Infosys Promoters

What happens if they entirely exit the company?

On the 09th of June, the Infosys stock price corrected sharply on the back of news that the founder promoters may be looking to completely exit the company. While the initial reaction was one of panic, the question is whether it could really impact the stock in the long run. Here are a few considerations…

Dilemma of minority promoters…

While none of the promoters of Infosys have either denied or commented on the news, what it represents is the dilemma of minority promoters. Unlike other IT companies like Wipro, TCS and even HCL Tech, where the promoter groups still exercises substantial control due to the ownership pattern, Infosys has been a different ball game. For too long the original promoters have been holding on to just 11% of the company in share ownership terms. That makes Infosys a predominantly institution-owned company. As a result the founder promoters have found it difficult to exercise any meaningful control over regular decision making within the company. Institutional shareholders typically prefer to stand by the existing board of management of the company as long as there are no major issues. That was evident the last time Mr. Murthy raised objections to executive compensation and governance standards. Without saying as much, the institutions backed the management of the company and the promoters could do little with limited ownership.
IT is entering an uncertain phase…

The big takeaway is that the Indian IT industry is entering an uncertain phase. Like pharma, the pressure on IT is coming from both ways. It is coming in the form of greater commitment to client economics and deteriorating economics domestically. That is not the kind of a situation that the promoters have operated in over the last 30 years. With annual exports of $150 billion, the Indian IT industry is actually of global scale. Markets as well as analysts need to be prepared for a clunky IT industry that is struggling to grow. The story of Rs.10,000 invested in Infosys in 1993 growing to Rs.26 crore today is the stuff that legends are made of. But that is not going to repeat! That is something neither the promoters nor the markets should even expect in the future!

Institutions may stay put…

The big question confronting us today is what would large marquee investors do if the promoters decided to exit the company? Frankly, nothing much! Most institutions are reconciled to slower growth and weaker margins in IT and that is reflected in lower P/E ratios. Most institutions are looking at IT as a means of de-risking their portfolio. Promoters can argue that they can get better investment opportunities elsewhere and they would be absolutely right. A little bit of old-time sheen may go away from Infosys, but not much else!