Infosys - Event Update - Sikka’s Exit a Near-term Setback; Further Downside Limited

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