Why Infy's better-than-expected earnings is not the result of Murthy magic

Looking at the way market has responded to Infosys’ first quarter results - the stock was up 10 percent before falling back on profit-booking- it appears as if the long-battered Bangalore-based IT services company has got its mojo back. It’s tempting to attribute the bounce to the return of NR Narayana Murthy. Murthy assumed the role of Executive Chairman two months back, prompting comparisons with the return of Steve Jobs to Apple.

Murthy is also known to be a man who not only sets ambitious goals, but also aggressive deadlines. Nandan Nilekani, a co-founder of Infosys and now the chairman of UIDAI, once told us that the importance of setting aggressive deadlines was one big lesson he learned from Murthy. So, are today’s results an early indication of the Murthy magic?

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The answer is no. For three reasons.

#1: In IT Services, it takes time before orders show up in revenues. If a sales team books an order worth $100 now, it will take about three quarters for even $20 to show up as revenue in the profit-and-loss statement. The growth that Infosys saw in the present quarter is to a large extent the result of the work that Infy had put in even before Narayana Murthy stepped in.

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[caption id=“attachment_951273” align=“alignleft” width=“380”] The buoyancy in Infosys shares post the results is a bit overblown. Narayana Murthy has brought new energy to the company, but it is premature to see results[/caption]

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#2: Efforts need not mean results - not always in the way we think. Infosys insiders say that Murthy has been busy ever since he stepped in - talking to top managers, questioning them, giving suggestions and ensuring that they are executed and executed fast. While some of them will have a short-term impact, others will have a long-term impact. The most visible action since Murthy came in was the hike in wages - which along with Murthy’s own charisma is expected to stem the attrition. But, wage hikes will also mean lower margins, about which the company has warned. Higher growth - which will lead to a higher utilisation rate - is expected to offset some of this. But it’s too early to say if there will be a sustained growth.

#3: Quarterly results are often misleading. Infosys continues to face the risk of headwinds in the coming quarters. Infosys CEO SD Shibulal - who likes to repeat certain phrases to the point of boredom - mentioned ‘cautious optimism’ several times today. It’s a term worth remembering, considering what happened in the quarter ended December 2012. The results were seen as good, and the markets responded pretty much the same way it responded to today’s results. A quarter later, the results were so disappointing that its share price fell from Rs 2,915 to Rs 2,273. There is no assurance that it won’t happen yet again. The demand situation is still bad, most of the growth for Infosys will have to come from rebids - where there is a downward pressure on pricing, and the company has warned about margin pressure. It would be unfair to attribute the headwinds to Murthy as it is unfair to attribute today’s better than expected results.

All these doesn’t mean Murthy has had no impact on Infosys in the last two months. There is so much more optimism and the energy levels are higher. But, for all these to reflect on the top line, one will wait for a few more quarters.

NS Ramnath writes for Forbes India