Tata Group is a multinational conglomerate and holding company headquartered in Mumbai. It was founded in 1868 by Jamshedji Tata and gained international recognition after purchasing several global companies. It is India’s largest conglomerate. In a sudden and dramatic turn of events, Cyrus Mistry was on October 24 sacked as Chairman of India’s largest conglomerate Tata Group and replaced by his predecessor Ratan Tata in the interim, a move that Mistry-camp slammed as unprecedented erosion of core values. When Mistry took over in 2012, he was facing some challenging situations such as the decision to sell Tata Steel UK in the wake of mounting losses and the legal battle with Japan’s DoCoMo over the split of their telecom joint venture Tata-DoCoMo. And while there were no reasons given by the company for the change of leadership of the man who was brought in with much fanfare, it is believed that Tata Sons was unhappy with Mistry’s approach of shedding non-profit businesses, including the conglomerate’s steel business in Europe, and concentrating only on cash cows.
Simmering discontent between the founders and the current board is adding fire to the speculation that IT giant Infosys may be following in the footsteps of the Tata Group fiasco. And one of the bone of contention seems to be that Narayan Murthy is unhappy with the flexible and generous variable pay of chief executive officer (CEO), Vishal Sikka. Sikka, appointed in August 2014, has seen a 11 fold jump in his take-home salary (including bonus and incentives) to Rs 487.3 million in FY16. In fact, Sikka draws the highest salary amongst the current lot of CEOs of large and mid-sized IT companies.
There is no denying that the Infosys CEO has steered the company out of a slowdown at a time when the sector itself is grappling with tough business environment. And Donald Trump’s stringent laws on HI-B visa are likely to further raise the heat particularly as Indian IT companies derive a significant share of revenues from the US. However, a look at the piling cash flows of IT company’s shows that shareholders may be getting a raw deal in this.
Large IT companies have witnessed a marked rise in incremental cash and investments as a share of free cash flows in the past six years. This share was over 20 per cent for Infosys, TCS and HCL Tech, whereas for Wipro the share shot up to over 45 per cent. However, the cash returned to shareholders in the form of dividends and share repurchases as a share of free cash flows stood well below 70 per cent over the same period. So while the founders may be unhappy with Vishal Sikka cornering a meaty paycheck, they actually should be rallying around the pile-up of cash flows that is depressing returns for shareholders. Tata group saw change of guard and IT companies are facing testing time in the high drama and power game.
(The views expressed by the author in the article are his/her own.)