Nilekani's return to Infosys: The worst is over for firm, say brokerages

Infosys gained over 3% in trade on Monday to Rs 941 levels on the National Stock Exchange, after Nandan Nilekani assumed charge as its non-executive chairman over the weekend. The stock hit a high of Rs 953.95 and a low of Rs 938 on the NSE in morning deals. By comparison, the Nifty50 and the Nifty IT indices gained 0.4% and 0.8%, respectively. 

Given the development, brokerages have revised their price target for the stock and suggest that the worst may be over for the company as regards corporate governance issues are concerned. Infosys, they feel, can now get back to focussing on tackling business-related issues.

Here’s is a quick compilation of what leading brokerages and research houses said.

JEFFERIES

Co-founder Nandan Nilekani was appointed Non-exec Chairman of the board, with current Chairman, ex-CEO and two independent members stepping down. This brings stability to the board, alleviates acrimony with the founders leading to CEO exit last week and eases concerns of potential CEO candidates, the next step in the repair. Stock remains attractively valued given that the strategic direction remains unquestioned and business momentum sustained, maintain Buy

NOMURA

Nandan Nilekani’s will largely be restricted to oversight, governance and bringing stability to the company. 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. 

Overall, we remain 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. The next moves in the stock are likely to be driven by near-term results and CEO selection and assessment of his/her ability to lead Infosys through the technological transformation facing the industry.

CLSA

Nandan Nilekani’s return to Infosys gives it the best start in six years in regaining leadership stability, strategic relevance and resolving 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. 

We upgrade our margin assumptions by ~70bps resulting in a 7% FY19-20CL EPS upgrade and a higher target multiple of 15.5x as the sharp discount to peers seems overdone. We upgrade our rating from underperform to BUY with a new target of Rs 1,070 (from Rs940).

MOTILAL OSWAL RESEARCH

Nandan’s return has received Murthy’s thumbs-up, but if 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 wrong-doing, it leads to follow-up course of actions detrimental to Infosys in the near future.

Near-term attractiveness may be higher given the proposed buyback. However, beyond the event, the developments around new CEO, Panaya investigation and Infosys' near-term outlook will determine the extent of potential re-rating. 

We had lowered our price target to INR1,030, by cutting the target multiple to 15x (from 17x), at some discount to TCS’ 16x. That will unlikely be breached for now, with the sleuth of changes yet to take place, but offers upside from current 13.6x, driving our Buy rating.

EQUINOMICS RESEARCH

Infosys, as an institution, could attract founder and ex-CEO himself to come back. Nandan Nilekani's comeback is a positive development for the company. In our view, he may succeed in bringing some stability to the top board / management level as he already has adequate experience in dealing with founders, senior management and also institutional investors. We believe, the worst for the company is over and it can now focus on the real problems of the IT industry – poor single digit growth in revenues.

IDBI CAPITAL

We believe that Mr Nadan Nilekani joining Infosys board as non-executive Chairman on Thursday is a great move amid Dr. Vishal Sikka’s stepping down as MD & CEO just a week earlier. We did not expect such a move to happen so fast. We believe that the worst is over for Infosys and upgrade it to ACCUMULATE from HOLD with new target price of Rs 988 based on 14x FY19E (13x earlier) and factor the impact of share buyback. We would watch out for strategic commentary at Q2FY18 earnings con-call for any further upgrades.