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Should You Buy Or Sell The Infosys Stock After Whistleblower Allegations?
Good Returns | 23rd Oct, 2019 10:22 AM

Just when investors seem to have forgotten issues pertaining to Vishal Sikka's exit, questions are now being raised over corporate governance standards at Infosys.

One Board member received two anonymous complaints on September 30, 2019 one dated September 20, 2019 titled "Disturbing unethical practices" and the second undated with the title, "Whistleblower Complaint."

The undated whistleblower complaint largely deals with allegations relating to the Infosys CEO's international travel to the US and Mumbai. Additionally, on October 16, 2019 the Company was made aware of a letter dated October 3, 2019 which was purportedly written to the Office of Whistleblower protection program, Washington D.C.

This letter refers to the September 20, 2019 complaint, and to emails and voice recordings in support of the allegations.

One letter also states, "In (the) last quarter (July-September), we were asked not to fully recognise costs like visa costs to improve profits. We have voice recordings of these conversations,"

In any case, there are few more allegations in the whistleblower letter.

Should Infosys shareholders hold the stock?

The shares of Infosys plunged 16 per cent on Tuesday, following the whistleblower allegations. While the allegations are serious, Infosys has appointed a law firm and an audit firm to look into the same. One will have to wait to see what comes out of the investigations.

Investors should really worry whether things will change fundamentally after these allegations. To begin with the allegations are not likely to see too much of an impact on the bottomline of the company.

However, if perception of poor governance gathers steam, Infosys might find it difficult to win new clients and retain contracts. The resignation of the Deputy CFO last week has only raised concerns further, though it may not be linked to the present whistleblower allegations.

There are now reports that a US law firm is preparing class-action suit against Infosys, which could put further pressure on the stock. There could be a sudden re-rating of the stock and we could see price to earnings multiples contract.

The one thing that investors would need to wait for is the conclusion of the investigations. One is not sure what could come out of these allegations. It would be nice if Infosys could specify a clear time by which the investigations could be complete. At the moment, you might not want to bet on the stock, unless there is a further sharp re-rating.

The outcome of the investigations could also lead to uncertainty at the top, which could have an impact growth. Credit Suisse has given an underperform rating on the stock, while UBS says it remains neutral.

However, at the current price of Rs 643, we still see an element of risk of price to earnings multiple shrinking. There could also be a bounceback in the stock on short covering rally, which should be used to sell the stock.

Should the stock fall a good 10 per cent from here, it could become attractive for its dividend yield. Is all about entering the stock at the right price and that could be a dip below Rs 600.

Infosys, still gives a dividend yield of around 3.5 per cent, which is as good as interest on a savings bank account.

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