LDN - Business

Growth, healing: New CEO faces twin tests at India's Infosys

[December 04, 2017] By Sankalp Phartiyal and Euan Rocha

MUMBAI (Reuters) - Investors on Monday cheered the appointment of Infosys Ltd's new chief executive, in hopes the Indian IT services firm can move past a costly boardroom spat, though questions remain over how the new boss will navigate strained corporate ties internally. (Graphic: Infosys share price - http://reut.rs/2AUICYx)

After well over a decade with Capgemini, Salil Parekh is returning to India to head Infosys, where he is tasked with reinvigorating growth, while keeping the peace.

Parekh joins Infosys, historically a bellwether of India's $154 billion IT services sector, as it tries to heal following a nasty public spat between its board and founders that led to the dramatic exit of its previous CEO, Vishal Sikka, in August.

Shares in Infosys closed 2.8 percent higher on Monday following Parekh's appointment as markets welcomed the board's move to tap an industry veteran with both deep experience in leading a consulting firm and knowledge of the Indian IT model.

But investors remain concerned about how he will deal with potential strains in the relationship with the founders, which cost Infosys billions of dollars in market capitalization earlier this year.

"The incoming CEO will have to maintain a good rapport with the founders and take care of corporate governance," said R.K. Gupta, managing director at Taurus Asset Management, which owns shares in Infosys. "I believe both the CEO and founders will be cautious in their dealings with one another."

Parekh joins Bengaluru-based Infosys in January from Paris-headquartered Capgemini, where he headed their core application services business in key markets like North America and the United Kingdom, and their cloud services and cloud infrastructure businesses. He also managed Sogeti - a unit of Capgemini focused on digital transformation.

In its most recent quarter, Capgemini's digital and cloud services grew 23 percent in constant currency terms. Capgemini also reported 6.9 percent revenue growth in North America - a market largely under Parekh's watch and one which accounts for nearly a third of its revenues.

Infosys, by comparison, saw its North American revenue grow at the pace of just 3.9 percent over that same period.

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A Infosys employee stands at the front desk of its headquarters in Bengaluru, India, April 15, 2016. REUTERS/Abhishek N. Chinnappa/File photo

"We believe Infosys' slowing growth in the past 18 months has more to do with patchy execution rather than strategy," CLSA analyst Ankur Rudra wrote in a note to clients. "Infosys needed a dyed-in-the-wool execution-focused leader who understands services and can build consensus."

Nomura analysts said they awaited clarity on the company's strategy under Parekh, while maintaining a "reduce" rating on its stock.

DELICATE BALANCE

As CEO, Parekh will have to replicate some of his successes at Capgemini while being careful not to antagonize Infosys' founders, who own about 12 percent of the company, but command an outsized say in its direction.

The founders, led by Narayana Murthy, the doyen of India's IT services sector, engaged in a lengthy public feud with Sikka on issues ranging from flights on private jets, to over-spending on a takeover, and on the pricey rent for his U.S. office, to the largesse of payouts given to certain executives following their exits.

The spat culminated with the exit of both Sikka and Infosys' then chairman R. Seshasayee in August, and the return of one of its founders, Nandan Nilekani, as chairman. Nilekani, a highly regarded industry veteran, had remained silent throughout the public confrontation led by Murthy.

Shares fell nearly 10 percent on Aug. 18, the day of Sikka's resignation, hitting its lowest level since the start of his tenure in 2014 and wiping $3.45 billion off Infosys' market capitalization.

For Parekh, being hand-picked by Nilekani should give him some cover. Two weeks ago, Murthy endorsed Nilekani, saying "absolutely, all is well," with Nilekani at the helm.

In a statement on Saturday, Murthy wrote: "I am happy that Infosys has appointed Mr. Salil Parekh as the CEO. My best wishes to him."

(Reporting by Sankalp Phartiyal and Euan Rocha; Editing by Raju Gopalakrishnan and Gareth Jones)

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