Ranganath's exit from Infosys can puncture stock's momentum, say analysts

From left: Infosys COO U B Pravin Rao, CEO & MD Salil Parekh and CFO M D Ranganath at a press conference to announce the company’s quarterly results at the Electronic City campus in Bengaluru on Friday. Photo: Saggere Radhakrishna

Problems, it seems, have a way of finding Infosys. Just when the company was stabilising after the high profile exits of Vishal Sikka, their 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 leave the company.

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

Though the hunt for the new CFO has begun and Jayesh Sanghrajka, the deputy CFO can be 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. One, Mr Ranganath wanted to pursue CEO’s role, which was ruled out at Infosys post the appointment of Salil Parekh. Second, Infosys’ reversal in its strategy of choosing growth over profitability (conflicts with CFO’s function); and third, the exceptional payouts (over 100 per cent in FY18/19) as against investments for future growth,” write Rahul Jain and Devanshu Bansal of Emkay in a report.

Also Read: After a rally in CY18, experts see time-wise correction in IT stocks

For the quarter ended June 30, 2018, Infosys reported a net profit of Rs 36.12 billion (consensus analyst estimate at Rs 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 its earnings before interest and tax (EBIT) margin guidance by 100 basis points (bps) at 22 per cent - 24 per cent.

Also Read: CFO Ranganath's exit is an 'irrepleceable loss' for Infosys, says Murthy

At the bourses, Infosys has outperformed the markets by gaining around 37 per cent in calendar year 2018 (CY18), as 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-capitalisation (market-cap) hit Rs 3 trillion mark first time in intra-day trade on July 16.

Analysts at Emkay believe the run-up 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 is unwarranted. They believe the stock would see a structural de-rating in the coming months and maintain ‘sell’ rating with target price of Rs 1,040.

Also Read: Nifty IT index hits new high; Infosys at record high of Rs 1,400 on the NSE

“The churn in the top level continues and the recent development caught the markets by surprise. The CFO’s exit was least expected. The 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 going ahead,” says Madhu Babu, an analyst with the institutional equities division at Prabhudas Lilladher.

Even though analysts at Motilal Oswal Research have a buy rating on the stock with a price target of Rs 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.