The unexpected resignation of managing director and chief executive officer (CEO) of Infosys, Vishal Sikka, could impact the company’s operations in the near-term, given the uncertainty on leadership, worries related to employee exits and business growth. While the company, in an investors’ call, indicated there would be continuity in the business plan, the Street is jittery about the near-term fallout from the leadership vacuum till a new CEO is confirmed. U B Pravin Rao, the company’s chief operating officer, has been appointed interim CEO.
Emkay’s Rahul Jain and Ruchi Burde believe the resignation will impact the company’s financial performance in the short- to medium-term. While there could be short-term blips on business growth, the important parameter, according to analysts, is any employee exits especially in the senior management team in the wake of Sikka’s resignation. Said an analyst at a domestic brokerage, “The biggest worry is attrition which could impact business growth and the company could lose market share to competitors.” While analysts such as Sarabjit Kour Nangra of Angel Broking believe some attrition could happen, they believed the key is the transition period and the company’s ability to get a CEO who could deliver in a tough environment. Otherwise, growth will suffer.
On the operational side, the Street will look at the company’s ability to meet its constant currency revenue guidance of 6.5-8.5 per cent for FY18. Given the challenges on slowdown in client spending and business uncertainty, the company was forced to cut its guidance thrice during FY17 from 11.5-13.5 per cent it had projected at the start of the fiscal. Amit Chandra of HDFC Securities said the strategy was not going to change over the next couple of quarters given that Sikka would continue (as executive chairman). The company management indicated in the call that they were planning to meet the top 100 clients and explain the transition process. While there could be a slowdown in new business, over the next couple of quarters, current client commitments and deliveries will not be impacted, say analysts.
The Street is worried about the ongoing spat between the board and founding members continuing. The management indicated in the investors’ call “that there was no guarantee that it will be sorted out”. Infosys founders had issues related to corporate governance which were first highlighted about eight months ago. In fact, after Sikka's resignation on Friday which was followed by the Infosys board making allegations against N R Naranyana Murthy, the Infosys founder hit back, denying all allegations. The tussle between the board and founders could delay the process of selecting a new head.
On the business front, the growth trigger would be the company’s ability to improve the proportion of digital services which account for 23 per cent of sales. Though this is higher than TCS’ 19 per cent, it is much lower than Accenture’s 50 per cent. Digital services were growing at 25 per cent annually, while the legacy systems, which made up over 75 per cent of revenues, were growing at three-four per cent.
What would give the stock some technical support was the announcement of a buyback, a decision on which will be taken on Saturday. The company plans to pay shareholders Rs 13,000 crore through either a buyback or a dividend in FY18.