Madhuchanda Dey Moneycontrol Research
On expected lines, shares of Infosys cracked as investors digested the impact of CEO Vishal Sikka’s resignation. Such steep corrections happen in many companies and some of these crises turn out to be great investment opportunities in hindsight. Will Infosys be a case in point or should investors wait it out for a clearer picture to emerge?
In every corporate spat, the biggest price is usually paid by the minority shareholders and Infosys is unlikely to be any different.
Dr Sikka Delivered
The Board and the management had delivered a decent performance under Sikka. While not ahead of the curve, Infosys, nevertheless understood the change in IT landscape on time. Credit goes to Sikka for spearheading the transformation initiatives. Most of the efforts on digitising the company and finding traction in software like NIA, Panaya, Skava and Edgeverve have started showing early results. The first quarter result was a testimony to early success and investors had hopes that the IT bellwether was on the right track in its transformation journey.
Payout the only sweetener
There was more for the shareholders as the Board had clearly articulated a pay-out policy that includes dividend of up to 50 percent of post-tax profits and up to 70 percent of free cash flow. In FY18, the company intends to return close to Rs 13,000 crore to the shareholders that works out to over 5 percent dividend yield. This could protect near-term downside especially if the company decides to conduct the pay-out with a partial buyback at an attractive price point.
Board without power
For existing investors, this could perhaps be the only solace. In a conference call post the resignation, the Infosys Board stood united with Sikka, lauded his achievements, sounded confident of no wrongdoing that was highlighted by the founder, but could do nothing to prevent Sikka’s resignation and hence, protect the interest of the minority shareholders of the company.
Future performance to feel the heat of this resignation
The invisible hand of the founders seems to be playing a larger role in the company. As long as the spat continues, one shouldn’t pin high hopes on performance.
Today, nobody knows who calls the shots at Infosys. Certainly, neither Sikka, nor Chaiman R Seshasayee or Co-Chairman Ravi Venkatesan. What are founder and activist shareholder Narayana Murthy’s intentions? This is precisely the reason why shareholders have got to be worried.
In the next couple of months Infosys will begin the hunt for the “perfect bride”, one who is acceptable to the founders, understands the culture of Infosys well, and can navigate through the transformation in technology landscape. Prima facie, this looks like a tall ask.
The Board has admitted that the task of finding the new CEO might not be easy. A talented outsider of Sikka’s calibre will be wary of joining the company in view of the dirty laundry that was washed in public over the last few months. Even if an internal candidate were to step in, a repeat of the same situation cannot be ruled out since every decision has, seemingly, to be vetted by the (non-executive) founders.
If investors recall, Infosys under Murthy was exceptionally cautious about inorganic growth, at times attributing it to their middle-class upbringing and hence, wary of paying a high price. The technology landscape has undergone a drastic change from that time and inorganic growth is central to the future strategy of all leading IT companies. So the constant meddling by the founders will be detrimental to business, notwithstanding who takes over from Sikka.
Meanwhile, the spat which is out in the open has a bearing on customers as well as employees. With a clear vacuum at the top, Infosys faces the risk of losing clients in the highly competitive landscape. The environment would not augur too well for innovation (one of the USPs that Infosys was claiming in the past couple of years) that might lead to attrition of top talent.
Unless Murthy and the Board put an end to the conflict once and for all, shareholders would find it difficult to spot the shore from this rudderless ship.
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