Murthy’s miracle at Infosys?

Mobis Philipose  :Live Mint :: Fri, Jul 12 2013. 10 34 AM IST

This is hardly the time to get excited about a percentage point or two more of sequential growth, when Infosys has admitted it is in dire straits

Less than a month ago, N.R. Narayana Murthy asked Infosys Ltd’s shareholders for at least three years to turn around the fortunes of the company. Investors are now behaving almost as if he’s done the job in a month’s time.

The company’s shares have risen by 11% on the back of better-than-expected results. Revenues rose by 2.7% sequentially to $1.991 billion, compared to Street expectations of growth of less than 1%. Year-on-year growth looks impressive at 13.6%, especially given Nasscom’s industry growth target of 12-14%. But exclude the recently acquired Lodestone business and sequential growth falls to 1.7%, while y-o-y organic growth is just 8.5%.

More importantly, though, this is hardly the time to get excited about a percentage point or two more of sequential growth, when the company has effectively admitted that it is in dire straits and needs to put its house in order. Post-results, the company has said that it is cautiously optimistic about the rest of the year, and the fact that it hasn’t raised its weak guidance for the year shows that it is still mindful of the erratic performance in previous quarters. Besides, as the company’s chief executive officer S.D. Shibulal pointed out in an interview with ET Now, Infosys still has a disproportionately high exposure to business related to customers’ discretionary spend, which is still under pressure.

Investors are conveniently ignoring these ground realities. Infosys shares have now risen by about 28% from its lows in April, after the company’s March quarter results made it evident that it is nowhere near the road to recovery. In the process, they have outperformed stocks of better performing companies such as Tata Consultancy Services Ltd. Investors seem to have concluded that Murthy will undoubtedly turn around the company and bring it back to at least industry growth rates.

But even if he is successful in doing so, the road to recovery will without doubt include the high cost of increased sales and marketing expenses and other investments. In short, profit margins will be under pressure and earnings growth, if any, will be muted