Analysts cheer Infy move to appoint CEO

But wait for clarity on Vishal Sikka's strategies; say return to high growth will be long-drawn

Information technology (IT) company Infosys' move to appoint Vishal Sikka as the chief executive officer (CEO) and managing director (MD), with a host of top-level changes, has got a thumbs-up from most analysts. It is expected to increase clarity on the growth strategy, operations and succession plan. But there are questions on the pace of turn to fast growth and the impact of possible senior exits.

"Sikka's strategy will be watched in the light of the recent senior exits and Infosys' lower revenue growth compared to peers," says Sandip Agarwal of Edelweiss Securities. He has a buy rating, with a target of Rs 4,307.

Nomura and JPMorgan have maintained their buy ratings, with targets of Rs 3,770 and Rs 4,000, respectively.

But the stock was muted. It made an intra-day high of Rs 3,298 (up 3.7 per cent on previous close) in early trades on Thursday. It closed 0.4 per cent lower on previous close at Rs 3,167 on the BSE.

Infosys has been struggling to grow on a par with its peers over two to three years due to the exits at the top and middle. Attrition was 18.7 per cent in FY14, up 240 basis points on FY13. Unlike its peers, Infosys continues to be cautious on revenue growth given continued client-specific issues.

"While a positive step, we believe the recovery will be long-drawn. Investors will seek clarifications from the management on addressing issues of (a) high attrition, specially in sales, (b) loss of business and strategic vendor status from existing customers impacting revenue growth and (c) below par presence and acceptance in key growth market continental Europe," says Aniruddha Bhosale at Deutsche Bank Research.

Sikka was a member of executive board of SAP AG, leading all its products and innovation globally. He will take over from S D Shibulal on August 1. At 47, he is young and can serve a longer term, providing management stability. Exit of Narayana Murthy and Rohan Murthy means no multiple heads.

"Given Sikka's experience with IT products at SAP, he will command the respect of employees. His client relationships can help Infosys win business. But, with his products background, we are concerned about his ability to run a services company. This could have implications on his view of costs and, hence, margins. In this context, Pravin Rao's elevation to chief operating officer could be a measure to manage costs/delivery," adds Bhosale.

Analysts at Prabhudhas Lilladher, which has retained buy rating, with a target of Rs 3,920, say there is a possibility of fresh attrition at the top. But the current valuation provides cushion to the downside risk, they add.

Infosys scrip trades at an inexpensive valuation of 15.4 times FY15 estimated earnings. Most analysts, thus, remain positive on its prospects.