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Has Murthy’s return done more harm than good at Infosys?

LiveMint logoLiveMint 01-06-2014 Mobis Philipose

Investors seem to have concluded that N.R. Narayana Murthy’s return to Infosys Ltd a year ago has done more harm than good.

The Infosys stock has underperformed peers in the range of 14.3% to 21.1% in the past one year. It may have risen in absolute terms, but that doesn’t count for much because the rupee has fallen against the dollar since Murthy joined and demand for software services has improved. Even Wipro Ltd, which is still to show clear signs of a recovery in performance, has outperformed Infosys by a handsome margin.

Although the underperformance may not seem like much, in the four years between May 2009 and 2013, Infosys shares underperformed those of Tata Consultancy Services Ltd (TCS) by as much as 66.5%. At the time of Murthy’s return in June 2013, it had seemed that this represented a nadir and things could only look up.

In fact, on the first trading day after Murthy joined, Infosys’s market capitalization rose by $1 billion and its shares outperformed TCS shares by 6%. Despite TCS’s financial performance being far better last year, Infosys maintained this lead for most of the past year. The cookie crumbled when Infosys gave a profit warning in mid-March, followed by a weak earnings announcement in April. The last straw has been the exit of president B.G. Srinivas.

“Notwithstanding the spate of senior management exits in the past year since Mr Murthy’s return, this development is very surprising and disappointing to us since we have considered Mr Srinivas to be the clearest frontrunner in the CEO (chief executive officer) race,” analysts at JP Morgan Research wrote in a note to clients last week. “We see more uncertainty ahead, which only protracts the recovery for Infosys.”

While the company has been meandering along the recovery path, many investors have jumped ship. In the past five years, Infosys shares have underperformed those of HCL Technologies Ltd by 78%, TCS by 71%, Cognizant Technology Solutions Corp. by 47% and Wipro by 24%.

Last week, Murthy said in a note to reassure employees that the company’s best is yet to come. It now looks like things will get worse before they start getting better. Srinivas was overseeing businesses that together accounted for around 70% of the company’s revenue. His sudden exit will impact operations. If Infosys picks up one of the remaining senior managers as CEO, investors will be no doubt disappointed. So will many insiders and attrition will continue to be high.

Few analysts expect this outcome. It’s widely believed that the company will hire an external candidate as its new CEO. This has its own set of challenges. An outsider will take longer to bring about changes and the company’s recovery will get pushed out further.

The company does not have the luxury of time. It is already behind companies such as TCS and Cognizant in addressing the growing demand for the so-called social, mobile, analytics and cloud services. JP Morgan analysts say there is a very real risk that Infosys will miss the next big thing as energies over the next 12-24 months will be directed towards fixing its core problems.

A report in The Economic Times said that at least one external candidate the company approached expressed apprehensions about joining the company and working under “a very active executive chairman and founder”. Murthy’s second stint is for five years, and it’s not clear if a new CEO will have a free hand at turning around the company.

Murthy has already set in place a revival plan with three areas of focus. In the area of cost optimization, results are already visible. Even so, an arrangement where Infosys hires a so-called weak CEO who executes Murthy’s plans will be frowned upon by investors. A strong CEO who is given a free hand is certainly more desirable but will mean some churn and uncertainty.

Murthy is clearly faced with a difficult choice. The value destruction at Infosys has been immense and the company just can’t afford another poorly managed leadership transition.

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