Infosys data has no visible inconsistency as alleged in whistleblower letter: ICICI Securities report

Data points shared by Infosys Ltd., do not have any “perceivable inconsistency” as alleged in a whistleblower letter, according to a report by ICICI Securities, Mint reported on Tuesday. “Some of the data points shared by Infosys, like (the) Verizon deal being margin dilutive by 40 basis points, or visa costs being a margin drag of 80 basis points in Q1FY20, or (the) Stater deal being dilutive by 40 basis points, are consistent with the nature of these deals and investments in our opinion,” the brokerage firm said in its report. One basis point, or bps, is one-hundredth of a percentage point. ET reported that on September 20, a group calling itself ‘ethical employees’ had filed a whistleblower statement with the Infosys board and the US Securities and Exchange Commission, stating that the company was taking ‘unethical’ steps to inflate short-term revenue and profit numbers to boost its stock. The whistleblowers alleged that the company was bending rules around large deals and revenue recognition to boost growth at the expense of margins and trying to prevent the recognition of visa costs in the quarter to improve profitability in the second quarter. However, according to the ICICI Securities report, investor response to the whistleblower allegations worsened due to “absence of proactive disclosures by the company as well as the allegations not being looked at in isolation but also in the context of Ranganath Mavinakere (ex-CFO) and Jayesh Sanghrajka (Dy CFO) moving on from the company since Salil (Parekh) has taken over.” Sanghrajka quit the company on 14 October after spending about 14 years in the company. In November last year, Sanghrajka was made the interim CFO after the then CFO and MD Ranganath quit. The report clarified that there was concern only if “material information was held back from the auditors and board which we see as less likely.” ICICI Securities has rated the Infosys stock as attractive and upgraded it to “buy” as the stock is currently trading at a discounted 15.5 times its FY21 estimated earnings per share compared with that of Tata Consultancy Services trading at 22.5 times. The possibility of a management discontinuity driven by the whistleblower allegations will remain a key risk, the report concluded.  


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