Infosys turmoil: Will transition spell trouble for India’s IT giant?

Mtoday news/ET

BANGALORE, April 15: Infosys Technologies , long used to setting lofty standards and attaining them with ease, presented an unfamiliar sight on Friday.

It struggled with earnings for the fourth quarter of 2010-11 and two of its veteran stalwarts said they were leaving amid murmurings of dissent at the top. Infosys’ halo was slipping, making one of India’s most revered companies look ordinary, experts said.

 

 

Displeased investors pushed the stock price down by nearly 10%, its biggest percentage drop since May 2009, and many analysts were sceptical about the company’s prospects in the coming months.

"Infosys’ superior financial performance and crisp communication through much of last decade had created some sort of a halo around the company. The muted financial performance through the last two years, unsatisfactory explanation of their own FY12 outlook and uncertainty on the restructuring exercise which has dragged longer than expected has removed that halo and put Infosys in the category of other mortal companies," said Nimish Joshi of CLSA.

January-March 2011 revenue grew by just 1.1% compared to the previous quarter and volumes declined by 1.4%. Infosys forecast that revenues would increase by 18-20% in 2011-12, but its EPS guidance was way below expectations. Making matters worse were the surprise resignations of Mohandas Pai and K Dinesh just as Infosys prepares to take leave of its founder and chairman NR Narayana Murthy, who steps down in August.

"It was a double-whammy,’’ said a senior executive at the Life Insurance Corporation of India, the biggest financial investor in Infosys. Even so, he said, LIC will keep its faith with India’s second-largest software exporter. "It is a strong company and ours is a long-term business. We are not going to take a short-term call.’’

Infosys’ below-par performance also knocked the wind out of the stock market. The Bombay Stock Exchange’s benchmark Sensex index fell 310 points, or 1.57%. Infosys, which enjoys the second-highest weightage on the 30-stock index, contributed 193 points to that fall.

On the Nasdaq , Infosys’ American Depository Receipts were trading nearly 14% lower at $63 at 9 pm Indian time. A CLSA note was unsparing in its criticism of Infosys, saying that "for a stock near its highs every day, results need to come at the top end of street expectations, not struggle to meet them. By that yardstick, Infosys’ March quarter report is extremely poor, missing the most pessimistic expectations."

"Another quarter of outperformance should strengthen TCS’ re-rating prospects relative to Infosys." Pai, the head of HR, a member of the board and a former CFO, has been a favourite of Murthy. Some Infosys executives ascribed the outspoken Pai’s departure to bad blood between him and SD Shibulal, the chief operating officer and the CEO-in-waiting. But Pai, 52, denied that there were any differences.

"Murthy did not want to let go of me and asked me if I wanted the posts (of CEO/COO)," Pai said. But "it is time to let me step down so that those younger can also have their time under the sun."

The leave-taking, he said, was "excruciatingly painful, the same way as it did when I heard that my father who was in coma could not recover."

Infosys, founded three decades ago with savings of Rs 10,000 from Murthy’s wife Sudha, is in the middle of a leadership transition at a crucial time. Bigger rival TCS has been increasing its lead and fourth-placed Cognizant Technologies, snapping at Wipro’s heels, has shown that it is a force to reckon with. Infosys, which is sitting on about $3 billion in cash, has been described as a risk-averse company and many executives holding senior posts are restless for change.