Mumbai: How times change. About 12 years ago, this column had said that if cash is king, Infosys Ltd ruled the Indian IT industry. Even though its revenues were far lower than those of Tata Consultancy Services Ltd (TCS) back then, its free cash flow was higher in absolute terms.

In fact, as the chart above shows, this was true even about seven years ago. In fiscal year 2012 (FY12), Infosys’s revenues were about 30% lower compared to TCS, but its cash flows were 23% higher at $1.38 billion.

But all of this was before the leadership crisis at Infosys reared its ugly head. What soon followed was a period of flux, with multiple changes in the company’s top leadership as well as its board of directors. The impact these changes has had on Infosys’ financials qualifies as a classic case study on why companies must take leadership development and succession planning very seriously.

Seven years hence, Infosys has become a shadow of its former self, while TCS has become a far more formidable competitor.

In FY19, Infosys’s free cash flows were less than half of the $4.23 billion TCS generated as cash. This is largely a function of better revenue growth and improving profitability at TCS. In FY19, TCS’s earnings before interest and tax (Ebit) of $5.35 billion was nearly double Infosys’s Ebit of $2.71 billion. In FY12, TCS’s operating profit was only about 40% higher compared to Infosys.

While TCS’s margins have dropped around 200 basis points in the last seven years, Infosys’s margins have fallen by 600 basis points. One of the key differences is the larger spends the latter has had to make to retain employees amid all the uncertainty.

Besides, it has also had to invest higher amounts to drive growth, given the large gap in its growth rates compared to TCS.

Infosys’ troubles also began around the time when industry dynamics were changing, with increased demand for new digital services.

Companies with better capabilities in these new services did better compared to those that relied largely on traditional services.

The struggle to play catch-up, while at the same time managing high employee attrition, has evidently taken its toll. Infosys’s current margin woes are also reflective of the same struggle. While the company’s revenue growth has picked up to decent levels under its new chief executive officer, Salil Parekh, this is coming at a great cost.

All of this is of course also visible in the companies’ market valuations. Infosys is now valued 60% lower than TCS’s market capitalization of 7.9 trillion. In January 2011, its valuation was only 10-12% lower.

Great is the price that Infosys shareholders have paid for the company’s leadership woes.

Close