Dr.
Vishal Sikka has resigned as Chief Executive Officer and Managing
Director (CEO and MD) of Infosys with immediate effect, citing “a
continuous stream of distractions and disruptions over the recent months
and quarters, increasingly personal and negative as of late, as
preventing management’s ability to accelerate the company’s
transformation.”
We
view this development as negative and especially untimely, as under the
leadership of Dr. Sikka, Infosys managed to reach the threshold of
transformation to an innovation-led software-driven organisation from a
cost-arbitrage player. Dr. Sikka, who has been appointed as Executive
Vice Chairman with an annual salary of US$1, will hold office till his
successor is
appointed. Meanwhile, Mr. U.B. Pravin Rao has been appointed as Interim
CEO and MD, who will report to Dr. Sikka under the supervision and
control of the Board of Directors.
Distractions Took Up Management Time, Diverting Focus
As
cited by Dr. Sikka, the continuous stream of distractions sidetracked
the core focus
on business transformation to sail through the challenging scenario,
marked with multiple headwinds in the form of SMAC, revenue
cannibalisation, pricing pressure, currency fluctuations, BREXIT and
Donald Trump as the US President. Going into details of these
distractions will not serve any purpose at this juncture, as they are
available in the public domain.
Stock Impact – Negative in the Interim; Buyback Could Provide Support
The
untimely departure of Dr. Sikka has utterly surprised the street, with
the stock crashing by ~10%, wiping off >Rs225bn of Infosys’ market
capitalisation. Further, the recent verbal warfare in the public domain
could potentially affect the search for his replacement. Moreover, it
could be a challenge to find a successor who shares the company’s vision
as institutionalised by Dr Sikka. We believe this development will lead
to poor performance of the stock price at least
till the search for a new CEO and MD concludes and the issues with the
founders are put to rest.
Notwithstanding
the repercussions of this development, we
believe that today’s correction in the stock price has factored in the
potential negatives. Needless to reiterate, Infosys is a large
organisation, which does not depend on any particular individual to grow
further. A meeting of the Board of Directors is scheduled to be held on
Saturday, August 19, 2019
to consider the share buyback proposal, which could also provide
support to the stock. With valuation at 12.8x FY19E EPS, we believe that
the downside is relatively limited despite subdued stock performance in
the near-term. We maintain our BUY recommendation on the stock with a
Target Price of Rs1,080
Further reading: Infosys at lows buy it on dips
Further reading: Infosys at lows buy it on dips
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