Infosys shares shrug off Sikka blues, rallied 16% in last 3 months

November 24
20:25 2017

Infosys has emerged unscathed from the untimely exit of high-profile chief executive officer (CEO) Vishal Sikka, if stock price performance is anything to go by. After dropping close to 15 per cent due to uncertainty created by Sikka’s exit, the stock has recovered most of the lost ground.

Shares of Infosys shares have gained nearly 16 per cent since August 21 (first trading day after Sikka announced his resignation). In comparison, the benchmark Nifty has gained seven per cent and other technology stocks including Tata Consultancy Services (TCS), Wipro and HCL Tech have remained flat during the same period.

While the Rs 13,000-crore buyback has provided some impetus to the stock, brokerages believe competitive edge over other peers is the main driver behind the rally. The gains have come even as the Bengaluru-based company is scouting for a full-time replacement of Sikka.

Domestic brokerage Ambit says the Street need not worry about the new CEO -King as Infosys has strong portfolio -Queen.

“While the market is holding its breath to hear the name of the new king, we are more excited about the queen. Like in chess, the queen’s ability to pivot in every direction (products, platforms, next-gen technologies etc.) is the key winning strategy in the industry today. With a strong portfolio, Infosys is better prepared than its large peers to enter the next-gen and automation era,” said Ambit analyst Sudheer Guntupalli in a note.

Shares of Infosys on Friday gained 1.9 per cent– most among Sensex constituents – to Rs 1,010. Ambit has Infosys as its ‘top buy’ with a price target of Rs 1,111.

The stock currently trades at 14 times its one-year forward price to earnings (P/E) which is a steep discount compared to other bluechip stocks.

“The stock was oversold on concerns over issues such as governance and growth. However, with the arrival Nandan Nilekani, the Street has gained comfort again. The stock is undergoing a re-rating and could soon trade at par with other IT peers. We see a further 10 per cent upside,” said an analyst tracking the company.

Nilekani, one of the six founders of Infosys, was appointed as the non-executive chairman of the company after Sikka quit. UB Pravin Rao, chief operating officer, was made the interim CEO. The company is currently on the lookout for a permanent CEO.

Analysts say the company under the interim leadership of Nandan Nilekani is reaching out to the shareholders to build consensus on various issues. The pressure from the founding members has also subsided in the recent past.

“We were worried about continued promoter interference when we suspended coverage. But recent investor interactions show broader shareholder outreach and consensus building progressing impressively. With major concerns over corporate governance and long-term strategy waning, we see no material risks ahead,” said Ambit Capital in a recent note to investors.

Overall, 2017 was not a great year for IT stocks thanks to weak global cues. Ever since Donald Trump took charge as the President of United States of America, investors have trimmed their exposure to the sector anticipating protectionist policies and immigration checks would hit the Indian IT players. All the five big Indian IT companies – TCS, Infosys, HCL, Wipro and Tech Mahindra – have underperformed the benchmark indices this year.

However, analysts are now slowly turning positive on the IT stocks as the situation seems to be improving. One of the plus points for the Indian IT stocks is attractive valuations. Despite registering better growth and margins compared to global IT giants, Indian IT stocks are trading at a discount. This could provide an investment opportunity for the global funds to increase their exposure to Indian IT stocks. Also, H1B1 Visa issue would fade out soon as the Indian IT companies are increasing hiring the locals for on-site assignments thereby reducing the dependence on the immigration laws.

“After 10 months of downgrading the sector over protectionism concerns, we soften our negative stance. Contrary to consensus, Indian IT companies are not at a disadvantage on digital delivery capabilities. Continued adoption will drive 25-30 per cent CAGR in revenue next-generation technologies,” Ambit capital added.

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