Promoters rooting for Change of Infosys Chair~Seshasayee to Subrahmanyam?

The Infosys Situation is getting as explosive as the Tata Group’s did with  Promoters rooting for Change of Infosys Chair~Seshasayee to Subrahmanyam?

Corporate (Mis)Governance Issues~First Tatas & now Infosys !~Chairman & Board under Attack by Promoters

It’s been disruptive global times in many ways with Trump now US President and India re-gearing up Post Demonetisation & the Indian Corporate Big League crying out “Me Too” .

Headlines were hogged for months as first Promoter Family’s Ratan Tata led the unusually aggressive initiative  in the illustrious Tata Group to fire it’s Chairman, Cyrus Mistry & now Promoter N R Narayana Murthy has called to replace Infosys Chairman with Prof Marti Subrahmanyam .Ex Directors T V Mohandas Pai & V Balakrishnan support Murthy on this  & are calling for the Chairman’s resignation for serious misgovernance on issues of High Severance Packages,Hike in CEO Package ,Director Appointments,Inducements to bag Contracts,non disclosures among others that strike at the very core values Infosys was build on

Narayan Murthy has just asserted in an interview that the unusually high severance package to the ex CFO was just hush money cloaked & that he was concerned about falling standards in corporate governance

Whoa ! That’s a criminal charge in my view !

N R Narayana Murthy is rooting to replace Seshasayee with Prof Marti Subrahmanyam,Charles E Merrill Professor of Finance at the New York University Stern School of Business.The Professor has already served as an independent director on the Infosys Board for thirteen years till 2011

Four Years ago in January 2013 I had an opportunity to interact with Prof Marti Subrahmanyam when he delivered a paper at BSE on the  manipulation of Libor Rates.I had blogged on this then.I had asked him if the  Banks simply had to rig the rates to survive & if this was the case then the orders had to come from the top.Prof was taken aback a bit by the query & clearly reluctant to confirm this.Expected truthful answer should have been “Yes” as the question was rhetoric.Instead he had brushed it off abruptly & I got the impression of an intellectual arrogance at display.That view has stayed as I’ve not got another opportunity to interact to be able to change this view …He’s quickly thrown in the hat to become Infosys Chairman.Clearly Narayan Murthy has been in touch with him on this before putting up his name to replace Seshasayee,Murthy has always been straightforward and blunt like in yesterday’s interview calling the severance pay as hush money !.Can’t imagine Subrahmanyam to be as straightforward & I daresay will be Murthy’s ‘Voice’ just as Ratan Tata,in my arguable view,wanted a ‘Yes’ Man Chairman to head Tata & which Cyrus Mistry turned out to be not

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Infosys manages to beat Earnings Expectations but only because it deferred Investments…I expect it to correct to below Rs 1500

Infosys declared It’s Q1 FY 10 Results this morning…….as per IFRS……..as per Indian GAAP

I don’t see any headwind in Infosys…I will be surprised if it climbs more from the current Rs 1750 levels….Infact I expect it to drop below Rs 1500…..Read on to understand my thought track 

It has managed to show a little higher Basic EPS at Rs 25.56 than expected for Q 1 but has given a lower FY 10 EPS Guidance Range of Rs 94.59 to Rs 96 down 9.6% and 8.2% respectively yoy 

Market has reacted positively to Q 1 Results and Infosys is up 4% + at Rs 1755 with the Sensex at 13844,up 87 points just past 2.30 pm….This Price gives a Forward Multiple of 18 for FY 10

In April 2009 ,Infosys had warned of a 3% drop in margins in FY 10….This is not reflected in Q 1 as Infosys has deferred Heavy Investments to the remaining three quarters in FY 10…The margin contraction would be lower at 1.5% in FY 10 says Infosys CFO,V Balakrishnan

The Consolidated Networth of Infosys at June 30,2009 is Rs 19827 crs ( US 4.13 Billion) while the Market Cap is currently five times this at over Rs 102000 crs ( just under US $ 21 Billion) 

Infosys is cash rich and has US $ 2.51 Billion currently,that’s over Rs 12000 crs …It’s reflected in the fact that Other Income has shot up by 129 % to Rs 269 crs in Q1,indicating an 8% to 9% annual return on this…This would contribute nearly 20% of Total Profit for FY 10 !…This contribution % would move lower if Infosys does shift, as planned, some of the Cash to Business Investments…so you will probably see an Other Income Element of @ Rs 750 crs to Rs 800 crs,under 15% of projected Earnings levelsof @ Rs 5500 crs for FY 10

Now RONW in FY 2009 was 32.80 % with Infosys earning a consolidated Rs 5988 crs on Year end Networth of Rs 18254 crs…You could take the average Networth as the Denominator but the implications would remain the same…..With a near 10% decline in Earnings forecast for FY 10,the RONW will drop sharply to below 23%…In fact to maintain it’s RONW at last years levels Infosys has to register a 40% jump in Earnings !

So with no incremental Earnings and a reducing RONW will Infosys increase it’s Dividend Payout ?…In FY 09 it gave a 470% dividend…That’s Rs 23.50/share…that’s a payout of 22.5% on a Basic EPS of Rs 104.60…It’s Surplus Cash is earning just 8% to 9% pa…If the IT Business fails to generate incremental earnings and if the recovery is only in the Long Term,Infosys should reconsider to increase the Dividend payout…or,just a thought,look to diversify in another growth business…Jerry Rao of Mphasis has done this…he is also now in the Affordable Housing Sector….Infosys can extend it’s superior management capability to build yet another Business from Scratch !  

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