Infosys must correct dodgy data

In 2017 former chair Narayana Murthy complained about poor governance at Infosys, the successful Indian IT outsourcer he cofounded. CEO Vishal Sikka resigned. The problem may have lingered, judging from a whistle-blower complaint. This has raised questions over the integrity of Infosys’s profit reports.

On Tuesday, shares that had recovered since Sikka’s defenestration fell 17%. Current chair Nandan Nilekani needs to show he has a good grip on the situation.

Infosys is a big Indian brand overseas, supplying hardworking IT contractors to a grateful client base. It has won some big contracts of late. In the second half of the fiscal year to March the value of those contracts jumped 2.4 times to $3.1bn, according to UBS. That helped push up its forward price-to-earnings ratio in September to 21 times, the highest level since 2011.

Analysts and shareholders have focused on revenue growth rather than profit margins. Even so, Infosys has promised its operating profit margins will stabilise in the 21%-23% range after drifting down steadily since 2015.

The reliability of these numbers is in doubt. The whistle-blower report, sent to the US Securities and Exchange Commission as well as the board, alleges that senior executives oversaw irregular accounting practices to boost profits. Investors should also worry about growing delays in payments from clients. This is reflected in the steady rise of accounts receivables, relative to revenues, over recent years.

Nilekani has acted correctly in launching an investigation. Once the probe is complete, he needs to provide investors with information they lack: whether the books were cooked, and if so, what the true profits are.

If those are less than previously thought, Infosys shares would suffer a discount for its recurring governance problems. /London, October 23

© The Financial Times 2019