Infosys Facing A Tough Time

The Infosys ADR (American Depository Receipt) closed down by more than 6 % yesterday after its management viz. N.R. Narayana Murthy – Chairman, S.D. Shibulal – CEO and Managing Director and Rajiv Bansal – CFO expressed their concerns over the company's performance at the investors meeting organised by Barclays on March 12, 2014. Infosys stock was also trading down by more than 7 % since the start of today's trading session.

Narayan Murthy disclosed Infosys's expected revenue growth between 11.5 and 12 %, which is less than 13 % declared earlier by the company. Murthy was not very happy with Infosys's loosing opportunities to capitalise the depreciating rupee and efforts taken to strengthen the operating margins. During the last couple of years, the company was facing tremendous pressure on its profitability and its operating margins came down to present 23.5 % for current year against 29.5 % during FY11. Most unsatisfactory cause for Murthy is that Infosys should scale up its operating margins to 41.5 %, but the company's operating margin came down by 45 % and its revenue growth by 22 % in last couple of years. Murthy also highlighted Infosys' growth at 5.8 % during FY12 and FY13 against the growth of Indian software industry at 11 %.

Despite of all these negatives, Infosys's management is making every effort to regain the company's proud status. The chairman expects further 36 months for Infosys to contain costs and align to market realities and also expects major visible change by end of Q3FY16.

According to Shibulal, the company is facing severe challenges on the skill miss-match front and there is a huge gap between client’s needs and what Infosys could have provided. This in turn is resulting in slower growth compared to the industry growth rate.

Murthy clearly warned his fellow employees and expressed his dislike about no considerable critical value addition to the company by a major chunk of people in the company. He clearly said that there will be more and more exits over the next 12 months. This very event is one of the major causes of the pain seen in the market since yesterday as this will add up cost to the company’s finances. Furthermore, Murthy also clarified that there will be major changes in the top leadership of the company. SD Shibulal is going to retire by March 2015. The company co-founder, Srinath Batni and S Gopalakrishnan, are also going to retire by April 2015. The exiting of experienced management creating delayed strategical decision will be one of the major concerns in Infosys's investor’s fraternity. However, Murthy is confidence that the company will get a new CEO in next 12 months.

Despite of revival in global economies, Shibulal found his optimism crashing after his meeting with more than 30 clients, after the Q3 result announcement. Clients across Financial Services, Manufacturing and Retail segments are observing intensive pressure to reduce their cost.  Expecting a slowdown for some of the clients across these segments many clients have cancelled Infosys's projects in next quarter.

Considering all these concerns over Infosys's fortune, the management has lowered the FY14 guidance and will try to implement more predictable earning model in the medium term. Furthermore, the management is expecting slower start for coming financial year 2015. Though there will be slower or moderate performance in early part of FY15 by the company, we expect Infosys to give decent returns over next one year as the above mentioned concerns are already discounted by the market after today's fall in its share price. Hence, the long term investors should continue to stay invested in the company and wait till further clarity on these issues before taking fresh exposure in this stock.