The return of co-founder and emeritus chairman N R Narayana Murthy as executive chairman of Infosys (Infy) has naturally dominated information technology (IT) news over the past few days. A couple of comparisons have been made with Apple's decision to re-induct the late Steve Jobs.
Some commentators see this as an act of desperation. Infy has clearly lost a lot of ground in the past two or three years. It has been overtaken by Cognizant in terms of revenues (Cognizant is not listed in India) and slow growth has meant lost market-share overall.
The last set of results and guidances (forecasts) have deeply disappointed the market and the stock dropped 20 per cent in one session. It is down about 1.5 per cent in the last year, although the industry index, the CNXIT is up about 7.5 per cent and the Nifty is up 12 per cent.
This under-performance is despite some upside due to the weaker rupee and also despite the US slowly pulling out of recession. In fact, the company has decided to stop issuing guidances in a policy turnaround, underlining how beleaguered it is feeling.
The company has tried several different things. It bought Lodestone, for instance, in a search for inorganic growth. It has developed its touted 3.0 strategy, with a vision of "building tomorrow's enterprise". None of this has worked, so far. The results on Glassdoor, a website which allows employees to vote anonymously to rate their chief executive, shows Infy CEO Shibulal has a much lower internal approval rating than other big IT honchos.
The IT industry is probably on the cusp of a cycle where operating practices will change significantly. The cloud and its increasing adoption is already impacting the Indian model of putting vast teams of low-level competent coders into action.
Consultancy and systems integration is one way forward - Infy has looked for growth in this but the spends are discretionary and might not be easy to nail down. Other options, such as moving heavily into products is a possibility but no Indian major has really looked at that option with much seriousness. HCL Tech has pushed into infrastructure management.
Can NRNM turn things around? Or will he simply re-enter the picture at a point when the 3.0 strategy starts paying off? Or, will the US economic recovery accelerate, resulting in a rising tide lifting all boats? Or will Infy continue to slip?
I have no idea. The long-term prospects of Infy are a toss-up. What could get interesting in the short term is the market's reaction to the change at the top. Sudden management changes can have a sharp immediate effect on share price, regardless of whether these work in the long run or not.
Usually, those effects are negative. A CXO is sacked, underlining problems within the company and the share tanks as a result. Sometimes the changes are not so unexpected - there are rumblings from shareholders or the Board before the change occurs. Sometimes, the changes are shockers forced by legal circumstances - for example, Phaneesh Murthy.
This instance doesn't fit any of the above. While Infy had been rumoured to looking for the next CEO, nobody outside a charmed circle really expected NRNM to be put back in harness. If there is one man who is universally respected in the IT industry, it is NRNM. So, it's likely to be seen as a surprise but one with positive aspects to it.
There is a chance, and I'd reckon a fairly good one, that there will be a short-term positive impact on the share price. Whether that will translate into a trend that anticipates fundamentals is much more difficult to judge.
Speaking purely as a trader, it could be worth taking a long position in the stock or, more efficiently, in the stock futures with a perspective of 5-10 sessions. Infy has a tendency to see sharp moves in either direction. So, a leveraged position is a highly aggressive strategy. Keep a stop-loss at say five per cent below the price and be prepared to lose a fair amount if this doesn't work out.
