What is common between Rajesh Gopinathan, Vishal Sikka, and Vivek Paul?

TCS surprised everyone last week with the unexpected resignation of CEO Rajesh Gopinathan. Prior to trade on Friday, the view of quite a few market experts was that the stock could see a knee-jerk negative reaction. However, the markets took the news in stride with a muted response. Why was that?

To begin with, TCS’ has an excellent track record when it comes to management transitions. So, whether it was S Ramadorai handing over the baton to N Chandrasekaran and he in turn handing it over to Rajesh Gopinathan, the transition process has been impeccably smooth. So, markets are expecting the same with another TCS veteran K Kirthivasan chosen to take on the mantle now. Further, there is a six-month transition process before Rajesh Gopinathan exits, providing sufficient time.

While some have expressed concern that this may not be the best time for transition given the intensifying global headwinds, this too is not new to TCS. When N Chandrasekaran took over as CEO in 2009, the global economy was still licking its wounds from the global financial crisis.

Further, when Rajesh Gopinathan took over in early 2017, while the global economy was chugging along, the IT sector was not doing well. The industry was facing significant business model challenges, as cloud-driven technologies were threatening their traditional business model. 2015 to end 2017 were not good years for investors in IT stocks. However, amidst this challenge, the management change at TCS was handled smoothly and the company managed the accelerated shift to digital business quite successfully.

During Rajesh Gopinathan’s tenure, TCS has grown its revenues at a CAGR of 11 per cent and EPS at a CAGR of 9 per cent. This is quite a creditable performance given TCS’ large size, and headwinds faced at the time of his taking over.  The stock has returned a CAGR of 18 per cent under his tenure.

Thus, while in general the outlook for the IT industry is likely to get clouded due to global headwinds, for now the management transition is not a cause for concern.

On the lighter side, the takeaway now is that high profile IT CEOs who give aggressive aspirational targets quit unexpectedly! Rajesh Gopinathan has quit ahead of achieving his aspirational target of sustainable 26-28 operating margins for TCS. Neither did Vivek Paul  get anywhere close to taking Wipro to his aspirational target of $4 billion in revenues when he quit (Wipro’s 4x4 target). Vishal Sikka too quit before achieving his aspirational target of Infosys achieving $20 billion in revenue and 30 per cent operating margins. So, next time IT CEOs give aspirational targets, investors must take it with a pinch of salt.

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