Thursday, November 27, 2014

And Then There Were None

For the better part of two decades, no company was more synonymous with the Indian IT sector than Infosys. The Bangalore – based, Narayana Murthy – founded entity rose from being a minnow to a juggernaut in its industry and virtually achieved a cult status. The stock markets too loved Infy and revered it as the poster boy of the information technology sector, despite the fact that it was often overshadowed by TCS in terms of size and financial parameters. Infy grew from strength to strength and today, the company boasts of a topline in the region of $8 billion (Rs. 50000 Crores) and a bottomline of a little under $2 billion. It still commands one of the healthiest margins in the industry and an enviable client list that includes several Fortune 500 companies, many of whom have multi – hundred million dollar contracts with Infy. For over two decades, Infy had its time and place in the Indian sun.

     Then, a few years ago, Murthy and Nandan Nilekani decided to call it a day and left Infy in the hands of their trusted co – founder, Kris Gopalakrishnan, with the ex – ICICI Bank honcho, KV Kamath, taking over as Chairman. Murthy, however, named himself Chairman Emeritus, in order to have a bird’s eye view of the path that Infy would be treading in future. As far as the markets were concerned, this change at the top was expected to be a smooth transition. It turned out to be anything but that. Impacted by a sluggish economy, Infy soon began to show signs of fatigue and for a few months, the investor community chose to shrug it off. Infy, after all, was too big to fail. Everyone expected a quick rebound from the tech giant. But over the course of the next few years, leading right up to the present, Infy was battered by a stagnating market, aggressive peers and worst of all, an exodus of its top management. And how exactly did Infy react? Did it pull through its crises and return to its pedestal? Well, not exactly. Much to the markets’ chagrin and dismay, Infy staggered, stumbled and crashed to the ground.

     When Kris Gopalakrishnan stepped down, SD Shibulal, another co – founder, took over the reins of the company. His timing couldn’t have been worse. With the IT industry in the doldrums and with global peers such as IBM and HP scratching and clawing for even a modicum of growth, it wasn’t long before their Indian counterparts began to feel the aftershocks. The fact that Mexico, Indonesia and the Philippines were eating into India’s IT growth didn’t help the industry’s cause either. With the lion’s share of its revenues coming from the overseas markets and with a large number of its clients being in the banking and financial services industry (BFSI), which was the first casualty of the economic meltdown, Infy took a beating. Its revenue growth shrunk to low, single – digits, even as margins slowly began to come under pressure. Even as peers such as TCS and HCL Technologies took a hit on their margins in order to capture volume and revenue growth, Infy continued to adhere to its ‘holier than thou’ attitude of not sacrificing its margins or under – quoting its contract bids. As a result, while the other players in the industry were growing in double – digits, Infy surrendered to a single – digit rate of growth, albeit on a large base. Many felt that Infy had become complacent and arrogant, a company that was resting on its past laurels. Pride, however, comes before a fall. After being the second largest in the industry for a long period of time, Infy relinquished that title to Cognizant Technologies, a nimbler rival which was growing at over 20% annually.

     For over three years, Infy’s stock went virtually nowhere and it oscillated in a narrow range. Despite the fact that Infy was trading at a discount compared to its peers, the markets were disgusted with Infy’s slow growth, when a larger peer à la TCS was sprinting ahead. The markets were also clamouring for Infy to deploy its $4 billion cash pile to either initiate a share buyback or to load its elephant gun and make acquisitions in order to spur growth. Infy, which has always followed a ‘Cash Is King’ ideology, bought a Swiss consulting company, Lodestone and chose to hoard the rest of its cash. With the markets slowly losing confidence in the company, Infy had to undertake a drastic step to repose the market’s faith in it. And what better way to do that than to bring back the man with whom it all started?

     In June 2013, Murthy made his much anticipated return to Infy as its Executive Chairman for a half – decade term, with a mission to stem the company’s decline and steer it back to the top of the industry. As if by magic, the tide began to turn in Infy’s favour. In August, the Indian Rupee depreciated by around 15% to a level of Rs. 69, vis – à – vis the Greenback and Infy’s margins began to bloat. Revenue and profit growth both returned to the double – digit range and the markets began to believe that Infy, under the leadership of Murthy, had begun to turn the corner. Even though Infy was still trailing TCS and HCL Tech, its stock began a long – awaited run up and soared by close to 20%, in the space of a few months. Murthy, who seemed to be in firm control, proceeded to induct his son Rohan into the company as his Executive Assistant. This, however, was a blatant violation of Infy’s long – standing objective of eventually divorcing the promoters from the management of the company, in a bid to professionalize the company and catapult it into the league of the IBMs. For a month or so, it looked as if Infy was making a comeback. Murthy even declared that the company was back on track and he announced that any member of the top brass who wasn’t contributing value to the company would be shown the door. Little did he know that those very words, coupled with his return would soon result in an exodus of Infy’s high priests.

     With both the markets and the economy failing to provide a conducive growth environment for Infy, the last thing that the company needed – or anticipated – was an HR crisis at the very top. But that was exactly what battered Infy in the months following Murthy’s return. Infy’s HR troubles, however, trace their roots all the way back to the year 2009, when the company introduced its controversial iRace policy, which triggered demotions, exits and widespread disgruntlement in the company. Infy also chose to decelerate its hiring drive. Infy had already frozen pay hikes in 2012, when all its peers were doing the exact opposite and enhancing payouts. Infy had – and continues to have – one of the highest attrition rates of close to 18%. But now, with the promoters back in the saddle, the virus of discontent had spread to the upper echelons of the Infy’s management.

     Murthy’s return and his announcement of Infy seeking a CEO from outside the company, the search for which was spearheaded by the global HR giant, Egon Zehnder, resulted in several of Infy’s top – level executives having their CEO ambitions crushed. With Infy’s financial performance still not up to speed, heads began to roll. Over the course of the following nine months, Infy witnessed a spate of top – level exits, including those of V Balakrishnan, Basab Pradhan, Chandrashekhar Kakal, Ashok Vemuri and BG Srinivas, most of who had been with the company for ages and were holding critical portfolios in the management. These individuals were widely held to be in the reckoning to lead the company someday. The thirteen top – level exits shocked the markets. The fallout was a souring of investor confidence in Infy, resulting in its scrip tanking by close to 20% over the course of the hegira, virtually wiping out the gains that had materialized following Murthy’s return. Most of the ex – Infoscians went on to join Infy’s rivals, even as Murthy tightened his control on the company. With Shibulal all set to retire in January 2015, ahead of the original plan of having him retire in March 2015, Infy needed a new CEO, a saviour who would lead the company back to the glory of its heyday. And soon enough, it found one.

      When Infosys announced that it had roped in Vishal Sikka, a former executive at SAP, it sent its first signals to the investor community that the company was dead serious about implementing its turnaround plan. With BG Srinivas having resigned, effectively sounding the death knell for Infy’s dual CEO structure, Infy’s CEO – designate would be in sole control when Shibulal hands him the baton. And Sikka will have to sprint. The need of the hour is to spur revenue and profit growth, while keeping its margins intact. Infy still has one of the lowest employee utilization rates (at 78%) in the industry and rivals continue to poach talent and top management from the company. Employee satisfaction isn’t exactly at an all – time high either. Infy’s rivals continue to exhibit robust, double – digit growth, which the company hasn’t been able to match. But Infy will have to battle the odds and come out on top, if it wants to be the king of the hill once again. Its transformational drive, billed Infosys 3.0, certainly won’t be an easy one and the company has a long and arduous road ahead.

     And of course, the Murthy factor still looms large over Infosys, especially considering the glaring fact that most of the senior - level exits seem to have his stamp on them. Employee discontentment doesn’t seem to have dwindled and the company even went as far as forbidding its employees from speaking to the media about its HR troubles. Rumours that entitlement continues to score over meritocracy still do the rounds of the company. In a move to fortify its corner office, Infy has already elevated 12 individuals from its top management to the level of Executive VPs and the company has declared a greater focus on global alliances to drive itself forward. Its scrip still trades at a discount to its large – cap IT peers, due to the hangover of the top – level exits and its high attrition rate, besides its financial under performance. Infy’s revival from here on largely depends on how it manages to address the quagmire at the top. Incidentally, Murthy once famously stated that Infy’s core assets walk out the front door every evening and return the next morning. Over the past few months, the same core assets continue to walk out the front door just like the way they used to, over the past three decades of Infy’s existence. The cruel irony, however, is that some of them aren’t returning.

One little Infy had its day in the sun,
Thirteen heads quit,
And then there was one.

One little CEO left all alone,
He too might quit and desert the ship,
And then there will be none.

~ Ronak Ravindran PGDM 2014 Finance

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