy and investors will have to buy into it. 

“I think it is a good idea to tender shares in the buyback offer at Rs 1,150 / share. Investors should ideally wait for the company to unveil its long-term strategy before taking a fresh investment call,” Bodke says.

Despite the near 16% rally in the last three months, Infosys has been the worst performing stock in the Nifty IT index thus far in calendar year 2017 (CY17), falling over 5% till December 1, ACE Equity data show. By comparison, the Nifty IT index has gained nearly 5.3% during this period, while the Nifty 50 index has rallied around 24%. 

“I don’t expect things to change for the company overnight. One can tender in the buyback and buy again later once there is more clarity on the business strategy. The stock can dip to Rs 950 levels once the buyback offer is over,” advises A K Prabhakar, head of research at IDBI capital.

Nomura maintains a reduce rating on the stock with a target price of Rs 875, based on 13x FY19F earnings per share (EPS) of Rs 67.5.