Infosys Founder Murthy Returns—and Faces U.S. Visa Shock

N.R. Narayana Murthy Photograph by Manjunath Kiran/AFP via Getty Images

Steve Jobs went back to Apple. Michael Dell returned to Dell. Add Indian outsourcing billionaire N.R. Narayana Murthy to the list of visionary founders who came out of retirement to fix problems at the IT companies they once led. “This calling was sudden, unexpected and most unusual,” Murthy, 66, said in an e-mailed statement after Infosys announced his return as executive chairman on June 1. “But, then, Infosys is my middle child. Therefore, I have put aside my plans and accepted this responsibility.”

Two years ago, Murthy gave up his position as chairman of Infosys Technologies, the Bangalore-based company that he helped build into the premier IT services provider in India. It’s been pretty much downhill ever since for the company, which has struggled under the team of Chairman Kundapur Vaman Kamath and Chief Executive Officer S.D. Shibulal. The nadir came on April 12, when Infosys forecast annual sales growth would be in the range of 6 percent to 10 percent in the fiscal year ending March 2014. Analysts had been expecting 12.7 percent growth, according to data compiled by Bloomberg. Investors punished Infosys with a harrowing 21 percent drop in both its Mumbai-listed shares and its New York-traded ADRs.

Something had to change. Infosys is facing tougher competition from local outsourcing specialists like Tata Consultancy Services and U.S.-based rivals such as Accenture and IBM. There’s also Cognizant Technology Solutions, a hybrid with headquarters in Teaneck, N.J., and most of its operations in India. Those companies have been outperforming Infosys, making investors less willing than they had been to accept management’s excuses about a lousy global economy hurting results. “People gave them a pass for a long time,” says Bloomberg Industries analyst Anurag Rana. “But the last quarter was really good for most IT companies and Infosys is the lone person out there ringing the bell, saying the macro situation is bad and we can’t grow.”

Now Murthy is back and investors seem relieved. At one point, Infosys shares jumped 8.8 percent on Monday, although by the end of trading in Mumbai the exuberance had already started to fade, with the stock price closing up 4.25 percent.

There’s good reason for shareholders to be wary. While Infosys traditionally has enjoyed high operating margins, those are shrinking: In the fiscal year ended March 2010, they were 30.8 percent, and by March 2013 they had fallen to 25.8 percent. Still, there’s probably a lot more room for them to fall: Cognizant, which has come on strong in the past few years as a major threat to Infosys, has margins of about 18.5 percent.

Keeping margins fat is especially difficult now since the IT outsourcing business has become so commoditized. “If I were to blindfold you and take you to India, would you be able to differentiate from one company to another?” asks Rana. “You can’t really do that. It’s a commoditized service.” The multinationals that outsource so much of their work to India know that, too, and are more price-sensitive than they were back during Murthy’s tenure as Infosys boss. “The buyers are a lot smarter now,” Rana says.

Murthy will also face a challenge in the U.S., where immigration reform may target Infosys and other Indian companies that rely on importing workers from India on H-1B and L-1 visas to serve clients. If companies have more than 15 percent of their U.S.-based workforce on those visas, according to a draft bill now before the Senate, then workers on those visas won’t be allowed to work for clients in the States, Infosys Chief Financial Officer Rajiv Bansal said at a recent conference organized by Sanford C. Bernstein. The 15 percent rule “really just shuts you off from the entire business to a large extent,” Bansal said. Hiring more workers in the U.S. isn’t a short-term answer, he added, because of the shortage of qualified American citizens or green-card holders. It’s “just not possible” for Indian companies to ramp up that quickly in the U.S., he said.

The version of the bill that’s making its way through the Senate now “is really bad for the offshorers,” says Rana. Companies like Accenture don’t have to worry, since they don’t rely as much on visas for Indian workers. Infosys and other Indian companies do. “The bill is entirely targeted toward the H-1B [reliant] companies,” he says.

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