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Murthy asks Infosys investors to focus on long-term dream

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Infosys to develop software for chinese firm
Infosys to develop software for chinese firm

Infosys shares plunged as much as 9 per cent on Thursday after the IT major forecast weak revenue growth in the March quarter at an investors meeting organized by Barclays.

At the meet, Infosys executive chairman Narayana Murthy said the outsourcer may grow at 11.5 per cent, which is the lower end of its sales outlook for 2013-14 fiscal. At this growth rate, Infosys will continue to lag peers such as TCS and HCL Tech.

The muted outlook surprised analysts as only in January Infosys had raised its revenue growth guidance to 11.5-12 per cent from a previously forecast 9-10 per cent. Some brokerages were quick to cut their price target on Infosys after factoring in flat to negative growth in the January to March quarter.

Many analysts, however, retained their optimistic outlook on Infosys. Barclays, cut its 12-month price target on Infosys, but maintained its “overweight” rating on the stock. Macquarie said that the dip in shares presents a buying opportunity in Infosys.

Part of the optimism, despite sharp drop in stock price today, is on account of Mr Murthy’s eloquent outlining of the company’s long-term strategy at the investors meet.

Mr Murthy on Wednesday reaffirmed that Infosys is on track to fulfill its aspiration of becoming “the most desirable company” as promised by him last year. He, however, reiterated that the process of rebuilding Infosys will take three years.

“Infosys culture is to proactively bring bad news to people because we want to be remembered first as honest and decent people and then perhaps as smart people. We will follow the adage that let the bad news take the elevator, while the good news takes the stairs,” Mr Murthy said.

Phani Sekhar of Angel Broking told NDTV that markets have over-reacted to the management’s cautious commentary. “Infosys was re-rated after Narayana Murthy came back last year. It does not seem any of the previous steps taken by the management is being rolled back or they are not working. Certain clients in certain verticals are not ramping up to expectations in the March quarter. That does not change the structural story of Infosys,” he said.

Infosys has embarked on a three-pronged strategy of cost optimization, improving sales effectiveness and software delivery to drive growth and margins. The company’s focus on aggressively cutting cost has already started yielding results, as evidenced from the rise in margins in the December quarter, Mr Murthy said. Sales effectiveness could start kicking in by the first or second quarter of 2015-16 fiscal, he said, adding that software delivery effectiveness would take at least 18-36 months.

Mr Murthy sounded confident that Infosys will get to the median growth rate in the industry within three years and in five years the company will get back to industry-leading growth rate, which it enjoyed till 2007-08. Infosys’ margins may climb from current 25 per cent to 26-27 per cent over the long term, he added.

It is this long-term dream that investors are probably willing to buy at the moment despite Infosys’ significance underperformance over its competitors. Infosys shares have risen sharply since Mr Murthy returned back from retirement in June 2013 to head the company he founded many years back. Infosys had seen a sharp decline in revenue growth and margins between March 2011 and 2013 despite favourable conditions such as large depreciation in the rupee, but its shares have gained over 40 per cent since June 1, 2013.

Mr Murthy also stressed that contrary to popular perceptions, Infosys has not been hampered by the spate of exits since his return last year.

“Barring a few exceptions, most people that left us were not adding critical value to the company… Over the next few months, you will see some more,” Mr Murthy added.

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