Infosys after Narayana Murthy’s return: taking stock
Infosys Ltd is certainly making the right sounds and the right moves. The company said in a meeting with analysts at Barclays Securities (India) Pvt. Ltd
that it is no longer hung up about maintaining premium billing rates,
but is rather focused on cutting costs to improve margins. Besides it
has increased focus on traditional outsourcing deals to return to
industry growth rates.
Needless to say, this will be music to the ears of investors. Even
so, while the company may be making the right moves, the departure of
some of the company’s senior executives is likely to impact its
momentum. Infosys has done fairly well in the past two quarters, and it
has already managed to win a reasonable number of large deals. But every
now and then, a senior executive has resigned, leading to concerns
about the sustainability of the company’s recovery.
Analysts at CLSA Research said in a recent note to
clients, “Continuous churn and reallocation of responsibilities at the
top does bring along the risk of undermining some of the good work done
post (N.R. Narayana) Murthy’s return. A change in CEO scheduled in 18
months time could continue this top management flux.” Speaking to
Barclays’ analysts, the company’s chairman N.R. Narayana Murthy
said he isn’t worried about the churn in senior management, citing that
the company has a full bench of senior managers to fill any gaps.
Whether that is so, only time will tell. But, by and large, momentum
does get disrupted, given the close association senior management has
with large customers.
CLSA’s analysts wrote in their note, “Infosys believes
that the second half of FY14 could be weak beyond normal seasonality,
with the recent re-allocation of management responsibilities impacting
some growth. This is the key driver of Infosys’ weak implied revenue
guidance of 1-2% quarter-on-quarter decline in the December and March
quarters.”
All this is not to say that some of these issues can’t
get sorted out in the medium-term. In the interim, if the company is
successful in cutting costs, there could be a surprise on the margin
front, which will help reinforce investors’ belief about the recovery.
Murthy told Barclays’ analysts that the company is looking to cut costs
in three areas—a) decrease the proportion of senior people onsite, by
rationalizing its role ratio; b) reduce the usage of subcontractors by
improving internal training; and c) reduce the number of people in
onsite locations in business enabling functions.
While all this is welcome, it remains to be seen to what
extent the company gets flexible on pricing to win back market share, as
this could completely wipe out the gains from cost cutting.
All told, while Murthy’s return is doing the company
good, it’s still premature to conclude that the company will return to
its glory days.
At 10.30am the Infosys stock was trading 0.63% down at Rs.3,275 while the benchmark Sensex was up 176.22 points to 20,596.48.
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