Infosys MD & CEO Vishal Sikka Steps Down, Shares Tumble

In a sudden move, Vishal Sikka stepped down as the chief executive officer and managing director of Infosys Limited (NYSE:INFY) earlier today, citing conflicts that deteriorated into mudslinging under an anonymous name. The move led to deep unrest among investors, causing shares to plunge 10.8% at one point in pre-market trading.

The surprise move came amid intensifying animosity between the board and the co-founders, led by NR Narayana Murthy. It seems that a seven-month-long confrontation between the company’s founders on one hand, and Sikka and the board on the other, culminated into this drastic move. This is the second time that Infosys has plunged into a leadership crisis, after the founding members retired from the top management.

Sikka had taken over the reins of India’s second largest software and outsourcing company in June 2014.

Differences in New & Old Leadership

Sikka cited a relentless stream of distractions and disruptions over the recent quarters, which were becoming increasingly personal and negative, as of late, as one of the leading reason for his step. He asserted that the “very public noise around us” had created a shaky atmosphere, making it difficult for management to function effectively.

Differences had been simmering between Murthy and Sikka for quite some time now, with the former repeatedly disparaging Sikka's policies.

Infosys Limited Price, Consensus and EPS Surprise

In recent months, Infosys’ founders, including Murthy, have criticized the company's leadership, focusing on executive pay packages and alleged lapses in corporate governance. Other issues which the founders took offense to, included allegations of impropriety in the 2015 acquisitions of Panaya and Skava Systems.

In an email last week, Murthy reportedly addressed some of his advisers that he had been told by at least three independent directors of Infosys that Sikka was less CEO material and more CTO (chief technology officer) material. He also reportedly condemned the Infosys board for not upholding governance standards.

Further, Infosys founders (who still own 12.75% of the company) had questioned Sikka’s recent pay raise and the size of severance payouts given to some other executives, including former finance head — Rajiv Bansal.

Infosys expressed profound distress by the unfounded personal attacks on the members of the management team, through anonymous letters that surfaced in recent months.

Sikka’s Term

When Sikka took over the helm, Infosys was lagging behind industry growth. Under his leadership, Infosys revenues jumped from $2.13 billion in first-quarter 2015 to $2.65 billion in first-quarter 2017, with strong margin performance and sustained cash generation. Sikka's focus on profitable growth delivered an increase in liquid assets (including cash and cash equivalents) from $4.9 billion in June 2014 to $6.1 billion in June 2017.

Infosys also rolled out over 25 new services under Sikka, which helped bolster revenues significantly.

However, the company's growth has slowed down sharply, after having soared in Sikka’s first two years. Consequently, Infosys’ share price has also underperformed the industry in recent times. Infosys’ shares have inched up 0.2% in the past year, grossly underperforming the industry’s average gain of 27.1%.

Moving Forward

The Indian IT bellwether has named U B Pravin Rao as interim chief executive officer and managing director, while Sikka will continue as executive vice-chairman. Rao was the chief operating officer of the company, with overall strategic and operational responsibility for the entire portfolio of Infosys’ offerings.

In his new role, Sikka will continue to focus on strategic initiatives, key customer relationships and technology development. He will receive an annual salary of $1 during his tenure and will report to the company’s board.

Zacks Rank & Stocks to Consider

Infosys presently carries a Zacks rank #3 (Hold). Some better-ranked stocks in the broader space include CSRA Inc. (NYSE:CSRA) , CoStar Group, Inc. (NASDAQ:CSGP) and HP Inc. (NYSE:HPQ) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CSRA has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average beat of 10.4%.

CoStar Group also has a robust earnings surprise history, with an average beat of 27.6% over the trailing four quarters, beating estimates throughout.

HP generated an average positive surprise of 3% over the trailing four quarters, surpassing estimates thrice.

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