Hopes high on Murthy effect, but flip side exists: Ambit

There is high expectation that the change in guard will be positive for Infosys and may give investors some hope for recovery in the IT giant's finances, says Ambit Capital's Ankur Rudra about the recent development at Infosys.

Also Read: Narayana Murthy returns; Infosys top brass to overhaul ops  

"However, a change in business and economic realities, increased competition and dependency on founders or promoters to lead the company will not only prove to be a challenge to Narayana Murthy, but also force those aspiring to lead the company to raise questions about the IT giant's valued ideals of professionalism and meritocracy," he told CNBC-TV18.

Below is an edited transcript of the interview on CNBC-TV18

Q: What is your view on the recent development in Infosys? What will be the impact on the stock and the company? How are investors viewing the company?

A: I think any change for Infosys now is a positive given how much the IT giant has underperformed its own guidance and that of its peers for the last few years. And the stock has responded positively to the development.

The key positive is the change at the top. This change may possibly lead to some tactical improvement and better execution. But more importantly, the change could also usher in a change in the strategy that could be a longer-term positive for the firm.

In the immediate short-term, the change of guard could boost the morale of employees and to a larger extent, the mood of the investors who have been somewhat troubled with Infosys' persistent underperformance.

But on the flip side, the last time Murthy was at the helm the economic and market situation was very different — Infosys had a very clear proposition of positioning itself at a premium. Since then most of its older service lines have commoditised, many of its smaller peers have caught up with it and its positioning does not hold water in the market to that extent.

It has missed a few spending cycles, especially around infrastructure management and the management doggedly following many of the strategies that were implemented when Murthy was in charge has possibly has led to some of the current problems at the company.

So, we will have to wait and watch to see how much difference Murthy can make.

Infosys also suffers from most of is leadership being promoters of founders when compared with India-based peers including Cognizant. Most of its peers have transcended from a promoter-led leadership team to professional-led leadership team.

The recall of Murthy along with his son, though at a very limited capacity, will lead to questions by a few probable CEO aspirants on the ideals of meritocracy and professionalism that Infosys has always prided itself on.

Q: Do you plan to upgrade your EPS expectations from Infosy or will you wait for further evidence of the Murthy effect on performance? Will the market accord Infosys higher valuations and therefore push up target prices?

A: On earnings expectations, there is no reason to become over optimistic yet. If anything,  this change in leadership and the way Murthy categorised it to the extent of unexpectedness, suggests that the situation has not improved even in the current quarter. Therefore, there is no reason to revise estimates for FY14 upwards at all till we see a change in strategy and the success of that strategy in the market place.

From a valuation perspective, the market has already expressed its reaction. There were a few suggestions of this nature over the last few weeks and the last 10-percent move, including today’s move, already values the benefit of Murthy on the board. So, I do not think there would be any incremental upside valuation unless it is proven that the firm has recovered.