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:

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- 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;

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.