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Infosys investors lose faith in Murthy 2.0

02 Jun

 It’s one year since N R Narayana Murthy was forced out of his retirement to try and revive the sagging fortunes of the $8.2-billion IT behemoth Infosys. There was an initial euphoria. But it looks like the real celebrations will have to wait, if at all.

Over several investor and analyst meets, Murthy continued to harp on about optimising costs to improve margins, touching now and then upon revenues too. Mr. Shibulal’s favourite “3.0 strategy” — which focussed on building products and platforms — appeared to have made way for a sharper focus on Infosys’ “bread and butter”, IT services. These went down well with clients, investors and the markets.

In 2013-14, Infosys doubled revenue growth to 11. 5 per cent, added 238 clients and expanded operating margins to 25.5 per cent. Share prices too rose. Despite these positives however, its revenues have been lagging competition. Infosys’ revenue guidance for the current fiscal also lags industry outlook.

So was the focus on cost optimisation misplaced ? No, say insiders. There had been sluggishness in the team, partly due to weak leadership and lack of clarity in direction, and some trimming was for the good. However, there were 10 executive level exits in the last one year. Insiders at Infosys, former executives who have worked in top roles and industry watchers agree on one thing: cost-optimisation is not the only way to address margins. And attrition at the second largest IT exporter has not been confined to these high-profile exits. The company has seen its worst attrition ever in the last one year. At an uncomfortable 18 per cent, Infosys is finding it tough to retain employees across the board in times of perceived uncertainty. A slew of HR measures, apparently the brainchild of Mr. Murthy and his son, have failed to have the desired impact. “Though informal meetings and townhalls with executives have helped gain employee confidence to an extent, employees are not likely to miss the larger writing on the wall,” says a senior team leader.

Too centralised?

Mohandas Pai, former CFO, says that the failure to focus on revenue enhancement over the past four years, spilled over into Mr.Murthy’s tenure. “The strategic error was that there’s just not been enough focus on sales. This coupled with lack of a strong and empowered senior team, impacted the company.” By comparison, competitors TCS, Cognizant and HCL have focussed aggressively on revenues.

Mr.Pai insists that there are two major pieces to this puzzle. One, Infosys has retained a centralised model, while the industry has moved to a “more federated, closer-to-client model”. After 2008-09, sales and markets became a key determinant not execution, he explains. And even when Infosys did see a reorganisation, the structure did not change. “These leaders were not empowered. If an IT company wants to survive today, decision making has to be faster and decentralised. This was not the case,” explains Mr.Pai.

Other executives, including those who have quit recently, agree with Mr.Pai on the centralised model. In fact, a former executive who has quit during this period, says that while Mr.Murthy coming back was a “much-needed move” given he was perceived as an “anchor point, which can bring stability”, consequent developments at the firm were disappointing. “A parallel structure was created, where Rohan Murthy had a prominent role, and this made senior leaders uncomfortable. Before you knew, good people in the sales organisation were leaving,” he said.

The former executive described Infosys of the past as a “middle-class dream” where there was a set of rules and corporate ethic that was admirable, and people aspired to be part of it. “When Murthy returned many of these rules were broken. That Shibu (S.D. Shibulal) was not removed, despite underperforming, only because he was a founder was against the idea of meritocracy that many of us believed was Infosys.”

As Mr. Murthy completes a year into his second innings and the company is hunting for its next CEO, critics are asking the question: will Mr. Murthy revert to a non-executive role after the new CEO arrives or will there be two power centres in the company? Ironically, experts and insiders are now placing their bets on another co-founder, Nandan Nilekani. Over the past week, there’s been a growing clamour for his return. Among these voices are former Infoscions such as Mr.Pai and politician-turned-former CFO V. Balakrishnan who believe that the way out of the organisational conundrum now would be to bring back one of the founders, who would be able to work comfortably with this new structure. “Anything else would be too difficult to work around with. An external CEO will find it difficult to function and rebuild a team quickly,” says Mr. Balakrishnan. Mr. Pai agrees that given current circumstances, “someone like Nandan” will be able to command the investor, client and employee confidence required to steer the company, and meanwhile, build a next line of succession.

Will this not be a breach of corporate governance principles all over again? “It will be, but given the centralised manner in which the company is structured now, it is the only stable way out,” says Mr. Pai

India’s second-largest IT services company is battling an unprecedented exodus of senior executives, and it has got worse as it now hunts for its first non-founder CEO, with incumbent S D Shibulal stepping down by January next year.

Investors who showed confidence when Murthy spelt out a three-year turnaround plan are today worried.

Shareholder activist Anil Singhvi said B G Srinivas’ exit had jolted investors. Srinivas, the latest to exit, was president of the company and a man who many saw as the leading contender for the CEO position. “Whatever Murthy may say in his letters (assuring employees and investors), there is much to be desired in Infosys. In the last three to four months, the company’s stock price has dropped from the Rs 3,500 levels to Rs 2,900. The way the markets have been reacting to the Modi factor, one should have seen the Infosys stock price at the Rs 4,000 level,” Singhvi said.

He said the genesis of what’s happening now is the re-entry of Murthy. “Bringing his son along with him was Murthy’s biggest mistake. Many investors at that time were apprehensive but didn’t speak out. People in the management who were in the company for 10 to 15 years have quit. At the end of the day, what is the difference between the Gandhi family and the promoters of Infosys? How long do the promoters want to sit at the helm of the company?” he asked.

Shriram Subramanian, founder and MD of independent proxy advisory and governance research firm InGovern, said the departure of several top executives, especially during the CEO selection process, was a concern. “Investors’ broader concerns relate to leadership development and succession planning,” he said, and added that several FIIs and one large Indian institutional investor, who he declined to name, had raised concerns about the CEO selection process.

Infosys is one of the few, if not the only Indian listed company, where FIIs hold a 42.1% stake and domestic institutional investors hold 13.66% stake. The promoter group holds only 15.94% and retail investors hold 28.3%. 

Some of the big institutional investors owning stakes in Infosys include LIC (3.25%), Abu Dhabi Investment Authority (2.54%), Oppenheimer Developing Markets Fund (2.52%), Government of Singapore (2.22%), and Aberdeen Global Indian Equity — Mauritius (1.17%).

Amit Tandon, MD of Institutional Investor Advisory Services (IIAS), said investors expect some degree of stability and certainty. “Infosys has seen many high-profile exits that has caused concern among investors. But investors are not in a hurry to exit the company. Having said that, Infosys’ performance has lagged its peers and that has caused a bigger concern. Investors understand that leadership transition does not happen overnight and they will give it time to progress in the direction that Murthy has set in motion for the company.”

Subramanian said the promoters should opt out of executive and non-executive roles and should not even be on the board. “Such a step would be bold, but will at least make the company a truly widely-held company with no promoter on its board,” he said.

Infosys is scheduled to hold its AGM on June 14. Many will be watching to see whether the management will say anything about these investor concerns on that day.

 

 

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Posted by on June 2, 2014 in Uncategorized

 

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