Infosys faces ample real risks, it needn’t worry about fake ones
Early last week, Infosys Ltd made a laughable addition to the list of risk factors for its shareholders: it said that actions of activist shareholders could impact the trading value of its securities. Infosys’s decision to categorise this as a risk factor is ludicrous, especially at a time when peer Cognizant Technology Solutions Corp. has embraced nearly all suggestions given by activist shareholder Elliott Management Corp. Bloomberg Gadly columnist Andy Mukherjee has articulated well why Infosys’s move is plain silly.
As luck would have it, later in the week, a far more credible risk factor emerged at the company. Infosys announced that one of its top executives, Sandeep Dadlani, global head of the manufacturing, retail, consumer packaging and goods and logistics units, had resigned. Dadlani oversaw over a third of the company’s business, and his exit is the latest in a series of jolts the company has faced in recent months.
According to this Mint report, nine executives of the rank of executive vice-president and above have quit Infosys since Vishal Sikka took over as Infosys’s first non-founder chief executive officer in August 2014. And at least in some quarters, this is being construed as a vote against the new CEO’s strategy.
Besides, Mint reported earlier this month that Infosys has dropped its aspirational target of achieving $20 billion in revenue by financial year 2020-21. Then there were news reports that the company’s founders plan to sell their stake in the company.
And as if the flow of negative news wasn’t enough, chief operating officer U.B. Pravin Rao added to the mix by stating that clients are asking for a so-called cost takeout of 20-30% of contract value in traditional services, with the view to reinvest it in new technology solutions. While the company later clarified that this doesn’t mean there is pricing pressure, that’s what a part of the Street concluded anyway. After all, like most Indian IT companies, Infosys gets a much larger proportion of revenue from traditional services than from new areas such as digital solutions.
To say that investors have been apathetic towards Infosys shares is an understatement. They have corrected by over 22% in the past year, or about double the rate at which the Nifty IT index has fallen. Besides, the Infosys stock has given up about 70% of its gains since Sikka’s appointment was announced in June 2014.
An analyst at a multinational brokerage, a staunch cheerleader of the firm until recently, says he now has doubts about the company’s strategy and execution. Based on his analysis, Infosys’s June quarter results are likely to be weak, which can further dampen sentiment for the stock, he adds.
In this backdrop of slowing growth and pressure on earnings, it might be tempting for the company to put some of the blame on the “distraction caused by activist shareholders”. But even if it finds sympathy from some of its investors, it barely hides the fact that the company has other challenges that are far bigger.