Why management commentaries count over earnings numbers –


Tech- bellwether Infosys Technologies earnings marks the beginning of the result season and has always been one of the most awaited one. Though TCS is now considered as a bellwether stock for the IT sector, there is one aspect of Infosys that no company can replace. Infosys popularised the concept of quarterly guidance to the analyst and through its commentaries to give a better understanding of the immediate future and strength of global economies. Analysts would tweak their numbers for other companies in the sector based on the commentaries of Infosys. Since then management commentaries has become a norm with most of the top companies. With most of the top companies being researched by every broking outfit and media houses, earning number with business guidance from such companies has become a mere formality. Rarely have top market-cap company’s numbers been different from the consensus view. Only in rare case of an extraordinary income or expense has the number differed from the consensus view. Impact of currency fluctuations has been the main element of surprise in the earnings declared. More than the numbers, which are generally discounted, market keenly awaits the management commentary. Given the precarious state in which most of the global economies are in and the quick pace at which the environment changes it has become more important to seek clarity on the way forward. Take the case of some of the commentaries made during the recently concluded March quarter numbers. L&T posted a 26 per cent drop in its profit for the March 2015 but commenting on the results Executive Chairman AM Naik said that in the current year road sector has taken off well. The company bagged all eight tenders announced by the government in the last month. He added that the government plans to build 100 km road per day, and even if they can achieve 50 kms per day, it is huge volume. In the public private partnership segment, Naik does not think there will be any action. Going forward 65 per cent of the roads will be constructed by the government through EPC contracts and 35 per cent by the private sector provided investment can come from some other source. Naik also said that given the subsidy for oil and gas hybrid pooling the hydrocarbon sector looks promising. There are a number of takeaways from the above statement which not only gives information about L&T but also about the infrastructure space as a whole. First takeaway is that L&T because of its deep pockets and strong balance sheet is able to walk away with all the orders. Other companies in the road sector will be restricted to implementing the orders bagged by bigger companies. Second, despite what the government says, there is little money available for road builders and government will have to either bring in money by themselves or arrange it so that road building picks up. Banks will not be keen in funding road projects.Thirdly, Naik’s statement also highlight that it is only the road sector within the infrastructure space that is witnessing order flows. But there are other pockets of growth like the hydrocarbon and fertiliser sector. After more than a decade fertiliser capacity is expected to see capacity being added, stocks in the sector can see some activity going forward. The commentary not only highlights the growth area for L&T but also points out other areas of growth in the economy. Now take the case of the largest automobile company in the country, Maruti Suzuki. Maruti like most of the automobile companies in the country announces monthly sale of its vehicle. There is little to look forward to in an automobile company’s numbers. The company met the consensus numbers but did better than expected on the profit front on account of gains in currency. But in its commentary the company’s management pointed out that average discount per vehicle has come down by Rs 5,500 per vehicle. This one line highlights the fact that the company is witnessing higher footfalls and better conversion to sales. If more people are buying new cars despite lower discounts then there has to be something right in the economy. Further, the impact of automobile sector on the overall economy is also high, signalling better days ahead. Similarly commentaries from the banking sector give us an idea of which sectors are performing better than others. More than tracking the change in non-performing assets, management’s words on how does it foresees the future which is more important. Management commentary of each company not only gives us an idea of how they would be performing in the near foreseeable future but also how the sector and other stakeholders related to it will perform. Unless the earnings numbers are drastically different from the general consensus stock prices normally discount the results well before they are announced. Even if there is a surprise element in the result, the stock’s immediate movement will be decided by the management commentaries. But what the management thinks of the future is what decides the direction of the stock. Irrespective of the market direction a company with a better visibility will withstand the market fluctuations and will be one of the first to recover. Ultimately it is the future prospects that decide the price and earnings number are all about past performance.


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