Infosys (INFY - Get Report) , which was once a bellwether for Indian software stocks, has been hurt by stepped-up competition for large corporate clients as well as a turnover of senior management, which has slowed innovation.
Chief rival, Tata Consultancy Services (TCS - Get Report) , has taken advantage of internal turmoil at Infosys, by signing up higher-value clients. As a result, Infosys shares have gained 4.5% this year trailing Tata's Indian-traded shares which have advanced 25% in 2014.
Profit margins at Infosys have also declined as Accenture (ACN - Get Report) as well as IBM (IBM) have sought a larger slice of the business consultancy market making it more difficult to land the kind of big transformational deals that once propelled the Bangalore-based company into the ranks of emerging markets' favorite stocks.
But stepped-up competition has only been half of the problems at Infosys. Over the past two years, the company lost 12 top executives. That's a veritable brain drain, and operations suffered because of it.
Yet as Infosys enters a new period in its history, and the Indian stock market rebounds, investors are flocking back to once dependable emerging market growth stock. The Sensex 30, the Indian benchmark, has gained 20% this year compared to an 8% gain for the S&P 500
Part of the renewed interest in Infosys centers on its new CEO, Vishal Sikka. A former board member of SAP AG (SAP - Get Report) , Sikka was partly responsible for developing HANA, SAP's flagship in-memory database offering now. At Infosys, he's expected to drive innovation by pushing the development of new products along with global services. Until now Infosys' product development has been weak.
Additionally, there's been a noticeable departure of the old guard at Infosys, including former CEO S.D. Shibulal and founder Narayana Murthy, and those two high-profile departures have allowed Sikka to form a new management team. In response, Sikka has promoted some insiders, recruited others and helped stem a flight of top executives. Nonetheless, some positions still remain unfilled, such as head of strategic sales, but shareholders seem to believe that Sikka can deliver. The stock has risen 26% since his arrival, still lower than the levels seen when it was the market leader, so there's still room for improvement.
After stemming the exodus of senior executives, investors will be looking to gauge Infosys' ability to sign high-value deals even if margins stay low. The stock will spike if that happens, and buying shares now could allow investors to get good short-term returns.
The Indian stock market has also touched record highs this year after the election of prime minister Narendra Modi, who is pushing much needed economic and social reforms. He's also reducing business subsidies, another measure that is long overdue. Foreign institutional investors have poured in $2 billion this year, most of it coming since June when Modi won election. That has influx of new capital has boosted Indian stocks, including Infosys.
If the Indian economy meet expectations and does grow faster this year than the last, stock prices could continue to expand, and Sikka's new team at Infosys could be a beneficiary.
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