Infosys is ripe for a takeover

The Infosys stock price fell over 20 percent in one day on the back of weak revenue guidance by the company for financial year 2013-14. The company guided the market for revenue growth of 6-10 percent, which is below the industry body’s projection of 12-14 percent for the sector as a whole.

Infosys’ free float market capitalisation is around USD 21 billion. The promoters own around 16 percent of the company. The company is ripe for a takeover as the present management is floundering in vision. In fact Infosys is better off with owners that can give the company a direction and spur its employees towards optimism.

In current times, with many tech giants having USD 21 billion in liquid cash, the takeover itself may not be an issue. Infosys has a lot of value left in it, but that value will not be realised unless there is fresh vision of the management.

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Why is Infosys floundering in vision?

Infosys was the result of the vision of NR Narayana Murthy and friends who saw the future of outsourcing 10 years before everyone else saw it. Infosys brought in reporting standards to a country that lacked transparency. The quarterly reports and annual reports of Infosys were a revelation to Indian investors on the information and facts that the company provided. Infosys started the trend of providing guidance on business outlook in India.

[caption id=“attachment_697781” align=“alignleft” width=“380”]  Beginning of the end for Infosys? AFP[/caption]

Infosys was formed in the 1980s, became a trend changer in the 1990s, consolidated its position as the company to emulate in the 2000s but in 2013 it is looking to go nowhere. Infosys has generated wealth for many, over the years, with 40 percent compounded average growth rate (CAGR) in market capitalisation over the last 18 years. Promoters, employees and investors have benefited from Infosys’ rise over the years.

Infosys is a pale shadow of what it was in the 1990s and the beginning of the 2000s decade. The company lost its position as the second largest IT firm in India to the Nasdaq-listed Cognizant in 2012. The company has underperformed its peers in returns over the last five years. Infosys has returned 67 percent over the 2008-2013 period while TCS, HCL Tech and Cognizant have returned 232 percent, 237 percent and 192 percent respectively. The fact that the share price of the company tanked 21 percent in a day suggests that even optimistic investors have lost patience with the company.

The reasons for investors losing patience with Infosys are not far to seek. The Infosys management, led by one of the original founders of the company, SD Shibulal, is not giving any indication of the company gearing up to face current and future challenges. Statements such as “uncertain macro environment” and “slow-decision making by clients” do not work well for a visionary company.

Instead the management should say “that despite a weak environment we are doing the right things for growth down the line”. The management should then go on to list the right things they are doing. Investors will then want to stay with the company that has done well in the past and is still one of the best in terms of efficiency with return of capital of around 35 percent, has USD 4.4 billion in cash and is still running an annuity business with a dedicated client list consisting of the best companies in the world.

Infosys is a clear example of a company sticking to its original business model of outsourcing as the model is profitable and earns good margins. However, the fact that innovators such as Facebook have grown to more than twice the size of Infosys in terms of market cap in a span of just eight years should force the company to get out of its comfort zone.

Examples of companies such as Microsoft, which despite clear leadership status are now being undermined by Apple and Google by a wide margin, should prey on Shibulal’s mind. Apple and Google have returned 900 percent and 300 percent over the last eight years while Microsoft has just returned 16 percent.

Infosys desperately requires a change in thinking. The company need not move away from its outsourcing model but it clearly has to think out of the box to regain its past glory. If the current management cannot think different then its time for a new management to come in and hopefully for investors it will be in the form of a takeover.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com, a web site for investors.