D-Street stunned by sudden exit of Vishal Sikka! What should you do with Infosys stock?

Infosys

There is a saying which goes “things get worse before they get better”. It is not different for Infosys which just saw the exit of its CEO and MD, Vishal Sikka.

Infosys which accounted for 65 percent of Nifty50 losses on Friday saw its shares tanked by over 11 percent in intraday trade today to hit a fresh multi-year low. The resignation of Vishal Sikka came as a surprise to D-Street which wiped out over Rs27,000 crore of market cap in a matter of hours.

For Infosys, things are likely to get worse before it even starts getting better. It will be in the interest of employees to either tender their shares in the upcoming share buyback if it comes at an attractive valuation or book profits and invests in companies which can outperform the index, suggest experts.

“It is an unfortunate exit f Vishal Sikka – the timing and way it has happened have raised corporate governance issue. Will take minimum 12 months for things to improve,” A.K.Prabhakar, Head -Research at IDBI Capital told Moneycontrol.

“Investors can exit Infosys and shift to TCS, HCL Technologies or Tech Mahindra. We also like TATA Elxsi, Persistent and Cyient are few stock which can be looked upon,” he said.

Infosys, under the leadership of Vishal, developed and articulated a strategy to transform itself to meet the rapidly changing needs of the marketplace in the 21st century, but it fell short of market expectations as the stock has underperformed the broader market in last 1 year.

However, from a three-year perspective, when Sikka toll over as CEO and MD, the stock rose 22 percent outperforming its peers.

During Sikka's tenure, the company’s stock jumped 22 percent from Rs 835.33 on August 1, 2014, at close to Rs 1,020.85 on Thursday. (Interestingly, shares of its rival TCS rose.)

In the three year period, Infosys stock outperformed all of its large peers — Wipro, TCS and HCL Tech. Rival TCS fell 1.4 percent during the period, while Wipro rose 7.8 percent and Tech Mahindra fell 20.2 percent.

Infosys also outperformed the S&P BSE Information Technology, with the index rising only 9 percent during the period.

But, it has been an underperformer in last 12-18 months as a slowdown in business demand, automation, rising currency as well as allegations of corporate governance issues weighed on sentiments.

The Company was lagging significantly behind industry in growth rates when Vishal took over and now we are in top quartile from a performance perspective.

Infosys has grown in revenues, from $2.13B in Q1FY15 to $2.65B this past Q1. This was done while keeping a strong focus on margins, closing this past quarter at 24.1% operating margin, beating some competitors for the first time in many years, and improving against nearly everyone in the industry.

“Sikka’s exit draws a long drawn out board room battle to a close. While the Company did better than the industry during Sikka’s tenure, it was nowhere near achieving Sikka’s own $20 bn targets by 2020,” V K Sharma, Head - PCG, HDFC securities told Moneycontrol.

“The forthcoming buy back may belay the stock from falling more. Sikka’s allegation that he was continuously being distracted does not wash as he had long enough a honey moon period to make his mark,” he said.

In the IT space, Sharma like a smaller company, Persistent Systems more as it has business portfolio that is relevant to the times, which is SMAC - Social, Media, Analytics, and Cloud.

The board of directors of Infosys is expected to meet on Saturday to consider a buyback proposal of up to Rs 13,000-crore share. Attractive buyback offer can sprung some activity in the stock which is reeling under pressure.

“Investors may wait for the further action plan from the management which will give more clarity of the company’s future prospect,” Ritesh Ashar, Cheif Strategy Officer at KIFS told Moneycontrol.

“Looking at the overall structure, the IT sector has not performed well but correction is on verge of completion. In IT sector, Hexaware is a stock which is outperforming the indices, hence it is advisable to switch to Hexaware at this moment,” he said.