Infosys: no news is good news

Infosys Ltd’s chief operating officer U.B. Pravin Rao met some investors at a conference and reiterated the company’s revenue growth forecast for the year. He added that it will be a while before the company comes back to industry-leading revenue growth rates. Of course, none of this is news. Even so, it’s heartening to note that things haven’t worsened at the company in the midst of a leadership transition.

While Vishal Sikka’s appointment as chief executive has brought with it a fair bit of excitement, investors haven’t been carried away. Infosys shares have risen by around 18% since Sikka’s appointment, compared with a 16% rise in the CNX IT index. After a sustained period of underperformance, investors’ reaction to Sikka’s appointment is nothing worth writing home about.

One of the reasons investors have been a bit guarded, despite the benefits of finally having a stable leadership, is that Sikka, being an outsider, may take time to understand the business before being able to take corrective steps. This may impact near-term growth. Rao’s comments reaffirm concerns that it will be a while before the company turns around.

The silver lining in all this is that while many leaders have left the company in the past year, Rao and Sikka have the potential of being a formidable team. Rao being the insider can help manage and execute on the core business, while Sikka takes the required time to understand the business and plan for the revival of the company’s fortunes.

“We see Mr. Pravin Rao’s role as equally critical as Dr. Sikka’s. Dr. Sikka is likely to drive Infosys’s transformation and differentiation journey over the medium-to-long term (3-5 years) but over the near-to-medium term (1-3 years), we think it will be Pravin Rao (as the COO and 28-year-old Infosys veteran) who has principal responsibilities,” analysts at JPMorgan Chase and Co. said in a note to clients. “One, improving delivery essential to stabilizing the core and stem market-share losses and two, handholding Dr. Sikka as he familiarizes himself with Infosys, its people and culture.”

If the partnership indeed works well, Infosys could well turn out to be value pick at current levels. JPMorgan analysts say current valuations do not factor in Infosys returning to industry growth rates until financial year 2016-17.