Shares of Bangalore-based technology consulting company Infosys (NYSE: INFY) were trading as much as 9% lower on Friday morning. Nervous investors took the stock lower as CEO Vishal Sikka unexpectedly announced his resignation from Infosys' executive team.
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Sikka is stepping back to an executive vice chairman's role for now. Interim CEO Pravin Rao will technically report to Sikka until a permanent replacement has been found and vetted, so the exiting CEO will still have some influence over the short-term direction of Infosys.
What's going on?
Sikka has been locking horns with Infosys' founding fathers, led by former chairman Narayana Murthy. In a February interview with India Times, Murthy blasted the state of Infosys' corporate governance practices and Sikka's inflated compensation package. The company's co-founders still own about 13% of Infosys, so they should expect to be taken seriously in the boardroom. The company has largely avoided acting on recent suggestions and board appointment nominations from Murthy and his fellow founders, so the proposals have kept coming.
Sikka's letter of resignation after three years on the job referred to this pressure as a "constant drumbeat of the same issues over and over again, while ignoring and undermining the good work that has been done." Citing "malicious and increasingly personal attacks" that have proven false in official investigations, Sikka said that these distractions have made it difficult to focus on the job at hand.
"The structural challenges this engenders within the organization, has a very damaging effect on our ability to carry out any kind of a transformation, especially one that is as fundamental as transforming from a cost-oriented to an innovation-oriented value delivery to clients," Sikka stated.
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Along the way, Sikka's letter mentioned the rise of artificial intelligence and automation, Brexit, President Donald Trump, and the recent violence in Charlottesville. It got both emotional and personal, reflecting a difficult decision process.
What's next for Infosys?
The company's official acceptance of Sikka's withdrawal attempted to smooth over the rough patches a bit. That document noted Sikka's achievements as the first non-founder CEO of Infosys, like a 24% increase in annual revenues and rising profit margins during his three-year tenure. Coming from a highly technical background, including 12 years as the chief technology officer at German IT giant SAP (NYSE: SAP), Sikka turned Infosys' focus away from cost-cutting and toward driving positive growth via innovation.
That attitude should remain as long as he holds that vice chairmanship at Infosys, and a generally Sikka-friendly board is likely to pick a new CEO with similar long-term interests. Several large shareholders have already stated their support of Sikka's management style, so Murthy and friends can expect some pushback if they attempt to regain control of the company they created.
After this sudden price drop, Infosys shares are trading at the lowest P/E ratios seen since before Sikka took the helm. Sales and EBITDA profits have posted steady gains over the last three years, but share prices have not followed suit.
So this price drop could be seen as a buy-in opportunity, but only if you are comfortable with the assumption that Infosys will continue down the innovation-powered path that Sikka started to explore. That's not a guarantee, even if the deck seems to be stacked in his favor.
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