Check list of allegations against Infosys by whistleblowers

Examining the entire la affaire Infosys, Dalal Broacha Research says that in light of the recent developments, the Infosys management has been accused of the following allegations by whistleblowers:

- Unethical reporting and accounting practices - i.e. aggressive revenue recognition and delays in expense recognition to manipulate actual financial performance. For example:

a. Reversal of $50 Mn in an FDR contract was not recognized;

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b. Visa costs are not fully recognized;

c. Margins in certain large contracts are much lower than expected and zero in certain cases;

- Risky bets taken by Treasury to boost other income;

- Biased and incomplete reporting in investor presentations and annual reports;

- Critical information is undisclosed from Board to report boosted short term profits and performance;

- CEO and CFO bypass critical reviews and approvals in large deals and have irregularities.

As of October 23, 2019 and as per news flows, the following developments have transpired:

- Company issued a clarification on the same day that the matter has been sent to the audit committee for further investigation;

- Law firms (KSF LLC and Rosen Law Firm) have commenced investigations based on whistleblower allegations;

- Company has hired Shardul Amarchand Mangaldas for an independent investigation;

- CEO and CFO were questioned during October 11 and have denied allegations.

What scenarios can play out?

Best Case Scenario: Allegations are false and management is free from all accusations ? Current Management retains its position and carries on business as usual;

Worst Case Scenario: Management is found guilty ? Board fires the current management ? SEC and other law firms continue investigation into operations; High probability of law suits and settlement claims against management/company; Eventually board will replace current management

Our Take

We believe that in either scenario that plays out, company`s operations should eventually stabilize and bounce back, irrespective of the management. During Sikka vs Founders time, Infosys had fallen to 12x?13x forward. However, 2 years on, operations stabilized and stock bounced back to solid valuations.

For marginal risk taking investors, we recommend to buy the stock at 14-15x PE, which is between Rs 590-633.

For safe investors, it is recommended to shift to TCS in technology space due to solid reputation, strong parentage and industry leading profitability and performance.