Infosys would be much better off if it just came clean
Infosys Q2 result was never going to shed much light on a shift in strategy, its real significance lay in allaying concerns about corporate governance at the firm
Hong Kong: Infosys Ltd’s earnings announcement on Tuesday, its first after it unexpectedly lost its top management midway through the last quarter, was never going to shed much light on a shift in strategy.
It’s too early for that because the search for a new chief executive officer (CEO) is still underway. The real significance of the September quarter release lay in allaying concerns about governance. Specifically, investors wanted to know what—if anything—Nandan Nilekani, the co-founder who has since returned to the bellwether Indian software exporter as its non-executive chairman, wants to do about the suspected board-level lapses during the tenure of departed CEO Vishal Sikka.
N.R. Narayana Murthy, another co-founder, had questioned Sikka over a 2015 acquisition of Panaya Ltd, an Israeli automation-tech company. A whistle-blower had contended that the deal was overpriced and that a generous severance offer (later withdrawn) to a former CFO was actually hush money. Murthy wanted the full report of an external inquiry, which gave the management a clean chit, to be made public.
Sustained pressure from the founders, who own 13% of the stock, succeeded in taking down the CEO, the chairman and two other board members. But even with the co-founders back in control, shareholders won’t get any more details. “Confidentiality is critical to ensuring the candour and cooperation of whistle-blowers,” Tuesday’s earnings report said, adding that the allegations were baseless anyway.
The stock, which dropped 14% after Sikka resigned, is up almost 7% since then. But while Tata Consultancy Services Ltd, its larger rival, has gained almost 9% so far this year, Infosys has fallen more than 7%. Both are trailing India’s benchmark Nifty index. (Infosys’s American depositary receipts were down 4.5% in early US trading.)
Put some of that dissatisfaction down to a muddy business outlook. Traditional retailers have no money to spend after losing market share to online stores. Unless US banks have clarity on President Trump’s regulatory agenda, and until they know whether the Financial Choice Act is going to become law and the Volcker rule repealed, they won’t order a truckload of business software. To that, add a US health care industry that has no idea what is going to happen to Obamacare, and at least three large Infosys client groups would remain on the sidelines for at least a few more quarters.
Then there’s the continuing shift away from clunky on-premise software to subscription-based applications in the cloud. Clients are paying less for legacy projects, forcing vendors to embrace automation. The likes of Accenture Plc are now garnering more than half their revenue from digital products, according to Bloomberg Intelligence analysts Anurag Rana and Gili Naftalovich. However, companies such as Infosys are so used to charging clients for time and effort of code writers, they are finding it hard to switch tack.
No surprise then that the Bangalore-based firm managed only 4.6% growth in sales from the quarter a year earlier. That’s the lowest in five years and compares with an 8% increase for Accenture. Infosys also slashed its full-year guidance and distanced itself from Sikka’s outlandish revenue goal of $20 billion by 2020.
Investors would eventually get used to the idea that just as globalization is past its peak, so perhaps are the stocks of outsourcing firms. Infosys now trades below 15 times earnings, almost a 40% discount to the Nifty index. That valuation, however, may not fully reflect a permanent discount for poor governance. After all, the disclosures Murthy was demanding have been ruled out. But if there wasn’t any wrongdoing or cover-up in the first place, then Murthy’s entire campaign against Sikka smacks of a power grab. It’s unclear how Murthy would react to that suggestion.
Coming clean was really the better option, Infosys. Bloomberg Gadfly
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