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Advantage Wipro, TCS now. But Infy crisis can dent confidence in Indian IT

If the whistleblower complaint against the top management of Infosys turns out to be true, the entire IT sector could feel the heat. However, select names among them could gain in the near term at the expense of Infosys.

Analysts expect TCS and Wipro to gain, as funds flowing out of Infosys will look at them. The initial flow was already seen on Tuesday, after Infosys tanked as much as 19 per cent in Mumbai trade, while TCS and Wipro logged solid gains.

The fallout “should be very positive for Wipro. I have a ‘buy’ rating on Wipro, as we know the management quality there. TCS and Wipro would be two gainers from the problems at Infosys,” said Sajiv Bhasin, EVP for Markets at IIFL.

At 13.08 hours (IST), Wipro shares traded 1.7 per cent higher at Rs 253, while TCS shed initial gains to trade 0.3 per cent lower at Rs 2,050.

Bhasin sees contagion effect on the entire sector in case there is any truth in the complaints at Infosys. “We will know only when the investigation happens. If there is some truth in the complaint, then it will weaken the entire IT sector. It’s a glass half-full and half-empty kind of situation right now,” he said.

Sanjeev Hota, Vice President and Head of Research at Sharekhan, said it would have a sentimental impact on the entire IT sector. “The accusations that have been made are very serious. The overhang will there till the time clarity emerges. Infosys will continue to be under pressure,” he said.

He believes the crisis at Infosys will shift trade to TCS or Wipro.

A group of employees in a letter to the Infosys board accused its Chief Executive Officer (CEO) Salil Parekh and Chief Financial Officer (CFO) Nilanjan Roy indulging in "unethical practices" to boost short-term revenue and profits.

In a statement, Infosys Chairman Nandan Nilekani said the company's audit committee would conduct an independent investigation on the whistleblower allegations. The committee began consultation with independent internal auditors E&Y, and has retained law firm Shardul Amarchand Mangaldas & Co to conduct an independent probe, Nilekani said in the statement.

AK Prabhakar, Head Research at IDBI Capital, downplayed the severity of the whistleblower complaint. He said there is no fraud, just aggressive reporting of numbers.

“This is not the first time it has happened. Earlier also there were complaints (against ex-CEO Vishal Sikka). It is not a very serious complaint. It is not like they have taken the money out. The accounting has been slightly aggressive. That is what whistleblower has complained of,” he said.

Infosys last fortnight reported a 2.2 per cent drop in consolidated net profit at Rs 4,019 crore for the July-September 2019 quarter. Top line increased 9.8 per cent to Rs 22,629 crore from Rs 20,609 crore in the year-ago period.

Infosys also raised the lower end of its revenue guidance for FY2019-20 and the revised forecast now stands at 9-10 per cent growth in constant currency terms.

Prabhakar compared Infosys accounting policy to those at TCS and said the latter has a very conservative approach. “If you see the earnings, TCS’ receipt was below expectations and the guidance was muted. They have never been aggressive. Normally, Infosys is slightly aggressive,” he said.

However, Prabhakar agreed that money for the IT sector will now flow to Infosys’ peers like TCS.

Bhasin feels a hint of foul play in the complaint. “The market is in a mode where people have taken the advantage of capitulation and rumour mongering. We have seen that in the case of DHFL and Indiabulls. It may be a spread-out effect on Infosys, which is a pedigree stock. However, it is something hard to believe. We will be in a situation to comment further when we have more details of the investigation,” he said.
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