Brokerages unconvinced by letter
Brokerages are not reading too much into the whistle-blower allegations into Infosys’ lower margins on large deals, and higher unbilled revenue. A set of employees have alleged that unethical practices were resorted to, on recent deal wins with negligible margins.
Further, revenue and cost recognition was not done with respect to accounting norms and this was done to improve short-term profitability. Girish Pai and Seema Nayak at Nirmal Bang believe low profitability from large deals, in the initial phase, is a standard.
“Industry, because of its hyper competitive nature, has been giving customers concessions, in which some of the costs are front-loaded and margins tend to be either very low, or even negative, in the initial phase. This is in the hope that margins will recover subsequently during the life of the contract,” they add.
In addition to aggressive accounting, the whistle-blowers also alleged that the CEO and CFO circumvented reviews and approvals in case of large deals, and that critical information was deliberately hidden from auditors as well as the board, given that the treasury function took higher risk to boost other income.
Analysts at Edelweiss
Research indicated that the allegations were serious, but believed they won’t directly impact business, given that they don’t include charges related to violation of law in client markets or data security issues, which could have serious impact on business.
The charges revolve more around a ‘conservative versus aggressive accounting approach’, and thus involve subjectivity, they added.
While the company has received the complaint and an audit committee comprising independent members is looking into it, the Street is awaiting clarity from the management and more evidence from whistle-blowers.
Arya Sen and Ankur Pant of Jefferies believe the issue is likely to remain an overhang on the stock in the near term, given it raises questions over the credibility of the current management.
While a 100-basis-point lower Ebit margin impacts earnings growth by 4 per cent, the analysts believe a priceto-earnings derating could be the bigger risk.
Sustainable growth outperformance under a new management had led to a rerating. Analysts at Elara Capital anticipate a soft Q3, as seasonality and weakness in the financial sector and retail verticals could create an overhang in the near term.