Fears about wrongdoing at Infosys could’ve been overdone: Analysts

After a rather tumultuous week for Infosys, analysts are beginning to separate the wheat from the chaff with most suggesting that the whistleblower group’s allegations against the top management are also indicative of troubles elsewhere, particularly on the people/talent management front.

“Its inability to manage a massive flux at the top is perhaps the biggest reason for growing disgruntlement there. It has been going on for six years even though it has to be expected of a company which has been around for over 38 years,” said an analyst with a consultancy firm who was a former COO with one of the top-five IT companies.

ICICI Securities in a note also said that what has exacerbated investor’s response to the whistleblower’s allegations was the absence of proactive disclosures by the company as well as the allegations not being looked at in isolation but also in the context of Ranganath Mavinakere (ex-CFO) and Jayesh Sanghrajka (Deputy CFO) moving on from the company recently. There has been no perceivable inconsistency in the key data points shared by Infosys, the report said.

“However, looking at the allegations in isolation, some of the data points shared by Infosys, like Verizon deal being margin dilutive by 40bps or visa costs being a margin drag of 80bps in Q1FY20 or Stater deal being dilutive by 40bps, are consistent with the nature of these deals and investments in our opinion. Some of the key contracts should be seen as an investment made to build relationships,” said the report.

Exits of top leaders

Pointing out how key executives like Mohandas Pai, the former director and CFO had to leave Infosys because of the company’s inability to harness their leadership skills, the management consultant said exits have to be handled in a gracious manner. “But that hasn’t happened so far. It is not about an individual but about the manner in which such issues are handled,” he said. He also said that thanks to the Satyam fiasco and subsequent issues with the auditing firms, the bar has been raised very high. “Infosys has been a bellwether company. Practices like manipulating figures to boost profits are not possible,” he said.

An analyst writing for Seeking Alpha, a US-based crowd-sourced content service for financial markets, said that bigger concerns are the claims of inflated profits, hidden “critical information,” and under-reporting costs which can be detected depending on the relative magnitude of these irregularities.

“On the first pass, not only are all the forensic and value algorithms not adverse at the top level, but they are in highly favourable conditions for low risk of manipulation, bankruptcy, and financial irregularities,” said JD Henning, an investment adviser.

He added that it is unlikely the CEO’s international travel will turn up as an issue on the forensic and valuation models as an irregularity as these type of expenses would typically remain within sustainable operational parameters.

According to all the forensic models applied, there’s no indication of alleged rampant financial irregularities spanning from 2013 to today in the Infosys’ financials. “The three-year period of adverse scoring in the Beneish M-score factor for asset quality does not appear to be consistent with what little we know about the whistleblower claims,” he said.

Writing about the financials of the company, another analyst said that he expects Infosys to outperform the upper end of its revenue guidance in 2020. “Our current model calls for 10.6 per cent year on year revenue growth and the most recent earnings call didn’t give us reasons to soften our model,” said Alexander Veytsman, writing for Seeking Alpha.

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