In your interest.
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No beating about the bush.
Yesterday, when the Sensex was down 455 points, Infosys an index stock was up 3.32% while TCS and HCL Technologies were flat. On Saturday, Infosys announced that NR Narayana Murthy would come back as the executive chairman. A case of insider trading? We will never know because Infosys is a holy cow and there will be no probe
On Saturday, Infosys has announced that its main founder NR Narayana Murthy who was on a retirement, will be returning to the company as executive chairman of the board and as an additional director for five years beginning from 1 June 2013. It also said that Rohan, his son, will be joining the $7 billion company as his father’s executive assistant. This is strange because Mr Murthy is widely seen as a professional manager, who once headed a corporate governance committee of Securities and Exchange Board of India (SEBI). In addition, Rohan was never known to be interested in running Infosys.
More intriguingly, while the press statement by Infosys was released on Saturday, yesterday the BSE Sensex tanked 455 points, or 2.25%, but Infosys, a Sensex stock, actually rose by as much as 3.32% during the day.
As a matter of perspective, this was the highest percentage decline in the Sensex in 14 months and the highest rise for Infosys in one and half months, both happening on the same day! Did all software stocks rise yesterday? No. Tata Consultancy Services (TCS) and HCL Technologies were flat. Worse, ever since Infosys crashed by as much as 20% on 12th April, after declaring poor results and muted guidance, there has not been single positive factor that could drive the shares up. The stock has been moving sideways in a narrow band. There was absolutely no reason for the stock to rise yesterday. No material information was released to the public.
Clearly, someone knew that Narayana Murthy is coming back and that many investors will see this as a positive development. There is a prima facie suspicion of insider trading.
Two block trades did take place on the National Stock Exchange (NSE), according to web portal moneycontrol.com. One block deal took place on NSE at 15:28 hours, or two minutes before market closing. Another block deal took place at 15:18 hours, or 12 minutes before market closing. The value of these deals were Rs5.77 crore and Rs6.25 crore, respectively.
While taking over an executive chairman, Narayana Murthy said, “This calling was sudden, unexpected, and most unusual. But, then, Infosys is my middle child. Therefore, I have put aside my plans-in-progress and accepted this responsibility. I am grateful to Mr KV Kamath—the chairman, the board, and every Infoscion for giving me this opportunity. I intend to do my best to add value to the Company in this challenging situation.”
Amazingly, just last month, he had denied the possibility of returning to Infosys. When the Mint newspaper had asked him about it, Mr Murthy said, “I think as I said, sitting where I am, looking at the data, I don’t see that happening. I think it’s all speculation.”
According to the press release, Mr Murthy will be earning a token salary of Re1 only.
Infosys said, “In order to function more effectively Mr Murthy intends to create the chairman’s office to assist him during his tenure and has requested the board to permit him to put together a team for this function. The team will include his son, Dr Rohan Murthy, as Mr Murthy’s executive assistant.”
After the company’s March quarter results, Nomura Research had said that in the light of a lower-than expected fourth quarter performance by Infosys, it expects consensus earnings, multiple downgrades, and management’s outlook of pricing and margin pressure in the near term.
Infosys reported net profit of Rs2,394 crore for fourth quarter of FY2012-13, registering a marginal 3.4% year-on-year (y-o-y) growth and 1.1% sequentially, as per Indian accounting standard. Its consolidated revenues for the quarter under review, however, rose 18% y-o-y to Rs10,454 crore and flat (0.3%) sequentially.
Infosys’ management indicated to Nomura that there were delays in deal ramp-ups and deal closures in 4Q. While 4Q volume growth at 1.8% q-o-q was better than 3Q (1.5% q-o-q), pricing decline of 0.7% q-o-q and cross currency impact of 0.4% q-q impacted revenue growth.
On pricing, the management had stated, “There is pricing pressure in the non-discretionary portfolio (63% of revenue) and management expects this to get worse in the near term.”
According to Nomura, Infosys’ management expected the environment to be challenging and was finding it difficult to predict margins in the short-term as there are unknowns like pricing, cost of hiring onsite given likelihood of visa shortage and investments required to be made to push growth.
Coming back to the appointment of Narayana Murthy, veteran banker KV Kamath would step down from his position as chairman of Infosys and take up the role of lead independent director. In the statement, Mr Kamath said, “The board has taken this step keeping in mind the challenges that the technology industry and the company faces and in the interest of all stakeholders, particularly shareholders large and small, who have asked for strengthening of the executive leadership during this challenging time. Murthy’s entrepreneurial and leadership record and the long experience he has had as a technology pioneer makes him eminently qualified to lead the company and provide strategic direction at this point in time.”
S Gopalakrishnan, who was serving as the executive chairman, would be re-designated executive vice chairman and would primarily focus on key client relationships and broader industry issues, the statement said.
SD Shibulal would continue to be the managing director and CEO of the company, it said.
In August 2011, Kamath was appointed chairman, succeeding Murthy, who was made the chairman emeritus post his retirement. Also, the then CEO and MD S Gopalakrishnan (Kris) was elevated as the executive co-chairman, while COO SD Shibulal filled in Kris' position.
It remains to be seen how the market reacts to Mr Murthy’s appointment as an executive chairman. In five out of last eight quarters, analysts have been consistently way off the mark in estimating Infosys's results despite continuous interaction with the management. However, this stunning saga not only shows the quality of analysts but also shows how things have changed at Infosys. (When will analysts be realistic in their expectations about Infosys?)
There was a time when Infosys set the standards on corporate reporting in India. It was the first company to start reporting quarterly results much before it became mandatory. Also, for years, Infosys surprised the market with its conservative guidance and superlative actual results. It believed, in the words of founder NR Narayana Murthy, in the principle of under-promise and over-deliver.
Now, since Narayana Murthy is back at the helm, it would be interesting to see if he would be able to keep his words again.