CLSA optimism on Infosys led by Narayana Murthy

After 2 yrs of criticism, approves new direction but says quick turnaround unlikely

Brokerage firm CLSA, which had created a flutter in the market last year by writing an open letter to Infosys’ chief executive officer (CEO) to convey investors’ “frustration” with the company, has now exuded optimism on the “new found direction” with N R Narayana Murthy at the helm.

In a recent report, prepared after Murthy’s address to shareholders at the company’s annual general meeting last week, CLSA said Murthy’s assurance on changing some of his long-held beliefs showed he “is not rooted in the past”. This means the company is now ready to offer flexible pricing to clients and sacrifice margin for the sake of growth.

“We are believers in the company’s new-found direction and maintain (an) Outperform (rating),” the CLSA report said.

CLSA was most vocal in the past two years over Infosys’  performance. In a report prepared in April 2012, it had written a letter to S D Shibulal, managing director and CEO, saying investors were showing a rare frustration over the company’s performance.

“… the key question on every shareholder’s mind is what is troubling the company, which has been the flag-bearer of the Indian IT (information technology) industry globally and single-handedly raised the profile of Indian equities among foreign institutional investors,” went their report, authored by analyst Nimish Joshi, at that time.

Historically, Infosys’ focus has been to maintain a high operating margin, the highest among offshore-centric IT services companies. Tata Consultancy Services has since overtaken Infosys in terms of margins. In the quarter ended  March, Infosys’ operating margin was 23.5 per cent, as compared to TCS’ 26.5 per cent. The company had attributed that to the change in business mix in recent quarters.

According to CLSA’s latest report, while Murthy has indicated he’d address the key challenges, the company is unlikely to achieve a quick turnaround.

It said Murthy had indicated the current market environment required the alteration of Infosys “3.0 strategy”. As a part of his focus on the short term (six to 12 months), Murthy has said he’ll focus on Infosys’ traditional businesses, including indicated custom applications, business process outsourcing and infrastructure management.

“These areas have the potential to accelerate revenue growth in the near term and Infosys’ key target remains to enhance the win ratios in large outsourcing deals,” the report said.  

However, high-end consulting and enterprise businesses and intellectual property-led platforms and solutions are critical from a three to five-year perspective, it added.