Whistleblower blow to Infosys: How big is the crisis, what do brokerages say?
A group of anonymous employees sent the letter to the Infosys board on September 20.
The scrip hit an intra-day low of Rs 645 and wiped off Rs 44,000 crore from the stock’s market-capitalisation.
In overnight trade, US-listed American depository receipts (ADRs) of the IT major fell 12% on Monday, after reports of anonymous whistleblower complaints alleging unethical practices. Indian markets were closed on Monday for Maharashtra state elections.
In a statement, the company said "these have been placed before the audit committee as per the company's practice and will be dealt with in accordance with the company's whistleblower policy."
The whistleblowers also sent copies of the letter to the US Securities and Exchange Commission (SEC). ““He (CEO Parekh) directs them to make wrong assumptions to show margins. CFO is compliant and he prevents us from showing in board presentations large deal issues…Several billion-dollar deals of last few quarters have nil margin,” the letter states. “Please ask auditors to check deal proposals, margins, undisclosed upfront commitments made & revenue recognition,” it added.
What’re the allegations:-
A group of anonymous employees sent the letter to the Infosys board on September 20. They have pointed to multiple instances of unethical practices by CEO Salil Parekh and CFO Nilanjan Roy, especially with regard to large deal wins.
The allegations are…
1.Many of the large deals have negligible margins, and the company bypassed appropriate review and approval processes on these deals
2.Information related to these deals were suppressed from auditors and board members.
3.Revenue and cost recognition related to some of the large deals have not adhered to accounting standards to help improve near-term profitability.
4.CEO & CFO put pressure on treasury to boost other income by taking higher risks to help improve near-term profitability.
What does Infosys say:-
The IT major has acknowledged receiving the complaint. It says the matter has been placed before the audit committee of the board chaired by D Sundaram. The panel also comprises independent members Roopa Kudva and Punita Kumar Sinha.
What do brokerages say:-
Jefferies: The issue is likely to remain an overhang pending further clarity. We note every 100bps lower EBIT margin impacts FY20/21E EPS by ~4.3% but P/E de-rating could be the bigger risk.
“As we wait for further clarity from management and more concrete evidence from the whistle blowers, the issue raises questions over the credibility of the current management. P/E de-rating could be the bigger risk, especially given that the recent re-rating in the stock has been driven by hopes of sustainable growth outperformance by the company under the new management,” it said.
Morgan Stanley: The whistleblower news could put the stock under pressure. It comes as a setback for the company and could de-rate multiples until clarity emerges. The stock has been volatile over the last six years due to idiosyncratic issues. We have an ‘equal weight’ rating on the stock with a price target of Rs 805.
Reliance Securities: It is very serious news indeed. This equates to a corporate governance issue. Deputy CFO has also quit. This in itself is an indirect admission that something is rotten. Stock will now languish 10-15 per cent lower in the near term. It is also disappointing to see that a company that has long been viewed as a “poster boy” of corporate governance in India has seemingly fallen to such levels. It calls into severe question board-level processes at the IT major, which is even more disappointing given that when founder Nandan Nilekani was brought back on the board, his specific focus was to ensure high corporate governance standards post the Vishal Sikka fiasco.
While we await developments on the board investigation, given that it is so widely held, it is very likely that some investors will vote with their feet and sell at least some of their holdings. The market is very unforgiving of companies that have corporate governance issues and while it would not be fair to directly jump to conclusions, this issue appears quite ugly at least on the surface.
IIFL: Sanjiv Bhasin of IIFL said, “We will know only when the investigation happens. If there is some truth in the complaint, then it will weaken the entire IT sector. It’s a glass half-full and half-empty kind of situation right now. The market is also in a mode where people have taken advantage of capitulation and rumour mongering. We have seen that in the case of DHFL and Indiabulls.”
“May be spread down the effect on Infosys, which is a pedigree stock. However, it is something hard to believe. We will be in a situation to comment further on it if and when we see more details from the investigation. The present news is very positive for competitors like Tata Consultancy Services and Wipro,” he said.