Obverse Of The Coin...

Questioning, doubt, heated assertions that betray a sudden erasure of confidence—the cream of corporate India seems to be going through a phase of intense self-reflection. And there’s a pattern: criticism emanating from elders and peers at a time of generational change. All of that in a context of global flux. Four months ago, it was the cut and thrust for control at the Tata Group, where a promoter questioned the competence of a professionally appointed chairman. Now, Infosys—a talismanic name in Indian infotech, its second largest software and services expor­ter—is going through similar pangs.

At the heart of the controversy is a kind of performance audit conducted in the open, in full view of everyone. Promoters led by N.R. Narayana Murthy have publicly called into question the wisdom of several decisions taken by the present manage­ment and board. Specifically under the lens are two symptomatic issues: a lavish severance package given to two employees who left Infosys rece­ntly; and the slightly-more-than-lavish compensation package of $11 million per annum for CEO Vishal Sikka. (That’s Rs 73 crore-plus.)

The Infosys management is fighting to establish its discretionary turf: deciding the CEO’s compensation or severance packages is a clear prerogative of the management, it says, and it’s done in line with employment agreements. It justifies the huge increase in Sikka’s remuneration package in the name of competitive and difficult times and steep targets that lie ahead of the 1981-founded company. But the over 40 per cent spike in the CEO’s compensation from this January has not gone down well with the promoters. They feel it was not justified, especially in the light of Infy’s performance under him—and his stint has now spanned two-and-a-half years, long enough for an appraisal of how the worm has moved on the graph.

But first, all that may be profitably read against a wider context. The tussle between Sikka and the founders comes at a tough juncture for the $150-155 billion Indian IT services industry. For a company that has been a bellwether entity for long, the times are ripe for some hard introspection. Info­sys, like the rest of the industry, is facing a decline in new deals from clients in the West, the US in particular. On top of that, the industry is gearing up for changes in work visa rules in the US, Indian IT’s largest market, something that has the potential to cause a real dent in industry numbers.

In recent quarters, business has not been very good and IT growth rates have dipped to single digits, with the weather forecast showing mostly endless cloudy skies. Infosys has found no way to immunise itself from this general trend. The last few quarters have been rough. In fact, revenue saw a negative growth of 0.2 per cent in the last quarter. And the uphill trek required to restore status quo ante looks arduous and slippery. In Oct­ober 2016, Infosys cut its annual revenue growth target for the second time in three months as India’s software service exporters felt the pressures from major clients holding back on spending.

No surprise, then, that CEO Sikka’s New Year message to employees fairly bristled with caution­ary truisms. “The mountains ahead are tall”, “there is a long way to go”, “the road ahead is long and not easy”…gloomy motivatio­nal metaphors tumb­led out one after the other. To his people—whose collective moniker, Infoscions, recalls grander days—he warned against a “lackadaisical” attitude towards greater value creation and stressed on the importance of automation, something he has been driving after taking over the reins. It would not suffice, he said, to “just mechanically execute the job we are handed”. That last line could just as well have been a self-directed one. It’s an open question whe­ther the concerns raised by Narayanamurthy are limited to the payouts—or, by implication, stand as a general pointer towards the company’s performance in recent times, especially Sikka’s performance as a CEO.

To be fair to Sikka, in the time he has steered Infosys, its revenues have increased from $8.2 billion to about $10 billion. Simultaneously, attrition—one of the banes of the software sector and especially a concern area for Infosys—has come down from a high of 23.4 per cent to 14.1 per cent. “In the last two-and-a-half years, we have laid out an ambitious strategy to transform ourselves to being an automation-based company. Revenue growth has caught up with industry-level performance,” Sikka said at an investor call earlier this week. He specifically mentioned “automation, innovation and new services” as factors that have helped the company hold its margins.

There’s more on the credit side. In Sikka’s tenure, Infosys added five new $100-million clients to its kitty and its top 10 new products and platforms—Mana, Skava, Edge, Panaya, Cloud services, Cloud Migration, Mainframe Modernisation, API economy, BI Renewal and Cyber Security—now produce over $110 million in quarterly revenue. This was around $22 million in Q2 of FY15. According to Sikka, $100 million accounts increased from 12 (when he took over) to 18 now—and $200 million accounts too doubled from three to six. And all this in a challenging environment. Says business historian Raman Mahadevan: “Sikka’s leadership is different as compared to Narayanamurthy’s because the whole scenario has changed. The market is much more competitive and requ­ires a different approach. His is suited to the times.”

Some more positive data. Infosys estima­tes show that  revenues under Sikka grew from Rs 50,133 crore (in FY14) to Rs 53,319 crore (FY15) and further to Rs 62,441 crore (FY16). And net profit grew from Rs 10,648 crore in FY14 to Rs 12,329 crore in FY15—this 15 per cent rise slowed to a more modest 9 per cent as FY16 clocked Rs 13,491 crore. The total headcount in the comp­any increased from 1,60,405 in FY14 to 1,94,044 in FY16, a near-21 per cent rise, even as attrition dipped.

However, a closer look at quarterly results paints a different picture of Sikka’s leadership. During his tenure, the net profit figure for Q2 ’15 was Rs 3,096 crore—and this grew to Rs 3,708 crore in Q3 ’17. However, in that December 2016 quarter, net pro­fit grew by a mere 2.8 per cent and revenue actua­lly dipped by 0.2 per cent. In fact, read at that deg­ree of magnification, the 10 quarters Infosys has spent under Sikka’s leadership have been marked by low revenue and net profit growth.

Three of those 10 quarters have clocked negative net profit growth, and two quarters have also seen negative growth in revenues. Barring the double-digit figure of Q2 ’16, when net profit grew by 12.1 per cent, there has been no high growth in net profits, with growth mostly in single digits. The story with revenue growth is similar—no double-digit growth in revenue in his entire term so far. Q2 ’16 saw the peak at 8.9 per cent.

To put that in perspective, Sikka’s figures compare poorly with even the performance of former CEO S.D. Shibulal, whose stint (2011-14) is considered one of the worst in Infosys history. During Shibulal’s term, which spanned a comparable 33 months from Q2 ’12 to Q1 ’15, both revenue and net profit saw good growth—from Rs 8,099 crore to Rs 12,770 crore, and Rs 1,906 crore to Rs 2,886 crore respectively—despite the term as a totality seeing four negative quarters for net profit and three for revenue. Even Kris Gopalakrishnan’s term (2007-11) as CEO saw revenues grow from Rs 3,773 crore (in Q1 ’08) to Rs 7,485 crore (Q1 ’12). And neither of the two original legends, Murthy and Nandan Nilekani, saw a single quarter of negative revenue growth during their terms as CEO.

Does that make Sikka the worst performer as Infy CEO so far? Well, maybe Murthy (1981-2002) and Nilekani (2002-07) may have been at the helm in vastly different times and Sikka is struggling against a global context that his illustrious predecessors did not have to face in those nascent/boom years where growth figures have to be read against the low base. And yet, Sikka’s performance does not sit very brightly at all against even that of one of his peers in the sector—N. Chandrasekaran of TCS, India’s largest software company.

Chandrasekaran’s performance was exempl­ary to say the least. Under him, TCS’s revenues jumped threefold, from $6.34 billion in 2010 to $16.5 billion in 2015-16. Its profits too rose threefold—from Rs 7,000 crore to over Rs 24,000 crore in the same per­iod—and exports alone touched $10 billion. As on January 5, 2017, TCS under Chandrasekaran had a market capitalisation of $67.69 billion. Against this, Infosys had a market cap of $33.96 billion on February 15, 2017.

Of course, these are early days for Sikka and much could change if he gets a long innings. He has followed a transitional strategy, adju­sting to circumstances and reorienting Info­sys towards more competitive times. He has altered the organisational structure and work culture with new initiatives like design thinking, knowledge-based IT and a platforms approach. Besides the focus on growing its core business, Sikka has said he would also sharp-focus on consulting, an area of disappointment till now. Artificial intelligence too is a big part of his vision 2020.

The piquant part is that his chosen path to red­emption is itself a difficult one. Sikka’s strategy of ‘New and Renew’ raises the bar for Infosys. It has set a target of achieving revenues of $20 billion by 2020 at 30 per cent net margin and revenue per employee of $80,000. A stupendous task, considering the current turnover is around $10 billion. If Sikka’s vision is to be achieved, that will have to double in the next three years. That too, in a tough and much more competitive environment.

Add to that the problems the Trump administration is creating for companies that are beneficiaries of outsourced jobs. Almost 62 per cent of Infosys’s business comes from the US. With the curbs on outsourcing the American president is imposing, Sikka may as well say goodbye to any chance of robust growth from that market. Also, with curbs on sending workers overseas, he will be forced to hire locally in the US. This will be more expensive than Indian workers and will cut into margins, ult­imately reflecting in its balance sheet.

Investors, though, are keeping the faith—they seem sanguine that Sikka’s strategy will pull Infy through the tough times. Oppenheimer Developing Markets Fund, which holds a 2.13 per cent stake in Infosys, has reportedly said Sikka has imp­roved the company’s operating performance and is generally on the right strategic path.

On closer inspection, the CEO’s New Year message was more than a bunch of generalities—it was a call to action in tough times, getting employees and investors braced up for the ride. At the wheel, Sikka still has a lot to prove, to his investors, to his employees—and yes, to his promoters. For now, the board and the promoters have acceded to the massive increase in his pay package. But Sikka has to finally show a commensurate spike in bottomlines. Or else, he will go down in the books as one who validated the sceptics.

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N.R. Narayana Murthy
* CEO 1981-2002

• Double-Digit Revenue growth 5  Qtrs

• Negative Revenue growth 0 Qtr

• Double-Digit Net Profit growth 4 Qtrs

• Negative Net Profit growth 0 Qtr

Nandan Nilekani
CEO for 21 Qtrs

• Double-Digit Revenue growth 7  Qtrs

• Negative Revenue growth 0 QtrDouble-Digit

• Net Profit growth 10  Qtrs

• Negative Net Profit growth 2 Qtrs

Kris Gopalakrishnan
CEO for 17 Quarters

• Double-Digit Revenue growth 2  Qtrs

• Negative Revenue growth 2  Qtrs

• Double-Digit Net Profit growth 3  Qtrs

• Negative Net Profit growth 5  Qtrs

S.D. Shibulal
CEO for 12 Quarters

• Double-Digit Revenue growth 2  Qtrs

• Negative Revenue growth 3  Qtrs

• Double-Digit Net Profit growth 3  Qtrs

• Negative Net Profit growth 4  Qtrs

Vishal Sikka
CEO for the last 10 Quarters

• Double-Digit Revenue growth 0  Qtr

• Negative Revenue growth 2  Qtrs

• Double-Digit Net Profit growth 1  Qtr

• Negative Net Profit growth 3  Qtrs

* Results are from 1999-2002, earlier data not available

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Infosys Shareholding Pattern

• Total shares held 2,29,69,44,66

• Shares held  by Public 1,99,28,45,531 (86.76%)

• Shares held  by Promoter & Promoter Group 29,28,06,199 (12.75%)

• Shares held by Employee Trust 1,12,92,934 (0.49%)

• Non Promoter-Non Public 1,12,92,934 (0.49%)

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Infosys Financials In Sikka’s Tenure

Revenues in Rs crores

• 2014 50,133

• 2015 53,319

• 2016 62,441

Net Profit Rs crores

• 2014 10,648

• 2015 12,329

• 2016 13,491

Head Count

• 2014 1,60,405

• 2015 1,76,187

• 2016 1,94,044