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Are investors overcautious on Infosys? - Views on News from Equitymaster

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Are investors overcautious on Infosys?

Aug 23, 2011

In the last one year, Infosys stock is down 21%. In comparison, peers such as TCS (Tata Consultancy Services) and HCL Technologies and even the benchmark BSE-Sensex has performed much better. Why is this under-performance? Is it that the Infosys aura is fast fading?

While part of the stock price decline is due to turbulences in US and Europe, key end market for Information Technology(IT) companies, the underperformance relative to sector as a whole is attributable to the issues that are largely internal and company-specific. In the last few quarters, Infosys has missed its revenue guidance. That too at a time when arch-rival TCS reported blowout earnings with positive guidance and the entire IT sector seemed to be recuperating. With the stepping down of Narayan Murthy from the Chairman position last Saturday, the biggest concern in investors' mind is whether the new management can drive the company ahead and whether there is sufficient coherence between key personnel that is required to run a large company like Infosys. In short, investors are concerned whether Infosys will take back its IT bellwether tag. Will Infosys be the same without Murthy?

Of course it will never be the same. Apple would not be the same after Steve Jobs. Microsoft would not be the same after Bill Gates. But we should appreciate that Infosys has been grooming the next level of leaders by involving them in decision making process and taking the process one level below the Board. This way, people who were only looking at their unit earlier, now participate in planning and execution of tasks at the organization-wide level. We should realize that change is inevitable and that the succession issue is always a very difficult one.

In addition, by being overcautious on the management change issue, investors are in a way underestimating the new Chairman KV Kamath. He is the man who has brought ICICI Bank to the position where it is today - the largest private sector bank in India with an asset base of a whopping Rs 4 trillion.

Whether Infosys scales new heights and grows faster than peers under Kamath's able guidance is yet to be seen. But one thing is sure. Under Kamath's guidance, Infosys is all set to shed its 'conservative' image and will be much more aggressive than before. In the past, Infosys has been very reluctant to make better use of its cash pile of Rs 150 billion. Now, the company is more open to acquisitions. Kamath has already given indications that an acquisition in the near future is a distinct possibility.

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