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After remaining a fence-sitter as emeritus chairman and handing over reigns of the company he co-founded, N R Narayana Murthy has come to the rescue of Infosys after the information technology (IT) giant faced internal and external headwinds.
While on one hand Infosys struggled to cope up with these challenges, most of its peers – both in the large- and the mid-cap universe – have managed to ride out the storm. US-listed Cognizant, for instance, overtook the once considered IT bell-weather in terms of revenues.
The recent results and the management’s policy of not giving the guidance have not gone down well with the market. The stock has been an underperformer, rising 8.69% in the past one year as compared to 13% rise in the S&P BSE IT index since 01 June 2012 and a 23.8% rise in the S&P BSE Sensex.
"While this brings comfort to all stakeholders and raises hopes of a quicker recovery, it also signifies the realisation of the need for a turnaround, and that time is running out. Infosys needs to be set on a steady course before the current CEO retires and starts transitioning to the new CEO at least 12 months from now," note Nitin Padmanabhan and Soumitra Chatterjee of Espirito Santo Securities in a report.
However, the markets have given a thumbs-up to the development on Monday with the stock gaining nearly 8% in early deals on the Bombay Stock Exchange (BSE) to Rs 2596 levels, as compared to a marginal 0.1% rise in the benchmark index, the S&P BSE Sensex.
Stock strategy
So, can Narayana Muthy turn things around for the company, or is it too early to take this call? Will the rupee-dollar equation help the sector and propel Infosys towards the better? Is it a good time to buy the stock?
Says Amar Ambani, head of research at IIFL, “Murthy’s re-entry into the organisation is a positive signal since the company’s fortunes have been on a downward spiral once he exited. Other companies in this space, like TCS and Cognizant have done quite well. Infosys, on the other hand, saw its margins and market share dip. I feel that the re-structuring at Infosys was overdue and the others at the helm could not have helped improve the situation.”
“However, one should not expect an immediate improvement in the financials. It will take at least three quarters for the company before any signs of an improvement are visible. We maintain a market-performer rating on the stock,” he adds.
Points out Sanjeev Hota, assistant VP (research-IT), Sharekhan: “Infosys has witnessed management transition before as well and involvement of Mr Murthy is another such phase. We believe this change is positive but we are not very optimistic on the fundamentals of the company. I think there is further pain ahead. The kind of gains that we have seen on Infosys this morning is not sustainable and it will take time for Infosys to get back its glory.”
“The key thing to look forward will be how Infosys utilizes its cash surplus and builds strategy. Rupee above 54 will definitely work to their advantage but other factors such as US Immigration issues needs to be looked into. We have a BUY on TCS and HCL Tech while Sell-on-Rise rating on Infosys,” he says.
Observes Amar Mourya, IT analyst, IndiaNivesh Securities: “The change in management is having a tactical or a sentimental impact. Fundamentally, however, goods have to be delivered. The company has grown nearly 11-times since Narayana Murthy left, and so, its revival will take time. Moreover, the kind of team he had with names like Mohandas Pai and Nandan Nilekani is difficult to be developed again. Overall, it’s a welcome move and shows real measures taken be company to come out of pain.”
“We maintain BUY rating on Infosys with a target of Rs 2,683 as we believe company is in right direction, it is flexible about pricing policy, interested in new acquisitions with the latest being Lodestone. We also have a BUY on Tech Mahindra, NIIT Technologies, KPIT Cummins,” he adds.
“The key resistance level for Infosys was Rs 2,500. We believe traders should not chase the stock, but should wait for it to stabilise near Rs 2,500 to enter in fresh longs. On the upside, Rs 2,700 is possible in the June series, noted Navneet Daga, derivative analyst, KR Choksey Securities.
“Weakness in the local currency is good news for the IT pack as a whole. However, Infosys and Wipro are the best picks among the IT pack for upside momentum,” he adds.
Nitin Padmanabhan and Soumitra Chatterjee of Espirito Santo point out that their recent primary data meetings point to a recovery taking longer than they initially expected, and hence they have cut our EPS estimates for FY14 and FY15 by 8%, reducing the fair value (FV) to Rs 2,770 from Rs 3,000. However, they retain our BUY recommendation.
