MY TAKE ON INFOSYS : 4 QTRS UNDER VISHAL SIKKA

In Jun 2014 when Sikka’s appointment was announced the media went into an unprecedented frenzy     ( totally predictable ! ) given the formidable PR engine created by Infosys over the years……and the leadership of Mr. Narayana Murthy, Nandan and Mohan in consistently exceeding expectations of the markets through exemplary management.

As part of that media frenzy everyone and his uncle were interviewed for a “view” on Vishal Sikka …I too did my bit on BBC for whatever it was worth. Whilst most were at their effusive best my view, as usual, was reserved and contrary to the general effusiveness. My comment was that I did not know him personally and if NRN and KV Kamath had selected him he must be good. But as an investor I would reserve my judgment till I see evidence on the following three counts :

1. He is from a pedigreed German company : their management philosophy is vastly different, in fact diametrically opposite to what we practice in India which is loosely aligned to the US. This is especially true in the IT industry
2. He is from SAP : a predominantly product company : vastly different in approach, philosophy and outlook from the services industry where Infosys belongs
3. Given the depths to which the great company had fallen to under the erstwhile management under Shibu Lal ( which, by the way, was a given and had been forecasted by me when Mohan was not selected to taken on the baton from Kris Gopalakrishnan ), it is imperative for the CEO to operate from India..especially to turn around the morale in what is a people centric business.

After 4 quarters I am now convinced that Infosys has perhaps priced in most of the upside and, whilst Sikka has done well on turning around the morale in the trenches, the concerns around his management style alluded to above are now confirmed in my view. When one inherits a humongous cash reserve of a few billion dollars, it is relatively easy to throw money at the front and middle line employees, make some acquisitions and talk up the morale thru buzz words like “innovation, design thinking”, etc with some feel good training programs thrown in for good measure.

The key area for concern for me remains the management style and the leadership traits as relevant to the Indian IT industry. He has hired a large number of SAP executives, 16 to be precise, and reportedly has vested almost the entire decision making process to this layer. The old timers have practically no say in the larger decisions and are responsible only for execution. Creation of even a perception of a “Diwan e Khas” vs a “Diwan e Aam” is a death knell in our industry. It has always been my firm view that an incoming manager should never hire from his earlier organization barring one or two exceptions in rare cases. This betrays an insecure mindset as such managers thrive on loyalty more than on competence. This also creates a class divide, an air of suspicion amongst existing employees and overall lack of trust. In my various job changes I consciously followed this principle and always hired people from the market who were better than me … this encouraged healthy debates, generation of new ideas thru people who were given the confidence to speak their mind and overall benefitted the organization in many ways including building independent second/third layers. In the Indian loyalty driven culture, of course, this has often been misunderstood.

The results for Q 2 FY 16 released a few hours ago are in line or slightly better than estimates. However, the strains of pulling up revenue in the last two quarters is now apparent…..Infosys is actually guiding a flat performance in dollar terms ( and 1% in constant currency terms ) in the next two quarters. Though I am sure they will exceed their lower than industry guidance, this is hardly a sign of confidence that the turnaround is sustainable and, more importantly, is based on definitive business model changes. The revenue growth so far has been commendable but has come entirely from mining existing customers….which is usually the low hanging fruit after a management failure in any organization on the customer relationship front. It is not enough to say that the business environment is fuzzy…whilst that is true, results of Cognizant and Accenture demonstrate that there is enough business for the nimble and the fittest. Furthermore, the resignation of the CFO at this juncture is serious… especially as the incumbent was amongst the last of the core group ( read “independent” ) trained by Mohan and Bala. Attrition has been high despite the incentives, salary hikes, etc though Q2 could be explained as a quarter specific phenomenon due to higher education.

Whilst flying with Modi, et all, is a perk which most NRI managers find exhilarating and to be a new, hitherto unexpected experience when they land up in India, I hope they, and investors alike, would realize that such ephemeral trappings of “power” is nothing more than pure “hype” which we as a country seem to be riveted on. The jury is out…..but my decision is more or less made. Infosys will find it very difficult to bridge the valuation differential with respect to TCS and Cognizant…. And that should be the ultimate metric relevant to investors stripped off all the noise.  I would be most happy to be proven wrong next year as this is a company we have all admired and learnt a lot from ….. and has a special place in the hearts of many in our generation.

A lot is running on Sikka…………he must remember this is more than just a corporate role with incrementally improving company performance….this is about restoring the faith in a dream which spawned an entire generation.

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UPDATE ON JAN 31, 2017 : This is an update after 15 months of writing the above article where I had called for a top in Infy at Rs. 1130 ( Mkt cap : $ 40B ) based on my hypothesis as written. Some had commented on the wisdom of the above and I had reiterated that as investors I have no luxury of hindsight to decide....however, as analysts or critics we do have that luxury of hindsight.

Today the price is Rs. 928 ( Mkt cap : $ 31B ).....as I had said in the article, stripped of all the noise, this is the only metric which matters !