Infosys Loses Sikka: Whoever May Be At Fault, The Investor Got Hurt

Investors in Infosys Ltd. got a rude jolt this morning. The Bloomberg Terminal flashed in red three simple but grave words ‘Infosys: Sikka Resigns’. Grave, because a man who was inducted at the behest of founder NR Narayana Murthy was signing off mid-way through his tenure, because of Murthy. Grave, because the stock fell the most since April 2013, and wiped out almost Rs 22,000 crore of market capitalisation in a single trading session. Grave, because there is no clarity on who will start leading this ship again, and when. Yes, there is an interim chief executive officer, but he may not be the leader that the board wants. The board members mentioned there is a need for a ‘charismatic’ CEO. Grave, because there was dirty laundry that was hung out to dry, in the form of public statements made by both the company and its founder.

An average investor loses out here. Infosys had done reasonably well under Vishal Sikka and things had started to look up.

  • The stock had gained 22 percent since Vishal Sikka took over, which is much better than the 6.3 percent return given by the Nifty IT index or what stocks like Wipro Ltd. or Tata Consultancy Services Ltd. have done.
  • Revenue for the company has grown 11 percent on a compound annual growth rate in his tenure, and margins have gone up from 23.9 percent to 24.7 percent.
  • Infosys beat the EBIT margins clocked by TCS last quarter, for the first time in many quarters.
This is a decent record, and while people have been saying that the stock hasn’t gone anywhere, I urge them to look at what the others have done. Precious little. 

So whose fault is it that the dice rolled the way it did? Does it matter really? What matters is the damage to the stock and the potential damage to the company. Infosys closed 9.5 percent lower on Friday, though investors know a buyback is on the anvil. It slipped from the list of the top 10 most valuable companies in India by market capitalisation, intraday, with some serious damage to its reputation in the near term.

BloombergQuint spoke to Sudin Apte of Offshore Insights and he categorically stated that he would ask his clients, who are also clients of Infosys, not to give further business to the company until there is clarity on leadership and the way ahead. Maybe, some other clients feel that way too, and investors will keep this at the back of their minds before they make a decision to invest in the stock.

The fund manager of a large asset management company which holds the stock told BloombergQuint on condition of anonymity that the rift started with the Panaya acquisition and only got wider over time. The fund manager sees Infosys now as a driverless car which needs a strong hand to stay the course. If one of the old promoters like Nandan Nilekani takes over, it will restore faith, he said.

Ambit Capital, in its interaction with BloombergQuint, said that it took out the ‘Buy’ rating that it had on the stock just four days ago because it was not in a position to forecast the future of Infosys. Can’t blame them, can we?

Also Read: Asset Manager Ashburton With Large Stake In Infosys Is ‘Considering Options’

The press release by the board, just ahead of the investor call, made some serious allegations against Murthy, and just showed how fractured the board’s and Sikka’s relationship has become with the company’s founder. The stock would have digested these differences, as it had for the last few months. But Sikka’s resignation has changed that equation, ever so slightly, but so powerfully.

A company which had arguably just started finding stability again, had a settled top leadership after being in a state of flux for a long time, is now without a man at the helm. 

The board mentioned categorically, in the analyst call, that Vishal Sikka’s vision is now the company’s vision. Just that he no longer will be there to drive it. The hunt for a CEO is on. But the most interesting comment on this came from Ravi Venkatesan, co-chairman of the board, who expressed hope on the analyst call that the brand name and momentum of business that Infosys has would hopefully give a CEO candidate ‘courage’ to take up the role. Not the scope of work, not the challenge of the sector, but courage!

Niraj Shah is Markets Editor at BloombergQuint.

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