Wednesday, February 22, 2017

Cash pile at Infosys

Although there is a lot of noise about corporate governance, the poor utilisation of assets is a bigger issue

By Swami Saran Sharma

Sometime in the early 1990s, I read an interview of the then CFO of Disney, Gary Wilson, where he said that he considered it his function to implement the company’s overall strategy to maximise shareholders value. As a young chartered accountant then his statement had left a very strong impression on me. I have my own practice and have adviced several companies, but the foundation of the advice rests on shareholders’ value. So, when last week I read about former Infosys CFOs bicker over corporate governance issues and voice their concerns over shareholders values, I was intrigued.

With a key on reading balance sheets, I have been vocal about the poor money management at Infosys. Yes, the IT behemoth which has for long been the bellwether IT Company in India has not been as good at managing its finances as it would like several people to believe. A detailed insight into their annual report a couple of years back indicated that they had about Rs 6,500 crore as balance in bank accounts alone! This meant that this much amount was not even parked in mutual funds.  Their last balance sheet shows that they have close to Rs 24,000 crore in the bank in the form of FDRs and deposits, which is again a very inefficient way of handling cash, especially when there are safe and more tax efficient ways to manage cash.

What corporate governance?

For a company that takes pride in having introduced several best practices, such as declaring forward looking statement and earnings guidance, not handling cash efficiently does not bode well. The recent imbroglio over the founders raising their concerns over the quantum of severance package to a former CFO looks a trivial matter when I see the quantum of opportunity loss for the investors in the company who could have otherwise earned better returns.

It surprises me that even institutional investors are quiet about the cash pile, which has only been growing each year and not being deployed for acquisition or growth. In fact, the company could very well pay dividends to investors than former CFOs harping about buybacks.   

If the argument is that auditors have not raised questions on the way the cash is being managed, I would like to remind people about how the same level of auditors had signed on the Satyam balance sheets, which had grossly inflated revenues and profits, which boosted the company's valuations and share prices. At Infosys, the promoters, despite staying away from the day-to-day management from time-to-time step in with some allegation or concern, which mars their interests in the company.

Opportunity loss

Yes, the promoters of Infosys also created several millionaire workers in their company, but they have not been that magnanimous when it comes to distributing money by way of dividends to shareholders and sit on cash reserves with no clear plans on how this will be used in the future. They could take a leaf out of the PSUs, which tend to pay dividends and share the wealth than just sit on cash.

Assuming the interest on FDRs and money in the bank earns about 4.8 per cent after tax annually, it pales in comparison to the Earning Per Share (EPS) of over 11 times on the face value of shares. Even if I were to look into the severance package of former CFO Rajiv Bansal, it does not seem to be much. In fact, the two former visible CFOs Mohandas Pai and V Balakrishnan were party to this high cash being kept in banks and have no moral rights to raise concerns over governance issues at this moment, when they themselves did not work towards the maximization of shareholders wealth.

To me, keeping idle cash is the biggest financial crime being committed at Infosys, and it is not being addressed. It would be in the interest of investors if the board looks into transparency issues with its cash deployment than spend time over a board decision on a severance package and reacting concerns aired in the media by the promoters. Going back to Gary Wilson he took Disney from a $2 billion to $20 billion company and continues to preach that the role of the CFO is to create value for shareholders aside from crunching numbers and analysing cash flow.

To borrow from Wilson a good CFO brings intangible assets to his company. Company image and customer satisfaction are all intangible factors that eventually impact the bottom line. When CFOs understand this, they can play a much more pivotal role in their organisation. I wish the current CFO of Infosys takes Wilson’s advice and puts it to practice. 

 

olmdesk@outlookindia.com

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