NR Narayana Murthy may be soft spoken but he means business when it comes to Infosys. Addressing an investor concall hosted by Barclays, Murthy gave a rude shock to the entire analyst community when he said: “We expect to be somewhere between 11.5 percent and 12 percent in our revenue growth. Much more like 11.5 percent compared to what is being proclaimed as the Nasscom industry growth rate and that is about 13 percent.”
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Murthy just didn’t stay at the revenue growth, he went on to say Infosys hasn’t been able to cash in on the rupee depreciation and operating margins for the year to date stand at 23.5 percent, Murthy said. “The second matter of concern for us has been coming down of our operating margin which was 29.5 percent in FY11 and as of date, it is 23.5 percent for the current year. However, it went up to 25 percent during the third quarter of the current financial year.”
Murthy is not at all happy at the way Infosys has performed. He says under normal circumstances Infosys should have used the rupee depreciation to increase its margin to 41.5 percent... But instead its operating margin has fallen by 45 percent and revenue growth has fallen by 22 percent in the last two years.
Murthy remarked Infosys grew at 5.8 percent in FY12, FY13 when the Indian software industry grew at 11%. This growth is something he is not proud off. Murthy pointed out the failure of Infosys to contain costs and align to market realities led to the steep fall in the fortunes of Infosys. He claims the company will take 36 months i.e. he hopes by Q1 FY16 there should be visible change... But says Infosys should be back in the top league by the end of Q3 FY16.
On Management Exits:
Murthy didn't cry over spilt milk when it came to top leaderships exiting the company. He says Infosys Leadership college will be able fill the gaps left by these exits. In Murthy’s words: “By and large most people were not adding critical value to the company”. He says recent survey by the company on management exits with the customers gives confidence that customers have not seen any delay in delivery or services despite these exits. Murthy warns, “Over the next 12 months you will see some more exits”.
The company will see significant changes internally and externally. SD Shibulal will retire by March 2015, Srinath Batni and S Gopalakrishnan, company co-founder, will also retire by April 2015. On the board front there will be at least 3 directors who will be retiring, including Omkar Goswami.
On Succession:
Murthy did not miss the issue, as he himself raised it with respect to succession once Shibulal retires on March 5, 2015. He says the company will get a new CEO in the next 12 months - who will have support of the board and his guidance.
Infosys CEO SD Shibulal says his optimism was crashed after his meeting with 30-35 clients and client facing teams after the Q3 results. Shibulal says, clients continue to reduce cost through outsourcing in the Financial services and the savings are channelized into regulatory compoliance and risk related initiatives. Manufacturing has be hit by the reduced PC sales and capex spending in networking and this will have an impact on revenue growth in this segment. In the retail segment a sluggish sales over the last 2 months, severe winter, aggressive discounts by retailers have led to lesser profitability. And this has led to capping of additional spending in CY14. Some retail clients have specific issues leading to categorisation of spends.Shibulal says some of the clients across sectors have witnessed slowdowns and that has led to re-categorisation of spends, anticipated slowdowns and cancellations of Infosys projects in Q4. Infosys has also seen some challenges with skill mis-matches, between clients needs and what we company could have provided this has led to slowdown in ramp-ups.Infosys CEO says Business momentum has suffered due to these slowdown issues and revenues will be close to lower end of FY14 guidance.Shibulal says for FY15, its is little early to provide any estimates, but the company is in close discussions with its clients and expect to complete the planning exercise by the time they will announce the Q4 earning in April 2014. Shibulal warns, many factors which impacted Q4 slowdown will continue to impact client spending at least in initial part of early FY15, thereby warning near term performance will be choppy.
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