Infosys may need some private time to fix itself
■ Another protracted governance saga could be just as damaging
India's best-known software exporter is facing an impossible trinity of sorts: Out of sales, margins and governance, Infosys can hit only two goals at a time.
Or so it would appear from yet-to-be-proven whistle-blower allegations against Chief Executive Officer Salil Parekh and Chief Financial Officer Nilanjan Roy that they used hyper-aggressive accounting practices to hide from investors the lack of profitability on large deals. The stock tanked as much as 16 per cent in Mumbai after the letter was published by the Deccan Herald.
It's a deja vu moment for Co-Founder and NonExecutive Chairman Nandan Nilekani, who returned to the Bangalore-based company two years ago during a previous crisis - sparked by a set of different anonymous charges against Parekh's predecessor, the former SAP Executive Vishal Sikka, who was accused of impropriety in a $200 million acquisition in Israel.
That scandal culminated in an unseemly spat between Sikka and the board on one side and N. R. Narayana Murthy, another of the company's Co-Founders, on the other. Sikka resigned in August 2017. The new board exonerated him, but by then the damage was done.
It's been a slow road to recovery. At a one-year-forward price-to-earnings multiple of 20 times at the end of September, Infosys's valuation is now almost 50 per cent higher than at the depth of the last crisis. The The letter also accused CEO Parekh of instructing sales team not to send mails for approval and directing the sales team to make wrong assumptions to show margins. Also, CFO Nilanjan Roy prevents employees from highlighting issues around large deals in presentations to the company's board, the whistleblower alleged.
Infosys in a statement to the stock exchanges said that its audit committee was examining the allegations, in line with its policy on whistleblowers.
Nandan Nilekani, chairman of Infosys, said, “These complaints are being dealt with in an objective manner. The undated whistleblower complaint largely deals
risk is of a repeat of that slump. If investors start to believe that the culture at the software services provider, once seen as India's most transparent company, is beyond redemption, expect a durable with allegations relating to the CEO’s international travel to the US and Mumbai.”
“We will ensure that the generalized allegations are investigated to the fullest extent. Additionally, to ensure independence in these investigations the CEO and CFO have been recused from this matter,” Nilekani said.
“Because the investigation is ongoing, there will be no further comment so that investigation may be conducted in a thorough and objective manner. At the appropriate time we will provide a summary of the investigations results. The Board is committed to uphold highest standard of corporate governance and protect the interests of all stakeholders,” Nilekani added.
deepening of the 10 per cent discount at which Infosys traded against larger rival Tata Consultancy Services, or TCS, at the end of last month. Since the company's American depository receipts trade in New York, there's also the threat of expensive class-action suits.
The allegations are being evaluated by the audit committee and the board. The CEO and the CFO won't be a part of those deliberations. Whatever the truth of the whistle-blower's complaints, another protracted governance saga could be just as damaging.
It might not be a bad idea for a buyout fund to step in and take Infosys out of the glare of the public markets. As a private company, it could rediscover its moorings and find a new purpose in a digital world where clients increasingly want nimble, cloud-based, on-demand software, rather than clunky, onpremise enterprise solutions.
At $12 billion in the fiscal year that ended in March, Infosys revenue is nowhere close to Sikka's 2020 target of $20 billion. An operating margin of less than 23 per cent was lower than the near 26 per cent at TCS, according to data compiled by Bloomberg.
After a period of rehabilitation, Infosys should be able to deliver all three targets: sales growth, margins and good governance. Some private time could be just what it needs to get fixed. — Bloomberg