Mumbai: “Infosys is boring again, and that’s a good thing," Infosys Ltd chairman Nandan Nilekani said at Bloomberg’s New Economy Forum last week. His sigh of relief is easy to understand, especially after all the bad blood that flowed between co-founder N.R. Narayana Murthy and the company’s board last year. The acrimony and the constant trading of barbs had left investors jittery, but things have been stable since Nilekani, who is also a co-founder, took over as chairman last August.

Investors are relieved too. Infosys shares have outperformed the Nifty IT index by 4.5% since the changes in the company’s board of directors in late August 2017. But things aren’t as stable as they seem.

As the chart shows, employee attrition has risen in the past three quarters under Infosys’s new chief executive officer Salil Parekh. Annualized attrition rate stood at 22.7% last quarter. Analysts at Kotak Institutional Equities added in a note to clients that leadership attrition, or churn among senior employees, seems to have reached worrying levels. What’s more, efforts to arrest attrition are impacting profitability. In the September quarter, Infosys’s operating profit margin narrowed to a 20-quarter low, despite large gains from the depreciation in the rupee. Note that competitor Tata Consultancy Services Ltd’s (TCS) margins widened to a 14-quarter high last quarter, on the back of higher growth and gains from a weaker rupee.

“Perhaps, employees aren’t finding Infosys’s prospects exciting enough," says an analyst at an institutional brokerage. “A rise in attrition, at a time when demand for IT services has picked up, is alarming."

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In other words, boring isn’t good enough for a number of Infosys employees. The related impact on margins is a worry for investors as well. While shares of Infosys have recovered from their lows soon after former CEO Vishal Sikka’s exit, they still trade at a significant discount of around 20% to TCS’s forward price-earnings multiple.

It’s interesting to note that under Sikka, Infosys’s attrition rates had sharply reduced within a few quarters, and the valuation discount with TCS had more or less disappeared. Of course, while comparing the tenure of the two CEOs, it must be noted that Sikka had joined in the first half of fiscal 2014-15, a period when attrition rates are typically higher. Parekh, on the other hand, joined in the fourth quarter of FY18, a period when attrition rates are typically at their lowest. But even after adjusting for seasonality, it’s clear that attrition fell under Sikka and is rising under Parekh.

Some analysts also sense an uneasy calm on the Murthy front. “If the company’s performance stays subdued, we wonder how long Mr Murthy will lie low," says an analyst at a multinational brokerage. This is clearly an area where analysts and investors will prefer things to remain boring. But Infosys’s valuations suggest investors aren’t willing to rule out that risk just yet.

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