Takeaways from Infosys AGM: CLSA

Annual General Meeting
In his maiden interaction with investors after taking over as Executive
Chairman, Narayana Murthy warned that it could take up to 3 years to
take Infosys to the investor-desired level of performance. He also
admitted that this would require him to change some of his long-held
beliefs about the business (now open to chasing revenue growth at cost
of margins). His speech suggested that keeping employees happy and
improving communication with all stakeholders (Infosys has been poor in
these in last 2 years) are his key near-term target areas. In this
backdrop, money-making in Infosys remains a game of patience. We are
believers in company’s new-found direction and maintain Outperform.

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Focus on traditional “bread & butter” business in the near-term
Narayana Murthy indicated that the current market environment requires
Infosys to alter the execution of its Infosys 3.0 strategy. While high-end
consulting and enterprise business and IP-led solutions/platforms are critical
from a 3-5 year perspective, the traditional business (custom
applications/BPO/infra services) will be Infosys’ key focus area in the short
term (6-12 months). Somehow, over the past 2 years, Infosys’ focus on these
areas had blurred but that is about to change. These areas have the potential
to accelerate revenue growth in the near-term and Infosys’ key target
remains to enhance the win ratios in large outsourcing deals. However,
Narayana Murthy also warned that this could come at the cost of margins.
Employees to be “first among equals” among stakeholders for now
Multiple HR mishaps at Infosys over the last few years have left employees
scarred and Murthy was categorical that keeping employees happy and rebuilding their confidence is the need of the day. According to him, better
communication and compensation should help bridge the trust deficit which
has developed with the employees. Improving the quality of sales force is also
on Murthy’s to-do list. He indicated that Infosys would do everything (higher
incentives and more staff) to make the sales organisation happier and more
effective. In the same breath, Murthy also hinted at being flexible on pricing
policy (key complain of Infosys sales force in past) to enhance growth rate.
Long and a tough journey ahead
Per Murthy, predictability of Infosys’ earnings has gone down in recent times
making the guidance process difficult. Hence, Infosys has discontinued EPS
guidance starting FY14. Achieving the desired level of financial predictability
could take up to 3 years. Murthy’s address at the annual general meeting
suggest 3 key things: 1) Murthy is not rooted in the past (ready for flexible
pricing and margin sacrifice), 2) There is unlikely to be any quick turnaround
(some pain will continue in CY13) & 3) Employee welfare has been identified
as the first and most important step of the re-building process.