Rearguard action wont be easy for Murthy: Brokerages

Written by fe Bureau | Bangalore | Updated: Jun 4 2013, 21:26pm hrs
A string of brokerage houses on Monday called NR Narayana Murthy's return to Infosys as a positive for the company, but they do not expect a quick turnaround in the fortunes of India's second-largest IT services exporter. Many feel the changed circumstances in the IT world may not make things easy for Murthy despite his vast experience.

Infys 4.0: Murthy back in saddle

Murthy had headed Infosys at a time when the Indian IT industry was going through a boom, till around 2006. Since then, the global economic meltdown had cut into IT spends the world over, and even tier-I clients cut down on their discretionary spends besides demanding price discounts something that Murthy never had to deal with.

BNP Paribas in its note on Monday said, We believe investors are likely to see the step as reassuring given the recent volatile results, and the stock could react positively, at least in the near term. But we note the jury is still is out on whether Murthys return will be able to address Infosyss growth and margin challenges, which we believe are further complicated by the proposed immigration reforms in the US.

Murthy's 'middle child' needs health, infra boost

In his second coming, Murthy is believed to be interested in expanding his US and Europe teams soon while also taking direct control of the company's M&A team. He has already told his immediate team members at Infosys to become a more client-facing entity.

Ray Wang, CEO of US-based research house Constellation Research, said, On the one hand, NRN left his mark on many of his key disciples who have been in charge. On the other hand, the conditions have changed so much in the industry that one may wonder if one man can bring around the changes required to turn the tide. Infosys shareholders hope for a Steve Jobs-esque miracle. Yet, the odds are low based on history.

Barclays was more specific in their Monday note. While the focus of the company should remain on longer term growth, we hope that it also focuses on a few steps with quicker returns, which include communication strategy, CEO succession, cash management and cost control. The current CEO SD Shibulal's term will end in 2015.

Under Shibulal's regime, the company has been gradually decentralising some of its core functions to speed up decision-making. The slew of decentralisation initiatives, which was set to be rolled out by the company, has been put on hold. Different departments have been given some level of operational freedom in the recent past, especially in areas such as budget allocation, salary hikes and promotions. Sources point out that with Murthy returning in an executive position, the company may go back to the old model of centralised decision-making. While the business units will still decide on the variable pay component and promotions within their team, the different units are likely to lose some freedom to take independent decisions, sources said.

Barclays said, The next management change (due by March 2015) would be the first transition to a 'non-founder' CEO for the company. Given the disruption around the last CEO change, we believe it is vital for Infosys to come out with a definite succession plan significantly before the event to manage internal transition and allay investor concerns.

The entry of Rohan Murty son of Narayana Murthy as the latter's executive assistant has further complicated the matter, said BNP Paribas said in its note. The addition of Rohan Murty despite the former's strong academic qualifications and Murthys insistence that he will not be the next CEO is not necessarily the best signal to investors, Barclays warned.

However, the biggest challenge facing Infosys today is whether it is able to transform into a next- generation company and remain relevant in the global IT industry. As Wang said, The good news should NRN come back to implement change and shake up the company, hes one of the few individuals with the acumen and authority to accomplish this challenge. However, he must rethink the business model as product companies have become services companies. Services companies have become information-based companies and information companies are selling experiences. The original formula for success no longer exists. In fact, the future of the global IT services business requires firms to build IP, consider big data business models, and lead in creating new ecosystems.