Profit

Infosys May Need Some Time In Rehab To Fix Itself

After a period of rehabilitation, Infosys should be able to deliver all three targets: sales growth, margins and good governance.

(c) 2019 Bloomberg | Published: October 22, 2019 17:10 IST
 Share
EMAIL
PRINT
COMMENTS

Country's best-known software exporter is facing an impossible trinity of sorts: Out of sales, margins and governance, Infosys can hit only two goals at a time.

Or so it would appear from yet-to-be-proven whistle-blower allegations against Chief Executive Officer Salil Parekh and Chief Financial Officer Nilanjan Roy that they used hyper-aggressive accounting practices to hide from investors the lack of profitability on large deals. The stock tanked as much as 16 per cent in Mumbai after the letter was published by the Deccan Herald. 

It's a deja vu moment for co-founder and non-executive Chairman Nandan Nilekani, who returned to the Bangalore-based company two years ago during a previous crisis - sparked by a set of different anonymous charges against Mr Parekh's predecessor, the former SAP executive Vishal Sikka, who was accused of impropriety in a $200 million acquisition in Israel.

That scandal culminated in an unseemly spat between Mr Sikka and the board on one side and NR Narayana Murthy, another of the company's co-founders, on the other. Mr Sikka resigned in August 2017. The new board exonerated him, but by then the damage was done.

Mind the Valuation Gap

It's been a slow road to recovery. At a one-year-forward price-to-earnings multiple of 20 times at the end of September, Infosys's valuation is now almost 50 per cent higher than at the depth of the last crisis. The risk is of a repeat of that slump.

If investors start to believe that the culture at the software services provider, once seen as country's most transparent company, is beyond redemption, expect a durable deepening of the 10 per cent discount at which Infosys traded against larger rival Tata Consultancy Services, or TCS, at the end of last month. Since the company's American depository receipts trade in New York, there's also the threat of expensive class-action suits.

The allegations are being evaluated by the audit committee and the board. The CEO and the CFO won't be a part of those deliberations. Whatever the truth of the whistle-blower's complaints, another protracted governance saga could be just as damaging.

It might not be a bad idea for a buyout fund to step in and take Infosys out of the glare of the public markets. As a private company, it could rediscover its moorings and find a new purpose in a digital world where clients increasingly want nimble, cloud-based, on-demand software, rather than clunky, on-premise enterprise solutions.

At $12 billion in the fiscal year that ended in March, Infosys revenue is nowhere close to Mr Sikka's 2020 target of $20 billion. An operating margin of less than 23 per cent was lower than the near 26 per cent at TCS, according to data compiled by Bloomberg.

After a period of rehabilitation, Infosys should be able to deliver all three targets: sales growth, margins and good governance. Some private time could be just what it needs to get fixed.



Get Breaking news, live coverage, and Latest News from India and around the world on NDTV.com. Catch all the Live TV action on NDTV 24x7 and NDTV India. Like us on Facebook or follow us on Twitter and Instagram for latest news and live news updates.

NDTV Beeps - your daily newsletter

................................ Advertisement ................................

................................ Advertisement ................................

................................ Advertisement ................................

Top