Markets give a thumbs up to Nandan Nilekani's appointment

Meanwhile, Rs 13,000-crore buyback at Rs 1,150 a share, though, is near-term positive for the stock

The markets gave a thumbs-up to Nandan Nilekani’s appointment as the non-executive chairman at Infosys over the weekend, barely a week after Vishal Sikka resigned as the managing director and chief executive officer (MD & CEO) of the company.

Nilekani’s return at the helm, most brokerages feel, will address the corporate governance issues and trust vacuum between the founders, especially N R Narayana Murthy, and the Infosys board. The company, they say, can now get back to focussing on tackling business-related issues.

Sikka’s sudden exit on August 18 saw the stock slip nearly 16 per cent to hit a low of Rs 861 levels on the National Stock Exchange (NSE) and wipe out more than Rs 33,000 crore in investor wealth as measured by market capitalisation (m-cap) over the next few trading sessions.

“This (Nilekani’s return) brings stability to the board, alleviates acrimony with the founders leading to the CEO’s exit last week and eases concerns of potential CEO candidates; the next step is the repair,” writes Vaibhav Dhasmana, an equity analyst at Jefferies, in a report.

The development triggered an up-move in the stock, which closed nearly 3.1 per cent higher at Rs 940 levels on Monday, compared to a 0.6 per cent rise in the Nifty50 to 9,913 levels and 0.8 per cent rise in the Nifty IT index to 10,592 levels.

Analysts at CLSA, too, suggest the appointment of Nilekani as the non-executive chairman will see Infosys regain leadership stability and resolve cultural battles. 
 

“The new chair has stepped up the pace of CEO selection, strategic reassessment and alignment of stakeholders which has positively surprised us. With a likely change in strategic direction at Infosys, better than expected leadership and a low valuation, we think risk-reward has improved sharply,” CLSA said. Nilekani’s return to the company “gives it the best start in six years in regaining leadership stability, strategic relevance and resolving cultural battles,” it added.

However, there are challenges as well. While Nilekani is likely to bring in much-needed stability, the medium-to long-term business/financial performance of the company would depend on who is the new MD & CEO and how much he/she is aligned to company's path to new technologies. This, analysts say, would be very important as strong growth in new technologies is key for Infosys to get back to industry growth rates.

That apart, the markets will also be keeping a tab on how Nilekani deals with Murthy’s demand to reinvestigate the $200-million Panaya acquisition deal and the business strategy to be spelt out in October.

“Nandan’s return has received Murthy’s thumbs up, but retracting from this demand will be perceived as inconsistent pitch for governance, and continued demand could open up multiple possibilities. One such is that if the documents are made public, and there is clear instance of wrongdoing, it leads to follow-up course of actions detrimental to Infosys in the near future,” cautioned a Motilal Oswal Securities report.

Meanwhile, the Rs 13,000-crore buyback at Rs 1,150 per share, though, is a near-term positive for the stock, and it will keep the upside capped for now, analysts say. CLSA has upgraded its rating from ‘underperform’ to ‘buy’ with a new target of Rs 1,070 (from Rs 940). Their analysts have upgraded the margin assumptions by around 70 basis points (bps) resulting in a seven per cent FY19-20 earnings per share (EPS) upgrade and a higher target multiple of 15.5 times.

A few analysts, however, are still not fully convinced. Ashwin Mehta and Rishit Parikh of Nomura remained cautious on the structural concerns facing the industry and possible growth risks at Infosys, even as the overhang related to the tussle between the board and promoters is largely resolved.

“We believe the settling of the tussle between the board and the promoters is a positive, but the recent up-move in the stock price largely factors in this development,” they said in a report.

Girish Pai of Nirmal Bang, too, believes these abrupt changes will be difficult to explain to customers as many relationships of top 25-50 customers were run out of Sikka’s office. While the net has been cast wide for a new CEO, Pai believed external candidates may not find the position attractive.

“After this event, we have retained our ‘sell’ rating on Infosys but increased our March 2018 target price from Rs 794 to Rs 836. We believe the buyback, which is likely to be executed over the next few months, could support the stock in the short term,” he said.