June 3 (Bloomberg) -- Infosys Ltd. surged the most in nearly five months after co-founder N.R. Narayana Murthy returned as chairman to spur growth that analysts project at half the pace compared with Tata Consultancy Services Ltd.
Shares of India’s second-largest software exporter rose 4.3 percent to 2,514.1 rupees at close of trading, the most since Jan. 11, after surging as much as 8.8 percent. Billionaire Murthy will be chairman of the Bangalore-based company for five years and replace Kundapur Vaman Kamath, according to a company statement.
The 66-year-old Murthy, who helped Infosys become the first Indian company to list on the Nasdaq stock market, will have to steer it through proposed tougher visa rules and spending cuts in the U.S., its biggest market. Sales growth in the 12 months ending March 31 may be the slowest in four years, according to analyst estimates, as fewer customers commit to long-term contracts amid economic uncertainty.
“If Murthy is here to change the direction of the company, then shareholders will welcome him,” said Hardik Shah, a Mumbai-based analyst at KR Choksey Shares & Securities Pvt. who currently has a hold recommendation on the stock. “The company is lagging behind other players.”
Kamath stepped down from the role after “stakeholder feedback” to become an independent director of Infosys, he told Bloomberg TV India in an interview. Chief Executive Officer S.D. Shibulal will retain his position, and Rohan Murthy, the billionaire’s son, will be the new chairman’s executive assistant.
Kotak Institutional Equities Ltd. raised its rating for Infosys to add from reduce following Murthy’s return and increased its share price forecast by 12 percent to 2,750 rupees, analysts led by Kawaljeet Saluja said in a report.
Before today, Infosys shares had slumped 17 percent since May 2011, when Kamath, former CEO of ICICI Bank Ltd., India’s second-largest lender, took over from Murthy as chairman of the board and Shibulal was named chief executive.
Infosys’ revenue may increase 8.2 percent in the year to March, according to the median of 64 analyst estimates compiled by Bloomberg. Sales at larger competitor Tata Consultancy may rise 15 percent, according to a survey of 63 analysts.
Infosys’ earnings margin before interest, taxes, depreciation and amortization in the three months ended March narrowed to 26.5 percent, according to Batlivala & Karani Securities Pvt. That’s the lowest since at least 2005, according to data compiled by Bloomberg.
“There are many issues that need his attention, ranging from impending immigration bill in the U.S. to faltering growth and margins,” Rumit Dugar and Udit Garg, analysts at Religare Institutional Research, said in a note to clients yesterday. “While mixed demand environment will be a challenge, we do think the issues such as faltering customer connect and cost structure could be first to be addressed.”
Infosys’ move to ask Murthy recalls the successful returns of former leaders, including Apple Inc.’s Steve Jobs and Starbucks Corp.’s Howard Schultz. Yet similar comebacks at Dell Inc. and Yahoo! Inc. couldn’t reverse sagging fortunes. Procter & Gamble Co. last month hired back A.G. Lafley as its chief executive officer.
Under Murthy’s 19-year tenure as chief executive officer until 2002, Infosys became a 234 billion-rupee ($4.1 billion) company, according to data compiled by Bloomberg. That’s almost bigger than Wipro Ltd. and HCL Technologies Ltd. combined. Tata Consultancy was closely held when Murthy stepped down as CEO.
Infosys on April 12 forecast revenue will rise 6 percent to 10 percent in the year ending March. That compares with the 10 percent to 14 percent estimate of the industry group NASCOMM.
To compete with industry rivals, the company must shed its “conservative tack” as it competes for about $18 billion in outsourcing contracts in the next two years, Walter Rossini, a Milan-based fund manager for Aletti Gestielle SGR Spa, said in an interview on May 22.
Infosys announced Murthy’s return effective June 1. He will earn an annual salary of one rupee pending shareholders’ approval, according to the statement.
The company may struggle to win clients as U.S. President Barack Obama’s $85 billion in spending cuts prompts companies to rein in spending.
“The days of exporting people are over, the world is shifting in front of our eyes, and Infosys has been blindsided,” Tripatinder Chowdhry, Managing Director at Global Equities Research said today in an interview with Bloomberg TV India. “Innovation is very critical and without it, they will continue to suffer.”
Infosys, started by seven people including Shibulal with $250 borrowed from their wives in 1981, is also battling the potential approval of legislation in the U.S. that would discourage companies from outsourcing computer jobs using H-1B visas by barring the program’s heaviest users from obtaining additional permits and raising fees.
“Some things, like immigration reform, are really out of his control,” said Harit Shah, analyst with Nirmal Bang Equities Ltd. “It won’t surprise me if it takes almost a year for the change in leadership to trickle down through the company. There’s a lot of work to be done.”
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