Analysts cheer Murthy's return to Infosys, but with caution

Top broking firms have cheered the return of Infosys' co-founder N R Narayana Murthy to the company, but are hesitant to conclude the worst may be over for India's second largest software exporter. While the stock rose as much as nine per cent earlier on Monday cheering the development, analysts said the gains could be temporary as Murthy faces the stiff task of bringing the firm back to its glory days.

Most broking firms, which retained their 'overweight' or 'hold' ratings after news broke on Saturday that Murthy would come back as executive chairman, said Infosys is being weighed down by declining IT spending in the US and Europe as well as stiff competition, resulting in poorer visibility in earnings.

"We believe investors are likely to see the step as reassuring given the recent volatile results," said BNP Paribas Securities' analyst Abhiram Eleswarapu, while maintaining its 'hold' rating on the stock. "But, we note the jury is still is out on whether Mr Murthy's return will be able to address Infosys' growth and margin challenges, which we believe are further complicated by the proposed immigration reform in the US," he said in a client note. After the early euphoria on Monday, the stock gave up a portion of its initial gains before closing at Rs 2,514, up 4.4 per cent over Friday. The scrip has mostly been trading in the range between Rs 2,000 and Rs 3,000 in the past couple of years, raising doubts among shareholders about the company's long-term prospects.

Now, the change in guard may boost long-term investors' confidence in the firm, said Goldman Sachs, which has maintained its 'neutral' rating and price target of Rs 2,380 after the event.

According to Morgan Stanley, Murthy's presence could strengthen market perception about the company's leadership and improve execution. The investment bank, which maintained its overweight rating on the stock, said with Murthy taking charge, the worst may be over for Infosys shares, but the pace of earnings improvement could take another two to three quarters.

Murthy's 'second innings' at Infosys will likely be a lot more challenging since he has been away from executive responsibilities at the company for seven years, said Deutsche Bank.

"The company's problems are structural rather than mere quarterly stumbles," said Deutsche's analyst Aniruddha Bhosale in a client note, while reiterating its 'hold' rating and price target of Rs2,175.

On Murthy's return, Bhosale said, "The key question is, how will customers in the US and Europe interpret this? Those hoping for a bolder move may be disappointed."