There?s intense debate these days on whether companies need at all to issue ?guidance? to their shareholders, giving them their perspective of what they expect their future performance to be, based on present trends. More and more instances are taking place where it is the guidance, rather than the actual disappointing results, which has upset the market and wreaked havoc on the stock. It is exactly this factor which took its toll recently, when Infosys Technologies, a bellwether stock, crashed after its results and guidance were made public, dragging the entire technology sector and the benchmark Sensex with it.
Analysts drool ahead of the Infosys results every quarter, trying to predict every little bit of what the country?s most respected and intensely-watched corporation will come up with. There are bets even on guidance these days, and most were expecting the guidance from the company for the fiscal ending March 31, 2004, to be somewhere around a 20-25 per cent growth in bottomline. But what came from the company, a growth estimate of around 12-14 per cent for the fiscal just begun, was enough to leave the investor community shell-shocked. Result: a 41 per cent decline in Infy?s stock price in just two days, which was enough to knock the bottom off the rest of the market as well. Would the fall have been so intense if there had been no guidance? Probably not.
Why must a company issue any guidance at all? Mercifully, this is a phenomenon confined mainly to the technology sector, which is highly quarter-on-quarter performance oriented, and dependent on the order-book positions of the companies. Because of this ?continuous? nature of the business, it has become a practice for most tech companies to keep investors and the analyst community happy by issuing guidance statements for them to chew on. But in a market which factors in anything the moment it sniffs a development, even if a company matches its guidance, there will be chances that the stock price will take a beating.
So what, investors will ask. The company said it would record this level of growth, and it has done so! In case the company fails to deliver on the guidance, then the stock will be pummelled mercilessly by a fickle market. Only if the company manages to beat its own guidance does it stand a chance of saving its stock from being battered by those standing on tenterhooks.
The biggest companies in India, and even overseas, do not issue guidance to shareholders. What is important is the performance figures, issued transparently, and which stand the test of intense scrutiny. Trying to predict its performance in this world of uncertainty is playing with fire. How, for instance, can one foresee something like the Severe Acute Respiratory Syndrome or its impact? Or the exact duration of a war? More importantly, why even fall into this trap and try predicting things in these times?
If a company revises its guidance, the havoc in the markets is magnified. True investors do not take a narrow quarterly view of companies and their performances. The biggest and most discerning investors are those who are in companies for the long haul, based on their annual performance and levels of governance. In such a scenario, issuing guidance statements destabilises the markets unnecessarily and causes other sectors, which don?t issue such guidance, to also bear the brunt. The problem is more intense for stocks of iconic corporations like Infosys, since any adverse impact of guidance by these companies tend to affect market sentiment as a whole.
Ironically, despite the number of shareholders of infotech companies being very small compared to the total shareholder population in the country, the spillover effects are very high in case bellwether tech stocks are the ones issuing the guidance. Stockmarket regulator Securities and Exchange Board of India (Sebi) needs to immediately take stock of these developments and put out a policy on guidances. Ideally, ban guidances altogether. Or at least ensure a certain time-frame within which these can be revised by the company. If most sectors can survive without them, what?s so special about the tech sector?
Guidances are turning out to be shareholder-unfriendly, eroding shareholder value and confidence. Sebi and the tech companies need to realise that.