Infosys has been struggling to keep pace with the wider IT industry, it has had to deal with visa lawsuits and its 3.0 strategy is yet to deliver. These are just several challenges NR Narayana Murthy will have to deal with as he returns as executive chairman.
NR Narayana Murthy is returning to Infosys as executive chairman, at a time the once technology bellwether is going through a crisis.
"The board has taken this step keeping in mind the challenges that the technology industry and the company faces and in the interest of all stakeholders, particularly shareholders large and small, who have asked for strengthening of the executive leadership during this challenging time," KV Kamath, who is stepping down as the board chairman effective Saturday, said.
Murthy, who has been appointed as executive chairman for the next five years, will be joined by his son Rohan Murthy as his executive assistant. And the two will indeed have their hands full of challenges.
The company once used to lead the street with forecast beating results and was one of the few companies in the software services industry, which issued quarterly and annual guidance. But those good times have long gone.
Not only has it stopped issuing quarterly guidance from last year, it is also struggling to keep pace with the rest of the industry, as it continues its slow journey towards Infosys 3.0 strategy.
And that journey to the future is hurting its present, critics say.
Infosys reported fourth quarter net profit a little ahead of street expectations at Rs 2,394 crore (up 3 percent year-on-year). But revenue growth of 18 percent at Rs 10,454 crore, was lower than what analysts had expected. The EBIDTA margins slumped to an all-time low of 23.6 percent from 31.07 percent in September 2009, best in the industry at that time.
Worse, the company ditched EPS forecast and guided for only 6-10 percent full year revenue growth, way below 12-14 percent growth industry body NASSCOM has forecast.
In comparison, US-based Cognizant reaffirmed its full year 2013 revenue growth guidance of 17 percent. India's largest IT services exporter Tata Consultancy Services is also confident it will grow faster than the NASSCOM guidance.
In Kamath's words, Murthy has played a "pioneering role" in building the company and the Indian IT industry. He will certainly have to pull a lot of knowledge and experience, accumulated over the last several decades, out of his hat, to drive Infosys ahead and once again take back to the top.
Over the last several quarters, Infosys continued to focus on margins even as others like TCS and HCL Tech chased volumes. Now Infosys has also started becoming more flexible in pricing, but that certainly didn't translate into better volumes in the fourth quarter. This dilemma of volumes or margins will also have to be addressed.
The company has also had to deal with visa fraud cases in the US. Although one lawsuit filed by an ex-employee was dismissed in a US Court, a second case was withdrawn after successful mediation. However, it did raise the issue of sending employees to the US on short-term non-work visas and such cases have led to growing demands of curbing and strictly monitoring H1-B visas and outsourcing as such.
The stock too has underperformed. In the last one year, it has only risen about 1 percent, compared with a near 24 percent gain in the wider Nifty. Since fourth quarter results, Infosys has lost Rs 30,000 crore in market cap.
Murthy, himself refused to comment much on what were the key challenges that he saw and compelled him to take up executive role once again at a company, which he founded and calls it his "middle child." He said the decision to appoint him was taken only on Saturday morning and he himself has been away from executive responsibilities for the last 7 years.
He said, "the calling was sudden, unexpected and most unusual." He says the comeback is "exciting" yet "challenging," and the appointment has given him a unique opportunity for him to add value to SD Shibulal, MD and CEO. He will help the CEO in achieving his role as much as possible, he added.
Is it time to ditch the Infosys 3.0 strategy?
Murthy said that certain aspects of the strategy have delivered. But there will be a detailed study and if it is then felt that some changes are required, they will be taken.
Does bringing Rohan Murthy as his executive assistant, signal a more wider and significant executive for Murthy's son in the future?
"Rohan will have no leadership role and his only role will be to make me effective," Murthy stressed.
All eyes will be now on the street's reaction on the announcement. While the stock could jump on Monday, tackling the challenges will be a bigger and longer term task for Infosys and the Murthys.
Infosys stock price
On July 25, 2014, Infosys closed at Rs 3352.35, down Rs 25.9, or 0.77 percent. The 52-week high of the share was Rs 3847.20 and the 52-week low was Rs 2888.10.
The company's trailing 12-month (TTM) EPS was at Rs 185.71 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 18.05. The latest book value of the company is Rs 733.03 per share. At current value, the price-to-book value of the company is 4.57.
READ MORE ON Infosys, Narayana Murthy, executive chairman, Rohan Murthy, SD Shibulal, KV Kamath, Infosys 3.0, earnings, results, challenges
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