Infosys Limited - Management exit continues - Antique

Infosys announced on last Friday that V Balakrishnan (Bala), Member of the Board and Head Infosys BPO, Finacle, India business unit and Chairman of Lodestone have resigned from the services of the company. Bala was rumoured to be a potential CEO candidate post his elevation to role of Chairman Lodestone and offered additional charge of Utilities and resource vertical in North America. BPO and finacle, contributed an estimated 10% to Infosys revenues. Infosys has not announced replacement for Bala yet. This is the eight high level exit since June 2013, since N R Narayana Murthy assumed the role of executive chairman at Infosys.

Eighth exit since June 2013

V Balakrishnan, Member of the Board and head of Infosys BPO, Finacle , India business unit and Chairman of Lodestone (consulting) resigned from Infosys on Friday. This is the eighth exit amongst senior management, the other notable ones being that of Basab Pradhan (Global head of sales in July 2013), Ashok Vermuri (US head, August 2013), Stephen Pratt (ex consulting head, November 2013). Bala was rumoured to be a contender for the post of CEO. Bala was elevated to Chariman Lodestone and given given additional charge of Utilites & Resources in North America post exit of Stephen Pratt.

Stability in management an issue

An exit post even six months of NRN return indicates management stability is some time away and is a cause of concern. We believe it will reflect in weak deal flows for Infosys. NRN in recent interactions did indicate that revenue growth will remain choppy largely led by internal challenges.

Demand environment though improving

Anecdotal checks indicate an improving demand environment in BFSI vertical in US and Europe. Commentary on client budget so far is encouraging and spends overall likely to be better than last year.

See upside risk to margins

Management recently highlighted reduction in cost as one of the key priorities for the company. While its margins are down 500bps over last 2-3 years, its ability to recoup even 100-150bs would drive earnings upgrade. See upside risk to our flattish margin assumption for FY15E.

Valuations & outlook

Stock has outperformed the broader markets and IT peers by 40% and 30% over the last six months and trades at 17X FY15E, at higher end of its trading band of 11-18x. While we remain concerned on recent management exits and impact on revenues we think company could surprise on the margin front. Management recently has taken several initiatives to cut cost at onsite. Infosys earnings are sensitive to margins. A one % increase/ decrease in margins impact earnings by 3-4%. Its EBIT margins have declined by 500bps over last two years and ability to recoup even 100bs-150bps could lead to earnings upgrade and rerating. We retain our earnings and HOLD rating for now.

Source : Equity Bulls

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