NEW DELHI: Alarm bells went off when June quarter attrition at Infosys spiked. But there is a bigger worry waiting.
The software biggie received a huge blow on Saturday when old hand Chief Financial Officer (CFO) M D Ranganath quit.
Ranganath, who has been with the company for 18 years, will carry on till November 16. The second largest IT firm has informed stock exchanges that it will "immediately" start the search process for the next CFO. That means the Bengaluru-based company will look for a fourth CFO in less than five years!
Evidently, analysts are worried.
Some say Ranganath's decision might have caught Infosys management by surprise. They believe that everything — from total contract value (TCV) of large deals and scale-up of large clients — has been going right for the software firm except attrition.
At the end of June quarter, attrition at Infosys soared to an alarming 20.6 per cent, from 16.6 per cent in the March quarter.
"The string of exits at the senior level continues unabated at Infosys. This is disconcerting, compounded by the fact that the spike in attrition of the last quarter also saw high performers exit," said Motilal Oswal Securities.
Earlier in June, Sangita Singh, Executive Vice-President and head of the IT major's $750 million healthcare and life sciences business, and Nitesh Banga, Senior VP and Global Head of manufacturing and Edge products put in their papers.
In January, Infosys President Rajesh Krishnamurthy too quit to join CMA CGM Group as Senior Vice-President of IT and Transformation.
High attrition can be attributed to multiple factors in the past such as change in strategy and performance management systems, perceived underperformance of a few leaders leading to counseling them out and the CEO change in itself, Kotak Securities said.
"The net result is the leadership strength has thinned out. The new CEO has inherited a thinned-out leadership that requires augmentation. In the interim, the company requires stability in leadership ranks. Ranganath's exit, combined with recent exits of Sangita Singh (head of healthcare vertical) and Nitesh Banga (head of manufacturing) are not a good sign," the brokerage stated.
Ranganath has been the company's CFO for the last three years. He had replaced Rajiv Bansal in October 2015.
During his tenure, Infosys Ebit margins remained steady as it fell only 70 basis points to 24.3 per cent in FY18, from 25 per cent in FY16.
Cash generation remained strong during the period, with OCF margin at 17.2 per cent and OCF to Ebitda margin at 63 per cent.
Ranga was part of the Infosys leadership team and played several leadership roles in areas beyond finance. He worked on strategy, risk management and M&As and was instrumental in formulating and executing strategic priorities for the company.
Urmil Shah of IDBI Capital said he would not take Ranga's exit as an indication that more bad news is in the offing for Infosys, but "definitely it is a short-term negative for the company and stock".
"Ranga has been instrumental in making sure the financial performance, especially the margin profile and also on capital allocation the performance remains quite good in the last few years when there have been a lot of changes at the CEO level. So, to that extent, it is definitely negative in the short term," Shah told ET Now.
"But Infosys has demonstrated that it is a fantastic institution and it has managed the changes at the CEO level and seen other senior exits quite well. So, we believe that it should not have a material impact on the medium to long term performance," Shah added.
Motilal Oswal said that given continued work-in-progress nature as far as team stability goes, further accentuated by the CFOs exit, there is lesser case one can make for narrowing of the gap in the foreseeable period.
"The rally in Infosys stock hardly leaves stomach for news of continued rebuilding of the top leadership and the ensuing distraction to business. Hence, we would expect the stock to lose some of the steam that had built up in the recent past. Our price target of Rs 1,600 discounts forward earnings by 17 times. We have a Buy rating on the stock," Motilal Owal said in a note.