U.S. Markets open in 2 hrs 1 mins

Infosys: A Giant up from Slumber?

Zacks Equity Research

It seems IT bellwether Infosys Technologies Ltd. (INFY) is up from its deep slumber after a streak of disappointing results over the last couple of years. In third quarter fiscal 2014, earnings were up 8% year over year and a solid 21% on a sequential basis. Investors’ confidence is also getting back on track as reflected by a steady uptrend in share price.

Thanks to Executive Chairman of the Board Narayana Murthy, who came out of his retirement to take charge of the stranded ship amid declining top and bottom lines, lower margins, high attrition and loss of businesses to competitors such as Cognizant Technology Solutions Corp. (CTSH), Wipro Ltd. (WIT) and Tata Consultancy Services, Infosys have regained its lost Midas touch.

Mid-2011 to Mid-2013: The Unforgettable Period  

In Jun 2011, Narayana Murthy formally resigned from the executive position when Infosys was at its peak. With his exit, the company seemed to loose its focus and in a span of six to eight quarters, Infosys witnessed drop in revenues. Low employee morale, a confused 3.0 strategy and flawed PSPD (predictability, sustainability, profitability, de-risking) model further made matters worse.

Infosys suffered badly due to leadership issues as it could not frame a proper succession plan after Murthy. The company looked divided and locked in the trap of commoditization, whereby it lost ground to rivals on pricing.

When other companies resorted to aggressive reduction in budgets to reduce costs, Infosys was stuck in the pre-recession period. This had a domino effect on the company’s contract wins, leading to lower top and bottom line, ultimately resulting in lower profits. Infosys even began to offer revenue guidance in the range of 6% to 10% which was way below the industry growth projection of 12% to 14%.     

Leadership issues were also hurting Infosys dearly. The new CEO after Murthy’s exit failed to recreate the magic and Infosys was missing the focus, clarity and decisiveness in policy making. Within a span of less than two years, Infosys was forced to bring the founder back to the helm to retain the shareholders’ and investors’ confidence.

Just to give an excerpt of waning investor confidence, share prices of the company fell by approximately 29.7% from Jun 1, 2011 to Jun 1, 2013.

Murthy’s Comeback: A Sigh of Relief

With Murthy back on board, share prices had an immediate jump of almost 9%, leading to a two month-high. Murthy himself has given a time-frame of three years to revive the fortunes of the company with a more decisive and focused approach – all this for virtually no monetary compensation!  

After reassuming office, Murthy focused on winning large deals while maintaining the market share. Secondly, he addressed the high operating costs of the company through a cost-optimization strategy and decided to retrench non-performing highly paid employees who were perceived to add no significant value. At the same time, Murthy emphasized on improving employee morale through efficient rewards for avid performers.

Not a Bed of Roses

Murthy’s path is not that easy to tread on. The challenges confronting this dynamic leader include a fast revival of sagging sales, maintaining market share with competitive pricing, boosting employee morale amid high attritions. In addition, the recent immigration bill passed by the U.S. government on restriction on the number of visas it can apply for employees is another major challenge. This could increase the operating expense of the company, as a significant number of employees working in the U.S. will burden its already-stretched coffers.   

Despite all these issues, Murthy has maintained his composure and has emphasized that Infosys will continue to grow on its traditional path by focusing on plain vanilla services which are increasingly being commoditized. Furthermore, he intends to strategically utilize the dry powder of the company for healthy organic and inorganic growth.

Meanwhile, companies like IBM (IBM), Cognizant and Accenture plc (ACN) have strengthened their presence in India. These have intensified competition in the domestic market as well. Infosys, therefore, will have to provide a viable advantage to potential employees to attract lucrative human capital.  

Looking Ahead

Murthy’s comeback has created a positive vibe for Infosys that was staring down the barrel. The company now looks more focused and has revived in the last 9 months giving a share price return of 49.6%. The second time around, Murthy is all set to take his company to the zenith of the IT industry.

Read the Full Research Report on INFY
Read the Full Research Report on ACN
Read the Full Research Report on IBM
Read the Full Research Report on CTSH
Read the Full Research Report on WIT

Zacks Investment Research