Thumbs up for Sikka, but some analysts say wait and watch

Shares of Infosys rallied over 3.5 per cent to ₹3,298 on Thursday in early trade after the company announced the appointment of Vishal Sikka as the new CEO. But the stock could not hold on to the gains and closed weak at ₹3,166.60, down 0.38 per cent over the previous day’s close.

Most analysts, however, view the development as positive, as they see the uncertainty surrounding the top job at Infosys has ended, at least for now. However, some analysts believe Sikka’s actions are more important than his appointment at the helm.

According to Barclays Capital Inc, the new team of Sikka (CEO) and Pravin Rao (COO) should provide necessary stability at the top. “We think the strong technology credentials of Sikka and his relative youth (age 47 years) should bring back confidence in the company and could set it on the next leg of growth.”

Daljeet Singh Kohli, Head of Research, India Nivesh Securities, said the announcement of a new CEO could lead to restoration of investor confidence in the stock for now.

Shashi Bhusan of Prabhudas Lilladher said: “We see this as a positive development that clears near-term uncertainties. Infosys has made an unorthodox choice with respect to the CEO which separates it from its peers. We see the possibility of fresh round of attrition at the senior management level. However, the current valuation provides cushion to the downside risk.”

“Better strategic execution coupled with strong new management running the company comforts us that we could soon see Infosys reporting growth in line with industry over the medium-to-long-term,” added Kohli.

Despite viewing the developments at Infosys as positive, some analysts say a revival may take some time and it is better to wait for concrete action by the new management.

Deutsche Bank said: “With his products background, we are concerned about Sikka’s ability to run a services company. This could also have implications on his view of costs and hence margins. In this context, Pravin Rao’s elevation as the COO could be a measure to manage costs/delivery. We continue to believe the recovery will be long drawn.”

Foreign brokerage Maybank Kim Eng, however, said business restructuring would take more time to yield results and expects Infosys to under-perform the sector with growth of 8 per cent and 9.7 per cent for FY15 and FY16. “We expect Infosys to trade at the lower end of its one-year forward PE band of 13-20 multiple (in the past three years).”

According to Barclays, the near-term actions for the new management are likely to focus around: strategic changes with greater push in services like infrastructure and BPO, along with higher risk which large contracts in these services entail; improving financial metrics like revenue growth and margins; and operational issues, including reducing employee attrition.

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