Analysis: Growing worries for Infosys investors
, ET Bureau|
Updated: Oct 25, 2017, 08.59 AM IST
ET Intelligence Group: The second quarter numbers of Infosys and the subsequent management commentary may leave investors disgruntled on at least two counts.First, poor growth projections for the remaining fiscal; and second, the apparent futility of the accusations made by the cofounders against the previous CEO Vishal Sikka regarding corporate governance that was followed by over Rs 21,683 crore erosion of market cap in the past two months.
The second thing first. One of the co-founders NR Narayana Murthy had accused the previous management led by Sikka of wrongdoing in the case of the 2015 acquisition of Panaya, an Israel based cloud computing company. At a deal size of $200 million, it was suspected to be overvalued thereby prompting Murthy to seek a detailed inquiry . The spat eventually resulted in the exit of Sikka on August 18.
On Tuesday , the Infosys board, now under the leadership of another co-founder Nandan Nilekani, confirmed that “there is no merit to the allegations of wrongdoing". This should rest any doubts in the minds of investors over the quality of governance. At the same time, it also raises questions over the merit of allegations against the previous management that eventually interrupted its attempts to help Infosys adopt new technologies faster. On the operating front, the company reported continued momentum in the client additions and a stable operating margin performance.But, that did not stop it from reducing the full-year growth projections to 5.5-6.5% after excluding the currency effect from the earlier projection of 6.5-8.5% growth. This would be the slowest growth rate since FY15 when revenue had increased by 5.6%.
The drop in the headcount for the second consecutive quarter despite client additions hints at the changing nature of the operations in favour of automation. Total headcount was at 1,98,440 at the end of September 2017 compared with 2,00,364 at the end of FY17.
At Tuesday's closing price of Rs 926.8 on the BSE, the stock was traded at a trailing price-earnings multiple of 14.7. While the sombre growth projections will hardly enthuse investors, the stock may not react sharply in the short term, given the ongoing buyback offer.
The second thing first. One of the co-founders NR Narayana Murthy had accused the previous management led by Sikka of wrongdoing in the case of the 2015 acquisition of Panaya, an Israel based cloud computing company. At a deal size of $200 million, it was suspected to be overvalued thereby prompting Murthy to seek a detailed inquiry . The spat eventually resulted in the exit of Sikka on August 18.
On Tuesday , the Infosys board, now under the leadership of another co-founder Nandan Nilekani, confirmed that “there is no merit to the allegations of wrongdoing". This should rest any doubts in the minds of investors over the quality of governance. At the same time, it also raises questions over the merit of allegations against the previous management that eventually interrupted its attempts to help Infosys adopt new technologies faster. On the operating front, the company reported continued momentum in the client additions and a stable operating margin performance.But, that did not stop it from reducing the full-year growth projections to 5.5-6.5% after excluding the currency effect from the earlier projection of 6.5-8.5% growth. This would be the slowest growth rate since FY15 when revenue had increased by 5.6%.
The drop in the headcount for the second consecutive quarter despite client additions hints at the changing nature of the operations in favour of automation. Total headcount was at 1,98,440 at the end of September 2017 compared with 2,00,364 at the end of FY17.
At Tuesday's closing price of Rs 926.8 on the BSE, the stock was traded at a trailing price-earnings multiple of 14.7. While the sombre growth projections will hardly enthuse investors, the stock may not react sharply in the short term, given the ongoing buyback offer.
