Ranganath’s exit from Infosys may slowstock’s momentum: Analysts

Problems, it seems, have a way of finding Infosys. Just when the company was stabilising after the high profile exits of Vishal Sikka, who was managing director and chief executive, and Vishal Dadlani, its Americas head and global head of manufacturing and retail in 2017, Infosys’ chief financial officer M D Ranganath decided to quit.

The latest exit, which was announced on Saturday, surprised the Street and triggered 4 per cent fall in Infosys’ stock during intra-day trade on Monday to ~1,373 levels on the NSE. It, however, recovered partially as trade progressed.

Though hunt for the new CFO has started and Jayesh Sanghrajka, the deputy CFO is seen as a possible candidate for the replacement, analysts at Emkay Global do not rule out the possibility of an external candidate.

“We see three possible factors that could have triggered the exit. First, Ranganath wanted to pursue the CEO’s role, which was ruled out at Infosys after the appointment of Salil Parekh. Second, Infosys’ reversal of its strategy of choosing growth over profitability (conflicts with CFO’s function); and third, the exceptional payouts (over 100 per cent in FY18-19) against investments for future growth,” Rahul Jain and Devanshu Bansal of Emkay wrote in a report.

For the quarter ended June 30, 2018, Infosys reported a net profit of ~36.12 billion (consensus analyst estimate at ~37.41 billion), up 3.7 per cent year-on-year (y-o-y). The company announced a 1:1 bonus – that is one bonus share for each share held by investors – and maintained the FY19 constant currency (CC) revenue guidance at 6 per cent-8 per cent. It, however, cut earnings before interest and tax (EBIT) margin guidance by 100 basis points (bps) at 22 per cent-24 per cent.

On the bourses, Infosys outperformed the markets by gaining around 37 per cent in calendar year 2018 (CY18), compared to around 9 per cent rally in the Nifty50 and 30 per cent rise in the Nifty IT index, ACE Equity data shows. Its market capital is at ion (market-cap) hit the ~3 trillion mark for the first time during intra-day trade on July 16.

Analysts at Emkay believe the runup in the stock despite weak growth guidance for FY19, declining margin outlook, distress sale of digital assets (Kallidus, Skava, Panaya etc), personnel exits and modest Q1FY19 performance are unwarranted.

They believe the stock would see a structural de-rating in the coming months and maintain ‘sell’ rating with target price of ~1,040.

“The churn in the top level continues and the recent development caught the markets by surprise. The CFO’s exit was least expected. Overall attrition in the company in the June 2018 quarter has been high. Over the past three months, the rupee depreciation has also aided the rally and inspired confidence on earnings trajectory.

However, Infosys is trading at an expensive valuation of 18x FY20 earnings. The markets will not take any negative surprises lightly,” said Madhu Babu, an analyst at the institutional equities division of Prabhudas Lilladher.

Even though analysts at Motilal Oswal Research have a buy rating on the stock with a price target of ~1,600 that discounts the forward earnings by 17x, they believe the recent rally hardly leaves any room for negative news and the ensuing distraction to business.

They, too, expect the stock to lose some of the steam that had built up in the recent past.

G Chokkalingam, founder and managing director at Equinomics Research, does not recommend a fresh investment in the stock at the current level given the development and the recent run-up in the counter.