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Infosys Q4 numbers go off track, CEO Vishal Sikka's pay drops 40%

Ayan Pramanik & Raghu Krishnan/Bengaluru 14 Apr 17 | 08:33 AM

Infosys CEO Vishal Sikka (C), Chief Financial Officer M D Ranganath (R) and COO U B Pravin Rao during a press conference to announce the annual financial results of the company at its headquarters in Bengaluru

Infosys Chief Executive Officer (CEO) Vishal Sikka’s annual compensation has dropped by 40 per cent on the back of poor business performance, even as he struggles to grow traditional information technology (IT) services revenue and push for large deals in higher priced software-led services with clients globally.

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Sikka took home $6.7 million in FY17, against the contracted $11 million, as he slipped on mobilising the company to execute and achieve his target of double-digit growth. Sikka has a fixed pay of $3 million, the remaining being variable, based on performance targets. He earned a compensation of $7.08 million in the previous fiscal year.

Most senior executives got only half of their variable pay due to the company’s bad performance. Infosys also said average salary hikes for employees would be in mid-high single digits.

Infosys grew 7.4 per cent in dollar terms in 2016-17, against its April 2016 growth forecast of 11.5-13.5 per cent. In rupee terms, it was 9.7 per cent. Infosys has projected a growth rate of 6.5 to 8.5 per cent in FY18, indicating the company is back to its lower growth numbers before Sikka, who was hired from business software-maker SAP to transform the company.  

The company stock slipped 3.86 per cent or Rs 37.40 to end at Rs 931.40 on Thursday on the BSE. This despite Infosys announcing that it would spend as much as $2 billion on either share buyback or dividends to shareholders over the next 12 months.

V Balakrishnan, a former Infosys board member, said the capital allocation policy to return money to shareholders was still inadequate.

“Infosys has Rs 40,000 crore of cash and allocating Rs 13,000 crore is too small. The (payout of) 70 per cent of free cash flow is similar to the 50 per cent of net profit as dividend. There is no drastic change," said Balakrishnan.

"The benchmark should be  Accenture. Accenture returns 90 per cent of the free cash flow every year to shareholders." 

 Infosys also appointed Ravi Venkatesan as its co-chairman to guide Sikka on his transformation journey.

Infosys said fourth quarter profits declined marginally at 0.2 per cent to Rs 3,603 crore, while revenue grew 3.4 per cent to Rs 17,120 crore. The slower revenue growth was attributed to operational challenges and headwinds.  

The firm reported an operating margin of 24.6 per cent during the fourth quarter. For FY17, Infosys profit grew 6.4 per cent to Rs 14,353 crore, while revenues jumped 9.7 per cent Rs 68,484 crore. 

Since joining Infosys in August 2014, Sikka has taken several initiatives to push the company to adopt automation, and invest in artificial intelligence software to deliver services, while focusing on improving productivity and reducing dependency on people. Infosys’ hiring was 60 per cent lower than previous year — a net addition of 601 employees.  

Sikka also said the target of $20 billion revenue with margins of 30 per cent and employee productivity of $80,000 was difficult to achieve by 2020.

“It is increasingly difficult to achieve," he said, arguing the business environment had become worse in the last two years not just for Infosys but across the industry.  

Sikka’s point vindicated the concerns of Infosys founder N R Narayana Murthy, who had objected to a higher salary to Chief Operating Officer Pravin Rao, and had questioned the ability of the company to meet its targets.

“Finally, given the current poor governance standards at Infosys, let us also remember that these targets for variable pay may not be adhered to if the board wants to favour a top management person," wrote Murthy on April 2.  Murthy did not respond immediately to queries.

Sikka defended higher wages to executives, citing the need for better talent in tough market conditions and dismissed the concerns over pay by Murthy, saying the company was transitioning from a founder-led one to a professionally-run and managed board.

“With company transitions from a founder-led management and board to a professionals-led management and board, there are certain changes that have to be made. We have to be comparative with the market," said Sikka. “The deeper transformation that I see is to bring this idea across the board to the entire company. We have done ESOP of 8,500 employees over time we wish to bring this to everyone."   

Analysts say the underperformance of Infosys could be a dampener for the Indian IT industry as it indicated that growth was not returning as fast.

“Given the kind of automation we are seeing in the industry, many IT vendors are offering competitive pricing to customers. That sort of cannibalisation is happening and that is preventing growth apart from the geopolitical situation like visa concerns. Traditional sources of revenues will continue to shrink and it is time for Indian services need to shift the gear," said D D Mishra, Research Director, Gartner. 

“Infosys’ guidance was keenly awaited as a cue to any potential recovery in demand, given the positive BFSI undertones. But the guidance does not seem to suggest that, with the management too citing that the macro is not reflecting in deals/IT budgets in BFI just yet — it should come in the second half," said Ashish Chopra, IT analyst at brokerage  Motilal Oswal Securities.

Infosys said it would spend as much as $2 billion on either share buyback or dividends to shareholders over the next 12 months. 

The company said it would invest in new development centres and step up hiring from campuses in the US. 

Infosys has indicated the mix of services offered by the company and other IT services players has changed, with automation and Artificial Intelligence (AI) eliminating repeatable works, thereby impacting the business model. 

“The revenue guidance is based on our expectations from the business. The overall atmosphere that we are working in is challenging. Of the mix that we have had, not only Infosys but also other IT services companies, portions of it is commoditised and very big portions of it are amenable and susceptible to automation," said Sikka. “As AI technology advances more and more of that will happen, there are portions that are very relevant to the client’s future. The endeavour is to ensure that we continue to grow in those high-growth areas and bring extreme focus on automation to the existing (operations)."

Even if there is “no shortage opportunity" for a traditional IT service provider like Infosys with increased demand for digital technology, Sikka believes the company should evolve engagement strategies with clients.     

At the same time, Infosys said that its new software-led and AI offerings to customers had grown by 45 per cent in the last year but on a lower base.

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