Another crisis is knocking at the door of
Infosys, barely days after the company looked to be on the growth path, having completed its guided investment in order to be ready for the emerging environment.
A few anonymous employees of Infosys have accused its CEO Salil Parekh and CFO Nilanjan Roy of unethical practices for many quarters. The whistleblowers have alleged that employees have been instructed not to share large deal information with auditors.
Even more worrying is the fact that these whistleblowers who are calling themselves 'ethical employees' had sent a 2-page letter to company's Board of Directors on September 20 that did not elicit any response. Subsequently, a letter was written to the US-based office of the Whistleblower Protection Programme alleging wilful mis-statement and material accounting irregularities for the past two quarters (April-September).
What lies at the heart of the allegations is serious fudging of numbers by the top management to inflate profits and ensure share price performance. As per the allegations, revenue recognition has not been as per accounting standards, costs have been suppressed and in large deals, reviews and approvals are being bypassed and wrong assumptions are being made to show margins. According to the whistleblowers, several billion-dollar deals in the last few quarters have zero margins. Fingers have been pointed at the CEO's personal trips at the expense of the company as well. According to these employees, the management has shared only a rosy picture of the company with the board, investors and analysts, and key information has been deliberately withheld. In fact, according to the whistleblowers, Infosys treasury has also made changes to policies and taken extra risk to show higher profit.
Incidentally, Infosys has been a big outperformer in the past one year on the back of its improved execution and deal momentum.
In recent times, the Street had been comforted by the acceleration in revenue momentum – especially in the past two quarters. In the quarter gone by, Infosys also managed to
improve margins by 120 basis points sequentially and guided for an improving trajectory.
Source: Company
Large deal momentum has been strong and that had given the management the requisite conviction to up its full year revenue guidance for FY20.
With the allegations, every number coming from the company will be treated with suspicion. In fact, the reported numbers will completely lose credibility. The developments at Infosys remind us about whistleblower's allegation at a leading financial institution that resulted in the ouster of its CEO last year. In fact, after much delay, the board of that institution had to appoint an independent Committee to look into the allegations to assuage disgruntled stakeholders.
For a company like Infosys that was known for its “ethical practices”, this is indeed a massive blow. The founders may again have to step in to douse the fire. In fact, investors might question if the exit of ex-CFO Ranga, a highly respected professional in the industry, had anything to do with his discomfort with such practices of the new CEO.
In a nutshell, what investors should remember is that these developments are bound to impact performance, the company's image with clients, and deal flow as well as employee morale when the sector is facing tumultuous times due to global macro uncertainties.
Infosys will be in the midst of turmoil and uncertainty that will impact its fundamental performance. In a highly competitive environment, this will benefit peers and result in a vicious cycle which might make it difficult for Infosys to rebound in the short-term. We advise investors to completely avoid Infosys till the dust settles.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
