Infosys surges nearly 5% today; should you buy the stock?

Shares of Infosys have slipped around 14 per cent in the last 12 days after an anonymous whistleblower group alleged that the company's management was taking 'unethical' steps to spur revenue.

Leading information technology (IT) players such as Infosys, HCL Tech, and Tata Consultancy Services (TCS) were trading in the positive territory on Thursday. Infosys (up over 4.50 per cent) was the top performer on the S&P BSE Sensex, while TCS was trading close to its all-time high of Rs 2,296 on the BSE. HCL Tech, too, was trading nearly a per cent higher. Tech Mahindra, however, was trading over a per cent lower at Rs 747.40 apiece on the BSE. 

Shares of Infosys were trading higher for the fifth straight day, up 9 per cent in past one week, as compared to a three per cent rise in the benchmark index. Prior to that, share price of Infosys slipped 17 per cent in just three trading days from Rs 768 to Rs 635 after an anonymous whistleblower group called 'Ethical Employees' alleged that the company’s current management was taking 'unethical' steps to spur short-term revenue and profits.

According to the whistleblower's complaint to US Securities and Exchange Commission and the board of Infosys, the Bengaluru-based firm's current CEO Salil Parekh was not taking necessary approvals before entering into large deals. "Several billion-dollar deals of last few quarters have nil margin," the letter said. "In large contracts like Verizon, Intel, joint ventures (JVs) in Japan, ABN AMRO acquisition, revenue recognition matters are forced," the letter added.

Post the development, the company issued a statement saying the board was committed to uphold highest standard of corporate governance and protect the interests of all stakeholders.

SHOULD YOU BUY THE STOCK

Analysts at Edelweiss Securities remain positive on the stock saying they have full faith on the company's fundamentals and that it is well on course to outclass the industry. "Infosys has corrected by 14 per cent over the past 12 days in the wake of a whistle-blower complaint, alleging misdemeanors by management. The knee-jerk correction in the stock price implies it now trades at a mouth watering 16.5x FY20E EPS, thereby widening its discount to TCS (which has a similar growth profile) to 35 per cent from 19 per cent," they wrote. 

The brokerage has increased Infosys’s weightage in its model portfolio from 15 per cent earlier to 27 per cent. It has maintained ‘BUY’ rating on the stock with the target price of Rs 955, implying 20x Q4FY21E EPS.

Ambareesh Baliga, independent market analyst, too feels the correction in the stock provides a good opportunity for the investors to buy the stock.

"The allegations are trivial compared to what is followed by most of the listed entities – booking personal expenses, booking future income, postponing expenses etc to boost profits is done by most of the list entities. It becomes a big news as the entity involved is supposedly the epitome of Corporate Governance," Baliga said. 

In case, the allegations are proven, the CEO and CFO would have to go, taking us back to the situation when Vishal Sikka had to go. However, in such a situation, the new CEO/CFO would be clear on what Corporate Governance means in Infosys. And if the allegations are proven to be false, we could see an immediate bounce. Either ways it could be good entry point, the analyst added. 

As regards the IT sector, Edelweiss Securities remains bullish. "Record deal-wins, an encouraging deal pipeline and sanguine management commentaries on demand strengthen our conviction in the Indian IT’s solid earnings trajectory," the brokerage said in a note dated October 30.