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The 4 Cs that can turn around Infosys

Last updated on: June 4, 2013 08:28 IST

The 4 Cs that can turn around Infosys

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Infosys must focus on a few steps for quicker returns, says a Barclays report.

Hailing the return of Infosys founder, Narayana Murthy, as the executive chairman of the as a positive step, Barclays said the focus of the company should remain on longer term growth. It hopes the company will also focus on a few steps for quicker returns.

The 4 Cs Infosys should focus on are:

1. Communication Strategy
2. CEO succession
3. Cash management
4. Cost control

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Image: Russian President Vladimir Putin (L) shakes hands with N R Narayana Murthy (R) Chairman of Infosys Technologies, during his visit to the corporate headquarters of Infosys in Bangalore December 5, 2004.
Photographs: Jagadeesh/Reuters.

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Communication:Infosys stock has exhibited high volatility around earnings with the shares moving more than 5 per cent on six out of past 10 quarterly results. In the past two result seasons, the stock has moved 20 per cent on the result day.

This indicates to us 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.

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Image: Infosys Bangalore.
Photographs: Courtesy, Infosys.
Tags: Wipro , Infosys

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CEO: The next management change (due by Mar-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.

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Image: Vaclav Klaus (C), President of the Czech Republic, plays billiards as his wife Livia Klausova (L) and Narayana Murthy (R, white shirt) watch during his visit to the Infosys campus in Bangalore November 10, 2005.
Photographs: Jagadeesh/Reuters.
Tags: CEO

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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 $4bn with the company.

While historical conservatism around cash usage could be explained by smaller size and rapid growth, we believe that management needs to significantly improve its lazy capital structure to increase shareholder value.

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Image: Infosys' pyramid-shaped building in Bangalore.
Photographs: Courtesy, Infosys
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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.



Image: Employees talk as they stand next to flex board poster of Infosys founder Narayana Murthy at the Start-up Village in Kinfra High Tech Park in Kochi.
Photographs: Sivaram V/Reuters
Tags: TCS , Accenture

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