Stock attractively valued given strategic direction is unchanged and business momentum robust
Co-founder Nandan Nilekani was appointed Non-exec Chairman of the board, with current Chairman, ex-CEO and two independent members stepping down. This brings stability to the board, alleviates acrimony with the founders leading to CEO exit last week and eases concerns of potential CEO candidates, the next step in the repair. Stock remains attractively valued given that the strategic direction remains unquestioned and business momentum sustained, maintain Buy. Co-founder appointed Chairman: Infosys board has unanimously appointed co-founder Nandan Nilekani as the Non-exec Chairman of the board with immediate effect. Nandan was the CEO of the company in 2002-07 and was instrumental in the growth, margin and thought leadership that the company enjoyed during the time. His performance as CEO in the past and stint as Chairman of UIDAI (Unique Identification Authority of India) brings a lot of credibility, and stability to the board.
Other changes to the board, bringing an end to most recent controversies: Along with this appointment, the Chairman of the Board (R Seshasayee), Vishal Sikka (ex-CEO and exec-VC) and two independent directors (Prof Lehman and Prof Etchmendy) have left the board. We believe this should bring to rest questions which the founder had raised and therefore put an end to the noise that would have been expected to increase post the exit of the CEO.
Should improve CEO search process, strategic direction should remain intact: As highlighted in our note post CEO exit, Infosys’ near term challenges include finding a new CEO, finding closure to the ‘founder issues’ and maintaining business traction. Even as the long term strategic direction should remain unchanged, each of these risks has been alleviated with the new Chairman’s appointment. Stability of board is a positive sign for the potential CEO candidates, founder issues have effectively been laid to rest given that most ‘blamed’ people are now out and the co-founder has taken charge, and client and employee retention should be better. Valuation/Risks: Any incremental news of stability would have been good, and in that context appointment of Nandan as the Chairman is a key positive. With valuations near 5-yr low, strategic direction likely to remain unchanged and near term business momentum robust, maintain Buy with PT based on 15x FY19E PE. Risks: Weak macro, higher competition, stronger INR.