While much has been said about the management transition at Infosys, it may be worthwhile to look at how the company fared in the past 10 years when Narayana Murthy took a less active role in the organisation he founded.

Looking at the financial performance of the company during the periods when different CEOs were in charge, clearly it was under Nandan Nilekani that Infosys had a dream run, riding on a massive wave of outsourcing that brought in many large deals.

Subsequent CEOs had to contend with the financial crisis from 2008 and its aftermath, which meant a slower pace of outsourcing. Yet, the company continued to grow ahead of the industry for much of this time, slipping up only in the past couple of years in dollar-denominated growth, even as peers such as TCS and Cognizant continued to grow at a hectic pace. This has had a telling effect on the share prices.

Nandan’s dream run

After the heady days of Y2K and the anti-climax that followed it, Infosys, as with most of its large-size peers, built a strong global delivery model. Growth was led mainly by application services. Large deals from the likes of ABN AMRO, BT and Bank of America helped the company expand at an impressive pace. Banking, Financial Services and Insurance (BFSI) was the most important and largest vertical at that time. Telecom and Manufacturing were the other significant verticals.

The going was good and the company also gradually moving into areas such as package implementation and consulting until 2007, when the Infosys stock commanded an impressive valuation multiple of in excess of 30 times.

The war-time General

When the mantle passed on to Kris Gopalakrishnan, came the first signs of trouble from the global financial crisis. As a war-time General, he managed to navigate the challenges reasonably. Retail, healthcare, energy and utilities are some of the verticals that grew to become large segments for the company during his helmsmanship. The stock’s valuations, however, dipped a bit as the sector itself lost its place in the sun. Infosys, however, continued to command a price earnings multiple of 18-20 times, among the highest in the industry.

It is in the last couple of years that concerns rapidly escalated about Infosys’ prospects. With a new-found focus on building a ‘consulting led company’ and ‘quality of revenues’(read greater profitability), the company was not able to tap large application services deals, which TCS, Cognizant and HCL Technologies continued to do.

With focus on discretionary spends of clients that were not forthcoming in these challenging times, Infosys lost market share to its peers. Infosys has always been touchy about lowering bill rates and offering bargain basement pricing on deals. But even when it did take price cuts in the last couple of years, these did not seem to translate into greater revenues or a significant number of large deals.

For two successive years, the company fell below trade body Nasscom’s projected rate for the industry. With the guidance for FY14 too being tepid, it looks all set to lag behind this time around as well. Cognizant Technology Solutions has overtaken Infosys in dollar revenue terms.

The stock has fallen below the levels it traded two years ago, valuations have slipped to 14-15 times, which is lower than most large-sized peers that trade at 17-20 times. Looking at both the financial and stock price performance, it seems like it is a perfect time for Narayana Murthy to step in and navigate Infosys away from troubled waters.

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