Will Recent Management Changes Help This Company Reclaim its Past Glory?

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Infosys (NYSE: INFY) has been under pressure for the last two years. The company has been continuously lagging behind its peers in earnings. The growth forecast for FY13 given by the management is below the industry average provided by NASSCOM (6%-10% Y-o-Y vs. industry estimate of 12%-14% Y-o-Y). In order to revive the company’s falling fortunes, Narayan Murthy has returned as executive chairman. The company has also rolled out a salary hike for its employees, which will (hopefully) motivate them.

Narayan Murthy's return will help Infosys regain its position

Narayan Murthy has a reputation of delivering results. During his previous tenure at Infosys, he made the company the second largest IT company in India. With Narayan Murthy returning back to Infosys, we will see changes in strategy. During the AGM on June 15, 2013, he briefed the shareholders about his strategy to revive Infosys, during which he emphasized building a more predictable earnings model. We believe his management skills and expertise will help Infosys regain the confidence of the customer and investors.

Salary hike will boost morale

In his very first move after returning back, Murthy has proposed a salary hike across the board. The increase will be in the fixed component of the salary, which will be very helpful for the employees. Secondly, this will help the company reduce the attrition rate, which is at 20.4% now.  We expect that the recent salary hike will enable the company retain its employees and give some time to Narayan Murthy to remove inefficiencies which have crept in over the last two years. Though the salary hike will impact the company’s bottom line for FY14, it will be compensated by the depreciation in the Rupee.

Focus on flexible pricing strategy will accelerate growth

Infosys has always looked for an opportunity with high margins, but now the change in pricing strategy will help the company look for opportunities with low margins as well. This will help the company increase its revenue and compete on price with its competitors, especially Cognizant, which has modeled its business on a low margin, high volume strategy.

Improvement in sales force quality will help increase the customer base

The company is planning to invest in its front end part of the business. So it has decided to improve upon the quality of its sales force to make it more effective and to gain more business. The company has announced the maximum salary (8% hikes in salary) hike for this section of employees in its recent salary hike announcement. This section of employees is the most important to the business, as it deals with the company's clients. So this hike will help retain its best talent and also acquire new talent, which will help the company retain and win new clients.

Investment in consultancy will boost both top line and bottom line

The company has been investing in the consultancy part of its business. It acquired Lodestone Holding AG, a Zurich-based company, to increase its consultancy expertise. Generally this part of the business has provided high margins for the company. The company is expected to continue to expand its consultancy business under Narayan Murthy’s leadership.

Peer Analysis

Cognizant (NASDAQ: CTSH) has outperformed its peers in the last two years. The company has reported 18.1% growth in revenue in the first quarter of FY13 as compared to the first quarter of FY12. The company has provided full year guidance of 17%, which is higher than NASSCOM’s 12%-14% guidance. With strong revenue growth, it has replaced Infosys to take the second position behind TCS among the major Indian IT players.

The company has shown a strong performance in Manufacturing/Retail/Logistics and Financial Services, with revenue growth of 27.1% this quarter as compared to the first quarter of FY12. The company has been expanding its business in the Europe and Asia Pacific regions to reduce its dependence on North America, and it has acquired many firms last year to expand its presence in the European region (Acquired six companies of C1 group in Germany). With its low margin model the company has been able to snatch customers from its competitors.

Wipro Ltd. (NYSE: WIT) reported disappointing results for the 1st of quarter 2013. The company’s IT revenue increased by just 0.5% quarter over quarter due to the slowdown in its Telecom and Government verticals. Management’s guidance for revenue growth of -0.6% to 1.6% in FY13 is weak when compared to NASSCOM’s forecast of 12%-14% growth. On the positive side, the company has some deals in the pipeline. If it succeeds in closing on the deals, we will see improvement in its revenue and profit margin.

<table> <thead> <tr><th> <p><strong>Company </strong><strong></strong></p> </th><th> <p><strong>P/S ratio</strong><strong></strong></p> </th><th> <p><strong>Op. Margin</strong><strong></strong></p> </th><th> <p><strong>1 yr. Fwd. P/E</strong><strong></strong></p> </th><th> <p><strong> </strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Infosys</strong><strong></strong></p> </td> <td> <p>3.25</p> </td> <td> <p>25.97%</p> </td> <td> <p>13.65</p> </td> <td> </td> </tr> <tr> <td> <p><strong>Cognizant</strong><strong></strong></p> </td> <td> <p>2.48</p> </td> <td> <p>18.41%</p> </td> <td> <p>13.54</p> </td> <td> </td> </tr> <tr> <td> <p><strong>Wipro</strong><strong></strong></p> </td> <td> <p>2.54</p> </td> <td> <p>18.06%</p> </td> <td> <p>14.31</p> </td> <td> </td> </tr> </tbody> </table>

Infosys has a higher margin when compared to its peers, which supports its investment thesis of investing in high margin business. Its one year forward P/E ratio is along the industry line. The company has a higher P/S ratio which confirms the investor’s confidence in its shares.


With Narayan Murthy back, we will see Infosys find the urgency required to compete with its peers. Narayan Murthy’s good past record and his sharp management skills will help the company revive its fortunes. The company has also announced a salary hike across its global workforce. This strategy will hit the EPS in FY13, but the company’s revenue and profit is expected to show upward movement from FY14 onwards. With the well-placed strategy to compete on the price front with the competitors and simultaneously focusing on the high margin consultancy business, the company will increase its top line and bottom line in the coming years. I recommend a buy at the current levels. 

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Ash Sharma has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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