Infosys results will be about Nilekani's strategy & improving on the Sikka legacy

Infosys

Shishir Asthana Moneycontrol Research

Anxiety levels ahead of Infosys results are always high. It explains why the ‘straddle option strategy’, where a trader buys a call or a put option in anticipation of a sharp move on either side post the announcement, is conveniently placed around that time. Any deviation from the expected numbers causes a sharp reaction in the stock price. If the profits are in line with the expectation the market looks for other reasons to move sharply, like the company's guidance or its operating margins or attrition rates.

This time around, however, anxiety levels are a tad higher but not on account of what profits the company will be announcing but rather on every issue other than those numbers. The fact that the company has, perhaps for the first time in recent memory, delayed announcing its results much later than market leader TCS has only increased the suspense.

The September quarterly results will be the first quarterly numbers after a change of guard took place in Infosys where a publicly fought boardroom battle resulted in Vishal Sikka resigning from his position as the head of the company. He was immediately replaced by one of the co-promoters Nandan Nilekani who ‘agreed’ to take control of the company till a suitable CEO was found.

Nilekani’s gameplan on how he and his co-promoters would like to steer the company will decide the direction of the company’s stock movement.

The reason ex-CEO Sikka was brought to head the organization was because the co-promoters all had their chance at running the company and could not align the company to the fast changing shift in the business model of the information technology sector. Sikka, with his international exposure, brought about many changes in the company and tried to steer it towards digitization, artificial intelligence and products as against the conventional low-end body arbitrage model that the company had been following.

In doing so Sikka managed to bring down attrition rates in the company from a peak of 24.8 percent (consolidated) to 18.4 percent during his tenure. A shift in offerings also resulted in the company improving its operating margins and shifting from a back-office help to one that offered consulting services and customized product offerings.

However, before Sikka could achieve his target of reaching a 30 percent operating margins, revenues of USD 20 billion and employee productivity at USD 80,000, the public mud-slinging led by co-promoter Narayana Murthy against Sikka and other board members forced him to resign.

What markets would now like to see and hear from Nilekani is the new team’s change of direction from Sikka’s model. It’s a Catch-22 situation for Nilekani and his team as any major deviation from the earlier model, especially if the new model takes the company back to the ‘commoditised business of software development’, will rattle investors and suggest that the co-promoters lack ideas and are behind times. On the other hand, if there is no change in business model, questions will be raised on why was Sikka removed if his business model was robust.

The media would like to question Murthy’s silence post change of guard as none of the reports and allegations that he wanted to be made public have been disclosed. Expectations will be high on the details on the Panaya acquisition which had been a sticking point with Murthy. Details will and should be sought from the new management. If the allegations are true then why no action should be taken against the old members of the board and if they are false then what is the locus standi of the new team? Corporate governance in Infosys will be put to test during the quarterly results interaction.

Infosys’ September 2017 numbers will be a footnote in what is likely to be an interesting endgame to Sikka-Murthy battle.

However, the buyback announced by the company will offer downside cushion to the stock price but at the same time will make the buyback interesting. It will be interesting to see how many funds would be interested in holding on to the shares which they have recently purchased.

The promoters, despite the promise of a bright future for the company being allegedly unfulfilled by Sikka and his team, want to reduce their stake by participating in the buyback when their own team is calling the shots. This surely calls for cross-examination.

Finally, the market would like to know who would be replacing Nilekani as it has been publicly announced that a new CEO will be appointed not after March 2018. Given the treatment that was bestowed on Sikka, it is very unlikely that a free thinker would be interested in the job. Any insider would be a mere figure-head. So much for corporate governance.

September 2017 results commentary will mark the start of an important chapter in Infosys. All stakeholders will be dissecting every word that Nilekani and his team uttering tomorrow searching for an answer to the question – was the boardroom melodrama necessary.