Infosys Comeback Seen as Having a Long Way to Go

Infosys Comeback Seen as Having a Long Way to Go

Ex-Chairman’s Return Brings a Vision and Boost, But Executives Leave and Growth is Slow

DHANYA ANN THOPPIL

June 10, 2014 11:04 a.m. ET

BANGALORE, India—One year after coming out of retirement to try to revive revenue growth at Indian IT outsourcing company Infosys Ltd. 500209.BY +1.78% ,N.R. Narayana Murthy still has a long way to go, analysts and investors say.

The 67-year-old is one of the founders of India’s second-largest software and outsourcing company, and he is considered a global pioneer of the outsourcing model of doing business.

After stepping down as chairman and chief mentor in 2011, he was called back last June to lead the company, which had been falling behind competitors. He returned with big plans to make Infosys once again one of the most profitable and competitive IT companies in India.

He has made some progress, but analysts and investors say they still worry because the company keeps losing executives and seems to be losing momentum.

“The jury is still out,” said Nirmal Jain, chairman of India Infoline Ltd.532636.BY -2.07% , a financial-services company. He compares the situation toApple Inc., AAPL +0.59% where ” Steve Jobs came back, [but it took] some time to turn it around and get back on track. It may take longer than expected” for Infosys.

Nonetheless, Infosys’s bottom line has improved under Mr. Murthy’s leadership. In the nine months ended in March, profit rose 16% from a year earlier, while revenue measured in dollars—an indicator of real growth in business—grew 11%. For the fiscal year started April 1, Infosys expects 7% to 9% growth in dollar revenue, much less than the industry average, which is projected at around 15%.

Despite losing some of its top talent, “there is a growth in the sales and profitability of the company,” said R.K. Gupta, managing director of Taurus Asset Management, which owns Infosys shares. “In the long term, Infosys will do well with Mr. Murthy at the helm.”

An Infosys spokeswoman on Tuesday declined to comment for this article. Upon his return to the company, Mr. Murthy had said it would take at least three years to return Infosys to its previous strength.

Investors originally thought more highly of the company’s prospects after Mr. Murthy’s return. Infosys shares surged as much as 60%, though they have retraced some of the gain. The stock is up around 24% in the year since Mr. Murthy returned. That isn’t a bad one-year performance, but it is much less that the nearly 40% average rises for top technology-industry shares in India.

“His return gave a lot of comfort to all the stakeholders: employees, investors and customers,” said a former Infosys executive who left after Mr. Murthy returned and didn’t want to be identified. “But the last one year has been disappointing: A lot of leaders left the company, and Infosys is still struggling to grow.”

A number of its top executives leave without explanation, including board members Ashok Vemuri, V. Balakrishnan and B.G. Srinivas. So far none of these executives has offered any comments publicly.

Sandeep Mahindroo, assistant finance controller at Infosys, told investors at a conference last week that the departure of senior executives isn’t a problem because the next level of leaders has stepped in to take on more responsibilities as the company transitions to new leadership.

Analysts and investors say they assume the executive exodus resulted from Mr. Murthy’s efforts to bring in an outside chief executive to replace S.D. Shibulal, who retires in January.

“The ongoing departures are a concern because they are seemingly ongoing, as opposed to one systematic cull of managers,” said Phil Fersht, chief executive of HFS Research. “Until these departures stop, there will be a constant aura of uncertainty surrounding the firm, and it will be tougher for Murthy to set the future agenda and culture the firm so desperately craves.”

Managers aren’t the only stafff leaving. Infosys’s attrition rate has climbed from one of the lowest in the industry to one of the highest. Close to 19% of its employees left the company in the fiscal year ended March 31.

The company has attributed the attrition to the fact that it hasn’t been able to provide adequate promotions to employees because of poor revenue growth and a lack of compensation increases.

“A number of top executives have left the company. That raises a lot of questions on the style of functioning of Mr. Murthy,” said Mr. Gupta of Taurus.

In addition to shaking up management, Mr. Murthy came in promising to boost profit margins and cut costs. Infosys consequently got rid of some of its most expensive international sales staff abroad, slashed the number of backup people it paid to be available on standby and automated some of its simpler human-resources, marketing and sales-support tasks.

In the first nine months he was in charge, Mr. Murthy succeeded in cutting operating expenses more than 15% and widening Infosys operating margins by 3.6 percentage points to 25.5%.

Still, some analysts have warned that just slashing costs could hurt Infosys in the long run. Sandeep Muthangi, a vice president with Mumbai-based brokerage IIFL Capital, said revenue growth will suffer if Infosys cuts sharply because that may leave it without enough people to find new areas of growth and to respond to new orders. “Expanding margins by just cutting costs, with a subpar revenue growth, is an unsustainable strategy,” he said.

To jump-start growth, Mr. Murthy says Infosys has to win new large, multiyear contracts even for its low-value businesses like managing call centers, maintaining data centers and writing basic programming.

In recent years Infosys has focused on high-margin businesses like consulting, hoping to compete directly with big global names like Accenture ACN -0.74% andInternational Business Machines Corp. IBM -1.04% During that time, the low-margin businesses suffered, so Infosys has lost out on the rebound of that part of the outsourcing and software business in the last three years.

Infosys is still trying to gain momentum in infrastructure services, where the outsourcing company takes care of the software and hosts the hardware of a company’s servers, data centers and other networks. His company “can do better in infrastructure-led large deals,” said Infosys President U.B. Pravin Rao last week.