CEO changes usually don’t lead to a turnaround among large IT firms that have lagged on growth previously and IT stocks outperform over longer periods if they improve across multiple metrics, foreign brokerage Jefferies said in a report.
Hence expecting TCS/TechM to outperform on revenue/PAT growth due to leadership change may be optimistic, it added.
“Our analysis of 13 CEO changes over the past decade shows that midsized IT firms outperform on growth/profitability after a CEO change more often than large IT firms,” it added.
A CEO change led to outperformance on revenue growth on seven out of 13 occasions, on revenue and profit growth on five out 13 occasions and on revenue, profit & ROA/ROE on three occasions out of 13 occasions.
“We also note that on nine occasions, CEO changes have led to an improvement in two out of the three parameters and in seven out of these nine occasions, IT stocks have outperformed Nifty IT by more than 2 per cent CAGR. Of the four occasions where CEO changes led to improvements in less than 2 parameters, stocks underperformed on three occasion,” the report said.
Mid-sized IT firms benefit from CEO change. Among large IT firms, a CEO change led to outperformance on revenue growth on three out of seven occasions, on revenue and profit growth on one out of seven occasions. No large IT company has seen outperformance across all the three parameters relative to the industry, the report said.
However, among mid-sized IT firms, CEO changes have led to revenue growth outperformance on four out six occasions, revenue and profit growth on four out of six occasions and outperformance on all three parameters on three of the six occasions.
Hence, mid-sized IT firms have a higher likelihood of outperformance after a leadership change vs. larger IT firms.
Turning around IT firms is difficult — especially for larger firms, the report said.
“We define turnaround as a situation where in an IT firm that has lagged the industry on both revenue and PAT growth prior to the CEO change, starts outperforming on both revenue/PAT growth after the CEO change.”
Of the 13 CEO changes, there were six potential turnaround situations, equally split between large and mid-sized IT firms. Of the six cases, a turnaround has taken place on only two occasions, suggesting that turnarounds in IT firms are difficult to achieve. Furthermore, both cases of successful turnarounds were among mid-sized IT firms and none among large IT firms, the report said.
(Sanjeev Sharma can be reached at Sanjeev.s@ians.in)
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