Brokerages Downgrade Infosys Stock; Should You Buy?

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The buyback of shares announced by Infosys on Saturday failed to provide any support for the stock, as investors continued to dump the stock. Infosys was down another 4 per cent, following a 10 per cent slump seen on Friday. This means a loss of 14 per cent in two trading days.

What brokerages are saying?

Brokerage firm CLSA has said that there is a possibility of more senior level exits happening at the company. As a result of Sikka's exit, Infosys' deal wins, client mining and execution are likely to be under pressure as the focus will remain internal and the company's strategy will remain undecided, the firm was quoted by Economic Times as saying.

Emkay Global has said that given the exits of several key personnel in the last three years, the bigger dilemma will be to get a replacement as there are not many choices internally and finding an external candidate will be a challenge. Check stock quote here

Tendering your shares in the open offer

The buyback of Infosys was announced at a price of Rs 1,150 per share, against the prevailing price of Rs 886. It would be better to opt for the buyback offer, given the huge premium to the market price. This is also because nothing much is going to change structurally given the tough environment and the prevailing conditions at Infosys. Margin squeeze and client spends are unlikely to be too great going forward. While the benchmark indices are substantially up this year, the Infosys stock is down.

Institutional investors lose heavily

Many institutional investors, including Foreign Portfolio Investors, domestic institutions and mutual funds have lost heavily in the recent price destruction. Every large equity mutual fund has a holding in the company and the loss is likely to be tremendous. Unless, there is a swift replacement and capable replacement for Sikka, it is difficult to see how the stock could recover. An internal replacement may not be good enough.

Valuations

While valuations of Infosys maybe inexpensive at a p/e of 15 times one year forward earnings, investors are worried if the company can maintain profitability given the Sikka exit and worries over winning fresh business. However, if the stock falls a great deal there could be some buying that may emerge at lower levels.

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