Were foreign investors hedging Infosys’s leadership risk already?
Infosys Ltd’s shares have fallen 14% since chief executive officer Vishal Sikka suddenly announced his resignation last week. Evidently, the news came like a bolt from the blue; although some investors appeared to have hedged their bets in advance.
As the chart above shows, Infosys’s price-to-earnings ratio caught up with that of Tata Consultancy Services Ltd (TCS) in the first two years of Sikka’s tenure, but lost considerable ground in the past year.
In the past year, concerns about corporate governance have emerged, which have been amplified by the company’s founder shareholders, especially N.R. Narayana Murthy.
And the changes in the company’s shareholding pattern show that foreign institutional investors (FIIs) have taken the clear lead in selling Infosys shares. FII holdings has dropped from 40.4% in the year-ago June quarter to 37.5% in the preceding quarter.
Analysts at Nomura Research said in a note to clients that the reason for this is possibly that they gave “higher weight to recent issues with promoters or senior management attrition, over better results near term and (higher) valuation discounts to TCS (~20% on our estimates)”.
Domestic institutions, on the other hand, increased their holding to 20.2%, from 17.3% a year ago.
Nomura, based on conversations with both sets of investors, said that domestic investors were “possibly playing the lower valuation argument and hopes of a turnaround”.
Ahead of the trade, it seemed like the more nimble-footed domestic institutions— especially mutual funds—were on the right side of the trade. But in hindsight, FIIs were right all along.
Thanks to their heavy selling in the past year, Infosys shares underperformed those of peers such as TCS despite similar cuts in earnings estimates of both companies.
Nomura Research’s analysts point out in a 7 August note to clients that TCS shares rose 5% since January 2016, despite a 13% cut in the consensus estimate for its fiscal year 2018 earnings.
On the other hand, Infosys shares fell 7%, despite a similar cut in earnings estimates of around 14%.
Again, a big factor driving this difference appears to be a concern among foreign investors about Sikka’s clash with the founder shareholders.