Infosys virus jolts markets

BSE Tech index plunges on poor guidance; Mohandas Pai, Dinesh log out.

Infosys may like to forget the day in a hurry. First, there was a surprise announcement about two high-profile departures from the board. After that, the software major came up with quarterly results and earning per share guidance for the financial year ending March 2012 that were far below Street expectations.

The impact on the stock was severe. It plunged 9.5 per cent, the sharpest fall in almost a year, which was partly responsible for bringing down the benchmark indices. The BSE technology index fell 6.3 per cent, significantly more than the 1.5 per cent drop suffered by the broader market. On the Nasdaq, the company’s American depositary receipts got hammered and were down 13.7 per cent till 9 pm.

Investors were most worried about the disappointing outlook for the next year after the group said it expected revenue to grow by 15.4-17.3 per cent, much lower than the 18-20 per cent average estimate of analysts.

While Managing Director S Gopalakrishnan said the results were in line with an “expected slow quarter”, what added to the disappointment was that net profit rose just 2.1 per cent sequentially, indicating the company was losing steam.

Infosys, which remains a leader in India’s IT sector, has lagged TCS in net profit growth over the last three quarters.

Earlier in the day came the announcement that T V Mohandas Pai, the director-in-charge of human resources, had quit. Though the company said Pai had quit “in pursuit of future endeavours” – something the most recognised face of the company apart from its founders reiterated – the general perception is that he lost out in an internal power struggle.

Pai said he was leaving to make way for a new set of leaders. He dismissed speculation that his resignation was triggered by unfulfilled ambitions and said he did not aspire to become the chief executive.

The other departure, however, came as no surprise – that of the low-profile K Dinesh, one of the company’s co-founders. “Dinesh, who will retire by rotation at the company’s annual general meeting to be held on June 11, has expressed his intention not to seek re-appointment,” the company, in the middle of its biggest management transition since inception, said.

The board will meet on April 30 to finalise leadership plans, as Chairman NR Narayana Murthy retires in August. Former Microsoft India head Ravi Venkatesan was on Friday appointed an additional director on the board.

Now, just three out of seven original founders are left in the company. Infosys needs to get some executive board members too. The only three executive board members are S Gopalakrishnan, CEO and MD, Shibulal, COO, and Srinath Batni.

Analysts said Infosys needed to gear itself to face competition from companies such as TCS and Cognizant.

“An 18-20 per cent y-o-y growth projection in dollar revenues for FY12 does indicate that the demand trend for the sector looks robust. However, a very poor earning guidance suggests that somewhere Infosys has had to alter its much-vaunted high-margin strategy to get business. This, coupled with the impending organisational changes, indicates that Infosys is likely to remain in a flux in the near to medium term,” said a CLSA note on the company’s fourth quarter performance.

Many were also taken by surprise that in a market that was rebounding —especially with players like Oracle and Accenture reporting robust numbers— Infosys saw a 1.4 per cent dip in volume on a sequential basis. “This was the first quarter in the past seven when volumes sequentially declined. Happily, pricing was strong, as constant currency billing rates were up 2.1 per cent. We believe the only positive thing coming out of the quarter was pricing,” Viju George and Amit Sharma of J P Morgan said in their report.