Will Infosys stock soar after clean chit for Salil Parekh?

Mumbai: Infosys Ltd shares have received the cold shoulder from investors ever since an anonymous whistleblower alleged serious misconduct by its top management. With the company now issuing a detailed statement, offering almost a point-to-point rebuttal to the allegations, a moot question is if the shares will rally. Indeed, they have risen about 6% in pre-market trading on the New York Stock Exchange.

But gains may be limited, says an analyst at a domestic institutional brokerage requesting anonymity. “A 5% rally will take Infosys shares to about ₹775, higher than where they were before the whistleblower compliant.”

What about the fact that Tata Consultancy Services Ltd (TCS) shares have risen about 8% during the same period, causing Infosys valuation discount to the market leader to widen considerably? Before the complaint wreaked havoc at the company, Infosys shares had traded at an 11-12% discount to the price-earnings valuation of TCS. Based on Friday’s price on the National Stock Exchange, the discount has widened to around 25%.

“Given Infosys’s history of boardroom drama, a reasonable discount to TCS makes sense, notwithstanding the latest clean chit to the management,” says the analyst. A roughly 5% rally in Infosys shares will mean the valuation discount will narrow to about 21%.

Of course, given that Infosys is growing at a slightly faster pace than TCS should also help narrow the valuation discount a bit.

In the September quarter, for instance, Infosys’s revenues grew at about 9.9% in constant currency terms after excluding the impact of acquisitions. This was on the back of strong double-digit growth in nearly all of its business verticals. At TCS, growth in constant currency fell to 8.4% in Q2, from double-digit growth in the June quarter.

In Q3, Infosys has reported revenue growth of 9.5%, which translates to growth of about 8% in organic terms. TCS is estimated to report growth of about 6.8%, according to analysts at Kotak Institutional Equities.

The company, expectedly, has revised the full-year constant currency revenue growth guidance upwards to 10%-10.5%, from 9%-10% earlier.

The 20 basis points sequential improvement in operating profit margins to 21.9%, however, was lower than Street expectations. Also, the $1.8 billion large deal wins last quarter are lower than $2.7-2.8 billion worth deal wins in preceding quarters. But given the higher furloughs and softness in banking and financial services business verticals, the sequential slowdown was more or less on expected lines.