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Saturday, 17 June 2017

Sandeep Dadlani quits Infosys: It's only a temporary setback, say analysts - 17 Jun 2017

Problems, it seems, have a way of finding Infosys. Just when the company was coming out of the speculation that its promoters, including N R Narayana Murthy, plan to cut their stake in the company, its Americas head and global head of manufacturing and retail, Sandeep Dadlani, put in his papers.

Infosys was quick to find replacements and named Karmesh Vaswani as the Global Head for Retail, CPG & Logistics (RCL) and Nitesh Banga as the Global Head of Manufacturing.

The exit, post brief stability in the company’s higher management, analysts say, comes as a surprise as Dadlani had been recently handed additional responsibility of generating additional business from the company’s new software solutions, including the artificial intelligence (AI) platform Nia.

“Mr. Dadlani was an integral part of Infosys for the past 16-plus years and his exit is clearly a setback given his strategic portfolio holding and the current headwinds in the IT sector,” point out Sandip Agarwal and Pranav Kshatriya of Edelweiss Research in a note.

The market reaction to the development, however, has been lukewarm. The stock dipped 0.6% to Rs 946 levels at 12:30pm. It hit a high of Rs 953 and a low of Rs 940 in intra-day deals. That’s because markets expect Infosys to bounce back from this setback, which they feel is temporary.

“With the Indian IT industry undergoing transition, we believe stability within senior leadership is crucial. While Mr. Dadlani’s exit may hamper short?term momentum in manufacturing and the already struggling CPG verticals, we believe lateral promotions of Mr. Vaswani and Mr. Banga along with assistance of other senior executives, will help Infosys tide over the exit,” the Edelweiss research note says.

Meanwhile, reports suggest that Infosys may not be able to achieve its ambitious target of $20 billion in revenues by the year 2020 amid a challenging business environment that has seen the IT industry lay of hundreds of employees over the last few months. 

Infosys, while announcing its Q4FY17 results, had also made changes to its capital allocation policy. Starting FY18, it plans to use 70% of its free cash flows for paying dividends or buying back shares. That apart, the Board decided to pay Rs 13,000 crore to shareholders by way of dividend or buyback during FY18, subject to necessary approvals.

Going ahead analysts at Jefferies feel that news on promoters potentially selling stakes and pricing pressure have added to the negative sentiment. 

The promoter group together holds 12.75% and despite the denial this will remain an overhang, they say.

The company has clarified that it is not seeing any pressure on rate cards and that clients asking for a 20-30% cost takeout over three - five year duration of the contract has been the norm over the past few years during renewal.

"Expectations of 7-8% revenue growth for FY18E are well set and carry low probability of further disappointments, in our view. Our 12-month price target of Rs 1,100 is based on 15x multiple applied to FY19E EPS. Revenue guidance has set growth expectations with Infosys being best placed of digital versus peers. Maintain a buy rating. Weak macro, higher competition, stronger rupee, however, are key risks," points out Vaibhav Dhasmana of Jefferies in a recent note.

Edelweiss, too, maintains a buy rating on the stock with a price target of Rs 1,173.

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