Inefficient CEO selection process could hurt Infosys: Kotak report

The turnaround story of India’s second-largest IT services exporter, Infosys, could get delayed further due to an inefficiently handled CEO selection process and senior management exits, impacting its revenue growth during the current fiscal, according to a brokerage house.

Kotak Institutional Equities, in its latest report on Infosys, said, “An inefficiently-handled CEO selection process and high churn at the senior management level are the possible factors. Uncertainty and exits could impact near-term growth and delay turnaround prospects. This is not a surprise; after all an ongoing process of CEO selection may lead to less-than-optimum time utilisation by potential aspirants on client interactions.”

These comments were made by Kotak following its meeting with Infosys president UB Pravin Rao. “We now expect revenue growth of 7.2% (9.4% earlier) in FY15 and 12.4% (12.8% earlier) in FY16. Our revised EPS estimate is Rs 201.3 (Rs 205.2 earlier) for FY15 and Rs 222.7 (Rs 227.9 earlier) for FY16,” it said.

Infosys has provided a revenue guidance of 7-9% in US dollar terms for FY15. “While Infosys has maintained the demand outlook has not changed, we believe there may be downside risks to the guidance,” Kotak said.

Infosys has witnessed a string of exits over the last one year and its performance in the last two quarters of FY14 did not meet the market expectations. The presence of NR Narayana Murthy, founder and chairman of Infosys, has not led to any major upswing even as he provided a three-year time frame for a significant revival.

The report said that the management has indicated that the demand environment had not changed materially, though the demand was strong in Europe and volatile in North America with most of the verticals remaining steady.

Infosys is also implementing measures to improve the sales effectiveness. This including letting go of non-performing senior sales team members and the team size beefed up by hiring 350-400 freshers from business schools besides transferring about 150 delivery team members to sales functions.

The company has also instituted training programmes for the sales staff and has appointed an external agency to vet the quality of its sales proposals and processes.

The biggest challenge for Infosys has been its high attrition rate which also include the senior management exits. The company hopes to bring down this level through wage increases and promotions. However, the report said, “Predictably, Infosys was reluctant to talk about the impact of senior management attrition on the business.”

Infosys is also finding it difficult to bag large deals in the infrastructure services segment. According to Kotak report, Infosys is falling short in this segment due to lack of referenceable clients and a not so well-developed partner eco-system — critical factors to ensure success in this segment.