According to stock brokerages, while the return of Narayana Murthy is positive for Infosys in terms of leadership, he will have to take care of the company's communication strategy, succession plan, cash management and cost control
The second inning of Infosys founder NR Narayana Murthy as executive chairman of the information technology (IT) company is termed as morale boosting by analysts at broking firms. However, brokerages, especially Nomura and Barclays, are cautious over the long-term due to several impending issues and challenges that the company founder would have to face head on.
Nomura feels that Narayana Murthy returning as chairman is a positive as it would strengthen the leadership bench at a challenging time for the company, boost employee morale and possibly improve communication to stakeholders.
Barclays, on the other hand expects the company to focus more on long-term growth and take few steps with quicker returns. Infosys (and Narayana Murthy) need to take quick steps in communication strategy, succession plan for chief executive, cash management and cost control, the brokerage says.
According to Nomura, a sustainable turnaround is less likely to be forthcoming, while in the near term Infosys could continue to see sluggish revenue growth and margin pressures. “...we think the challenges for Infosys remain with, no material revival in discretionary spending (about 40% of revenues from this segment, weaker positioning and smaller scale in cost efficiency segments driving growth like infrastructure management services (IMS) and business process outsourcing (BPO) v/s competition and continuing margin pressure from cost escalation and pricing flexibility. In addition, US immigration bill remains an overhang, and if passed the bill could further depress an already flattish earnings growth over FY13-15F,” it said in a note.
Religare Capital Markets, on the other hand, expects Narayana Murthy's return to help bolster the leadership and re-ignite the morale of Infosys. It said, “While a mixed demand outlook is a near-term challenge for growth, at least internal issues like customer connect, sales and cost structure can be addressed. Overall the return of Narayana Murthy will lend lot of credence to vision, leadership and execution, which should drive near-term re-rating.”
Here are the issues, listed by Barclays, which Narayana Murthy would face in his second inning at Infosys...
Communication: Infosys stock has exhibited high volatility around earnings with the shares moving more than 5% on six out of past 10 quarterly results. In the past two result seasons, the stock has moved about 20% on the result day. This indicates ineffective communication on result expectations. Furthermore, the company suspended quarterly guidance in October 2012 and full year earnings guidance from April 2013. We agree that weak performance could be one reason behind higher volatility; however, we also note that despite weak performance, peers like Wipro have exhibited lower stock volatility and a more stable guidance philosophy.
CEO: The next management change (due by March 2015) would be the first transition to a “non founder” CEO for the company. Given the disruption around the last CEO change, we believe it is vital for Infosys to come out with a definite succession plan significantly before the event to manage internal transition and allay investor concerns.
Cash: Low dividend payout (and a reducing payout ratio over the past two years) along with a cautious acquisition strategy have led to a cash pile of $4 billion with the company. While historical conservatism around cash usage could be explained by smaller size and rapid growth, we believe that the management needs to significantly improve its lazy capital structure to increase shareholder value.
Costs: Infosys employee costs have increased by +270bps in the past five years compared with -650bps for TCS. While weaker revenue growth could be one reason, we note that Accenture has been able to protect its margins despite slower revenues growth on account of stricter focus on costs.
Nifty may try to rally if today’s low holds since the recent declines have been on low volumes
The market pared its morning gains on selling pressure from consumer durables, banking and realty sectors. The Nifty may try to rally if today’s low holds since the recent declines have been on low volumes. The National Stock Exchange (NSE) saw a volume of 48.70 crore shares and advance-decline ratio of 682:714.
The domestic market opened on a flat note on concerns about the slowing pace of economic growth. On the global front, markets in Asia were mixed in morning trade on speculations that the US Federal Reserve will continue its bond-buying initiative on the back of a contraction in US manufacturing data for May. US indices settled higher on Monday amid volatile trade after Federal Reserve Bank of Atlanta President Dennis Lockhart said central bank is committed to record stimulus measures.
Back home, the Nifty opened two points up at 5,941 and the Sensex resumed trade at19,606, down four points from its previous close. Buying in metal, oil & gas PSU and healthcare stocks helped the benchmarks gain momentum after a sluggish start.
The indices continued their steady rise and hit their intraday highs at around 10.30am on support from capital goods, healthcare, banking and realty sectors. The Nifty touched 5,982 and the Sensex climbed to 19,743 at their respective highs.
The indices pared part of their gains as profit booking set in at higher levels. The market was range-bound till noon-trade in the absence of any fresh triggers.
The benchmarks slipped into the negative in the post-noon session on media reports that the Reserve Bank of India (RBI) plans to take early action against banks whose officials were recently caught in a sting operation willing to indulge in serious violation of banking norms. State Bank of India, Axis Bank, HDFC Bank and ICICI Bank were all trading lower following the report.
The market extended its losses as the indices touched their lows in the last half hour of trade with the banking sector among top losers. The Nifty fell to 5,910 and the Sensex declined to 19,522.
The benchmarks settled near their low and in the red for the third day. The Nifty ended 20 points (0.33%) lower at 5,919 and the Sensex finished the session at 19,546, a fall of 65 points (0.33%).
The broader market closed in the positive with the BSE Mid-cap index rising 0.10% and the BSE Small-cap index gaining 0.27%.
The sectoral gainers were BSE Healthcare (up 1.88%); BSE Capital Goods (up 0.77%); BSE Power (up 0.44%) and BSE fast moving consumer goods (up 0.31%). The main losers were BSE Consumer Durables (down 1.34%); BSE Bankex (down 0.95%); BS Realty (down 0.86%); BSE Auto (down 0.46%) and BSE IT (down 0.45%).
Out of the 30 stocks on the Sensex, 14 settled higher. The top gainers were Dr Reddy’s Laboratories (up 1.88%); Cipla (up 1.83%); Wipro (up 1.60%); Larsen & Toubro (up 1.56%) and Mahindra & Mahindra (up 1.13%). The major losers were Tata Motors (down 2.34%); State Bank of India (down 2.11%); Jindal Steel & Power (down 1.98%); HDFC (down 1.61%) and Sterlite Industries (down 1.40%).
The top two A Group gainers on the BSE were—Bata India (up 6.61%) and GlaxoSmithKline Consumer Healthcare (up 6.02%).
The top two A Group losers on the BSE were—Jaypee Infratech (down 5.23%) and Dish TV India (down 3.25%).
The top two B Group gainers on the BSE were—Williamson Financial Services (up 19.42%) and Sukhjit Starch & Chemicals (up 17.60%).
The top two B Group losers on the BSE were—Splash Media and Infra (down 19.94%) and Rei Six Teen Retail (down 18.81%).
Of the 50 stocks on the Nifty, 21 ended in the in the green. The main gainers were Ranbaxy Laboratories (up 4.22%); Dr Reddy’s (up 2.52%); Cipla (up 2.42%); Lupin (up 2.03%) and L&T (up 1.78%). The key losers were Tata Motors (down 2.53%); Axis Bank (down 2.51%); Sesa Goa (down 2.21%); SBI (down 2.07%) and Ambuja Cement Company (down 1.91%).
Markets in Asia closed on a mixed note as the Japanese market rose on support from financials, consumer durables carmakers while Chinese shares settled lower on pressure from consumer companies after the government ended subsidies for home appliances with effect from 1st June.
The Hang Seng added 0.01%; the Jakarta Composite climbed 1.01%; the KLSE Composite gained 0.59%; the Nikkei 225 surged 2.05% and the Straits Times rose 0.01%. Among the losers, the Shanghai Composite dropped 1.17%; the Taiwan Weighted lost 0.12% and the Seoul Composite ended flat with a negative bias.
At the time of writing, the CAC 40 of France was trading 0.31% higher, the DAX of Germany was up 0.50% and UK’s FTSE 100 gained 0.70%. At the same time, US stock futures were mixed with a negative bias.
Back home, institutional investors, both foreign and domestic, were net sellers in the equities segment on Monday. While FIIs withdrew Rs86.66 crore from stocks, DIIs pulled out funds worth 71.82 crore.
Wind energy major Suzlon today said its unit REpower Systems has signed contracts with ABO Wind for the supply of 13 wind turbines. “The turbines will be installed for two wind farms in Burgundy. The wind farms will generate a total output of more than 26 megawatts (MW),” Suzlon said in a statement. The stock gained 1.42% to Rs10.75 on the NSE.
Mobile value-added services provider On Mobile Global has entered into a definitive agreement to acquire Boston-headquartered Livewire Mobile, a provider of managed mobile entertainment solutions for network operators and device manufacturers. On Mobile will pay $17.8 million for the purchase of LiveWire’s business assets and certain liabilities, subject to certain contingent payments, the Bangalore-based company said on Tuesday. OnMobile advanced 1.88% to close at Rs35.20 on the NSE.
Lanco Infratech has been awarded a major EPC contract by Gujarat Industries Power Company. The contract, worth Rs3,294 crore, is for setting up of 2x300 MW lignite-based thermal power project. The stock gained 3.41% to close at Rs9.10 on the NSE.
“Any import of gold on consignment basis by both nominated agencies and banks shall now be permissible only to meet the needs of exporters of gold jewellery,” the RBI said, adding the restrictions are applicable with immediate effect
The Reserve Bank of India (RBI) today extended the restrictions on gold import to other agencies in addition to banks, in a bid to curtail demand for the precious metal for domestic use amid widening current account deficit (CAD).
“It has now been decided to extend the provisions (of 13th May circular) to all nominated agencies/premier/star trading houses ...accordingly, any import of gold on consignment basis by both nominated agencies and banks shall now be permissible only to meet the needs of exporters of gold jewellery,” the RBI said, adding the restrictions are applicable with immediate effect.
On 13th May, such restrictions were put on banks.
RBI also said all Letters of Credit (LC) to be opened by nominated banks and agencies for import of gold “under all categories will be only on 100% cash margin basis”.
Further, it said, all imports of gold will necessarily have to be on “Documents against Payment (DP)” basis as the imports on “Documents against Acceptance (DA)” will not be permitted.
The restrictions will, however, not apply to import of gold to meet the needs of exporters of gold jewellery.
The government and RBI have been taking steps to reduce gold import. High import has widened the CAD, with such deficit hitting a record high of 6.7% of GDP in the third quarter of 2012-13.
The import of the yellow metal during the first two months of the current fiscal are estimated at $15 billion.
Gold imports by India, the world’s largest consumer, stood at 860 tonnes in 2012.
Yesterday, the Financial Stability Development Council (FSDC), chaired by finance minister P Chidambaram, had discussed the issue of high import of gold.