Podcast | Editor's pick of the day - Latest Exfosyian: CFO MD Ranganath quits

But what does this exit mean to Infosys? Who will be the fourth CFO of the country’s second largest IT services firm in as little as five years? Does Infosys have an attrition problem that only seems to grow? How did industry watchers view this development? How did the stock market react to the news? (Hint: not well.) These will be among the questions we will aim to answer on our Story of the Day. My name is Rakesh, and you are listening to Moneycontrol.

Ranga out

Ranganath’s resignation from the post of CFO was accepted by the Infosys board of directors on Saturday, the 18^th of August. He will remain CFO until November 16. “The Board will immediately commence the search for the next Chief Financial Officer,” Infosys said in a statement. A likely replacement for Ranganath, according to Mint, is current Deputy CFO Jayesh Sanghrajka, although the possibility of an external candidate is not ruled out.

"After a successful career spanning 18 years in Infosys, including as CFO for the last three crucial years, I now plan to pursue professional opportunities in new areas," said Ranganath in a statement. He added that he was proud that over the last three years, during a critical phase of the company, "We delivered strong and consistent financial outcomes, maintained high standards of financial reporting, built a world class finance team, further strengthened the company’s competitive position and thereby enhanced value to the stakeholders."

Our own Neha Alawadhi reporting for Moneycontrol, went on to say, "Ranga, as he is affectionately called, has been a part of the Infosys Leadership team during his tenure at Infosys and has played several leadership roles in the areas of consulting, finance, strategy, risk management and M&A and has worked closely with the Board and its committees in formulating and executing strategic priorities for the company."

NR Narayana Murthy – a man at the heart of the conflict in the Sikka kissa as widely reported – was certainly full of warmth and good wishes for Ranganath. He said in a statement, "I have worked with Ranga for over 15 years. He is clearly one of the best CFOs in the country. His ability to take tough decisions in challenging situations, his solid financial expertise, strong value system, unfailing courtesy and flawless execution always distinguished him as an exemplary leader and a key asset for the company. He has been instrumental in raising investor confidence in the company during the last five years by managing costs and margins. He is a rare individual who understands all important stakeholders — clients, delivery teams, employee aspirations, finance, investors, governance, the law, and the role of an ethical business in building a better society. He is everything the idea of Infosys has always stood for. His departure is an irreplaceable loss for Infosys at this critical juncture. I wish him the best in his future endeavours."

"With Ranga as CFO, the company has, in the last three crucial years, delivered a strong and resilient financial performance on multiple fronts, implemented an efficient capital allocation policy, and earned the respect of all stakeholders through enhanced value creation," said Infosys Chairman Nandan Nilekani.

CEO Salil Parekh asserted the crucial role Ranganath played. "Ranga played a crucial role as the CFO and provided strong leadership for the company. I am confident that over the next few months, Ranga will ensure a smooth transition. I thank him for his lasting contribution and wish him all the best," Parekh said.

"We see three possible factors that could have triggered the exit. One, Mr Ranganath wanted to pursue CEO’s role, which was ruled out at Infosys post the appointment of Salil Parekh. Second, Infosys’ reversal in its strategy of choosing growth over profitability (conflicts with CFO’s function); and third, the exceptional payouts (over 100 per cent in FY18/19) as against investments for future growth," said Rahul Jain and Devanshu Bansal of Emkay in a report, as quoted by Puneet Wadhwa, writing for Business Standard.

Industry watchers have remarked that it is quite unusual for a CFO to leave without the board having already found a replacement. While the parting of the ways seems amicable, it certainly did come as a surprise to many. Shriram Subramanian, Founder and MD of InGovern Research Services, said the announcement was "completely surprising". "One was hoping Infosys would have stability at least at CFO level," he said. Subramanian added that Ranga was seen as an Infosys loyalist, and that he doesn't believe there is any other opportunity out there like Infosys.

Ranganath's exit is only one aspect of what we want to discuss today. The Infosys foundation seems to be experiencing a series of minor earthquakes with multiple high profile exits in the past three years. The biggest one was of course Sikka's last year. But the exodus has been steady even before the Sikka episode. Let’s investigate this a little closer.

'Ex-Fosys'?

There has been trouble at the top in Infosys for a while now. Only recently, about two months ago, Sangita Singh, who was executive vice president and head of the $750 million healthcare and life sciences business, quit. The head of the manufacturing vertical, Nitesh Banga, had quit around the same time. An Infosys employee of 26 years, Rajesh Krishnamurthy, who was President and Head of Europe, quit earlier in January as well. 2017 saw the exit of Sandeep Dadlani (President, Head of Manufacturing, Retail, CPG, and Logistics); Abdul Razak (Head – Platforms, Big Data and Analytics); and six other top executives, in addition of course to Vishal Sikka. The very public spat between Sikka and co-founder Narayana Murthy later led to a split opinion between the Board as well. After Sikka’s departure, several Board members also left, including the former non-executive chairman of the Board, R Seshaaayee. Ravi Venkatesan, former independent director of the Infosys board, also left in May, citing more exciting opportunities. In 2016, Infosys bled seven top executives from its rank and file.

Attrition at the senior management level has now become a problem for Infosys. Analysts believe a lot else about the company is on the right track. They believe that everything -- from total contract value (TCV) of large deals and scale-up of large clients -- has been going right for the software firm except attrition. In the March quarter, attrition was 16.6% only to rise to 20.6% in the June quarter. Some analysts see this exodus as a part of Nilekani and Parekh’s strategy to fixing governance and operational issues. Yet still, there are others who believe the exits are due to the perceived lack of a coherent vision in the changing IT world.

Vivek Wadhwa, distinguished fellow at Carnegie Mellon University Engineering at Silicon Valley, and an industry watcher was quoted as saying by the Times of India that this phenomenon was not surprising. “This is to be expected as the company reinvents itself – it badly needs to. The next few years will be most traumatic for Indian IT as the markets are changing rapidly along with technology. There need to be dramatic changes in the service offerings as well as management of Indian IT. The Leadership Institute (of Infosys) and curriculum are surely dated.” It was a sentiment echoed by Vijay Govindarajan, Coxe distinguished professor at Tuck Business School at Dartmouth University, who said a similar churn was afoot at Silicon Valley start-ups as well as digital giants.

There also appears to be certain institution-based confusions at Infosys as outlined by Nirmalya Kumar, Lee Kong Chian, professor of marketing at Singapore Management University and distinguished fellow at Insead Emerging Markets Institute, who said, “The recent departures, not necessarily of the CFO, is symptomatic of the problem that it is not clear as CEO/CFO whom do you report to? The Infosys board, or Narayana Murthy, or both? Who is in charge? Despite having no formal governance role, Murthy clearly does not shy away from attempting to run the company through press pronouncements. It is depressing to see someone who was previously seen as a legitimate Indian corporate icon attempting to sabotage their own creation.” He also believes that Infosys will struggle to attract good talent given the excess of great opportunities in the changing tech world now.

Analyst-speak:

For the quarter ended June 30, 2018, the company reported a net profit of Rs 36.12 billion, up 3.7% YoY. The company announced a 1:1 bonus – that is one bonus share for each share held by investors – and maintained the FY19 constant currency (CC) revenue guidance at 6% from 8%. It, however, cut its earnings before interest and tax (EBIT) margin guidance by 100 basis points (bps) at 22%.

Infosys has outperformed the markets by gaining around 37% in calendar year 2018 (CY18), as compared to around 9% rally in the Nifty50 and 30% rise in the Nifty IT index, according to ACE Equity data. Its market-capitalisation (market-cap) hit Rs 3 trillion mark for the first time in intra-day trade on July 16.

Analysts at Emkay believe the run-up in the stock despite weak growth guidance for FY19, declining margin outlook, distress sale of digital assets (Kallidus, Skava, Panaya etc), personnel exits and modest Q1FY19 performance is unwarranted. They believe the stock would see a structural de-rating in the coming months and maintain ‘sell’ rating with target price of Rs 1,040, as reported by Business Standard.

"The churn in the top level continues and the recent development caught the markets by surprise. The CFO’s exit was least expected. The overall attrition in the company in the June 2018 quarter has been high. Over the past three months, the rupee depreciation has also aided the rally and inspired confidence on earnings trajectory. However, Infosys is trading at an expensive valuation of 18x FY20 earnings. The markets will not take any negative surprises lightly going ahead," says Madhu Babu, an analyst with the institutional equities division at Prabhudas Lilladher.

Even though analysts at Motilal Oswal Research have a buy rating on the stock with a price target of Rs 1,600 that discounts the forward earnings by 17x, they believe the recent rally hardly leaves any room for negative news and the ensuing distraction to business. They, too, expect the stock to lose some of the steam that had built up in the recent past.

G Chokkalingam, founder and managing director at Equinomics Research does not recommend a fresh investment in the stock at the current level given the development and the recent run-up in the counter. (All analysts’ opinion as reported by Business Standard)

Motilal Owal said in a note, "The rally in Infosys stock hardly leaves stomach for news of continued rebuilding of the top leadership and the ensuing distraction to business. Hence, we would expect the stock to lose some of the steam that had built up in the recent past. Our price target of Rs 1,600 discounts forward earnings by 17 times. We have a Buy rating on the stock."

At the end of market hours on a record-breaking today otherwise on Dalal Street, Infosys defied the market sentiment and ended 3% lower, in the process eroding 10,079.73 crore rupees from the company’s market capitalisation. During the day, Infosys after opening on a weak note at Rs 1,388.70, and later tanked 4.03% to touch an intra-day low of Rs 1,373.55. At close, the stock was quoted at Rs 1,385.20, down 3.22% on BSE. Similar movements were seen on the NSE as well. The stock opened at Rs 1,388.00, then fell 3.97% to a low of Rs 1,373.50 and finally settled at Rs 1,388.20, down 2.95%.

Ranganath’s legacy at Infosys

Ranga’s exit was not received warmly by the stock markets, but the man himself, by all accounts, was received warmly in the Infosys family – his (alleged) not gelling well with CEO Salil Parekh notwithstanding. During his tenure, Infosys Ebit margins remained steady as it fell only 70 basis points to 24.3 percent in FY18, from 25 percent in FY16. Cash generation remained strong during the period, with OCF margin at 17.2 percent and OCF to Ebitda margin at 63 percent.

Urmil Shah of IDBI Capital, speaking to ET Now, said, “"Ranga has been instrumental in making sure the financial performance, especially the margin profile and also on capital allocation the performance remains quite good in the last few years when there have been a lot of changes at the CEO level. So, to that extent, it is definitely negative in the short term. But Infosys has demonstrated that it is a fantastic institution and it has managed the changes at the CEO level and seen other senior exits quite well. So, we believe that it should not have a material impact on the medium to long term performance."

We wish Mr Ranganath a happy rest of the stay at Infosys and greener and more fulfilling pastures come November when he exits the company he helped grow for eighteen long years.