Last week Maruti released its Apr’10 – Jun’ 10 results. The street was expecting a profit of +20% and when the results came out the stock tanked 12%. The profit for the quarter was -20%. Reason, the company took a royalty hit of 5+% on Sales compared to 3% earlier.
The RBI recently removed a cap on royalty for transfer of technologies. An Indian company can now pay more royalty (as a % of sales) which was earlier capped at a certain % on sales. Suzuki is the major shareholder in Maruti with about 54% holding in the company and post the removal cap they are charging more on transfer on technology. (K series engines – the Ad were you see a guy runs faster than the train)
Certain policy changes need not be tabled on board meetings and hence are not disclosed. Such policy changes, in my opinion are material and should have been notified. Had Maruti disclosed its intentions, it would have been much easier both for the Analysts who recommend stocks and to the investors to make an informed decision. Agreed, there will be a fall in the stock price had the company announced then, but more importantly -
- The fall wouldn’t have been ferocious as there would be no expectation built in the stock. As in the current case, clubbing it with the quarterly results, there was an expectation built and not having met, the stock got hammered.
- Information dissemination would have been quicker and everybody would have got an equal chance to sell their scrips. In the current case RBI changed its policy in Nov 2009 and I wont be grossly wrong if one were to say that the Mgmt would have decided the change in royalty policy atleast a couple of months ago. The greater the timegap between a policy change and its announcement, the greater the joy for insiders and punters.
Had there been a regulatory requirement stating that “Any contract or change in company policy affecting profits of say x% (say 5%) or affecting sales of x% of the most recent year, the company should inform the exchange” – the blog article wouldn’t have come up.
Some of the things which comes to mind that India needs to work on are-
- Every company must have a website (many don’t) and an investor section. The section should contain past results and also any materials that could be useful for an investor to understand the business better. When the results are announced it should immeditaly be accessible from the website. In many cases results are uploaded a day later the official release from the exchanges.
- It should be mandatory for every company to announce new contracts / cancellation both being above a certain % of sales(many already do, but it should be done by everybody). Report every change in policy which is material say 5% or x% of profits or sales (the one I discussed above).
- Releasing Cash flow statement(CFS) and Balance Sheet(BS) in Quarterly releases. Currently companies just need to report the Income statement of a company, accompanied by a standard set of disclosures. There is no requirement to present the CFS and BS. Its very difficult to know whether a company is making cash profits or has piled on huge debt. If one were to dig, there would be umpteen number of cases where rising sales and profits has not really got converted into cash and a couple of years later it either been written off and in some cases has led to the company going bankrupt.
- Companies should have a Management Discussion and Analysis section in its quarterly results. While many company’s do it once a year, times are changing so fast that people need to be aware of things on a quarterly basis. The management should discuss the broad industry & company outlook and what strategy it is adopting on a macro level. They should also discuss the operational numbers, what led to the increase, decrease for all major line items. Numbers are there because of the business, getting it from the Horse’s mouth gives much more clarity than analyzing ourselves.
- Releasing results pre or post market hours. Many companies release results during market hours this causes huge volatility in the stock prices. Its very difficult for anybody to analyze the results in less than 5 mins, by which time the stock reacts heavily. There could be cases were the profits are down heavily, but on closer inspection there could be a one time charge which if adjusted would meet expectations. By the time this information is cracked the stock would have seen a atleast 3-5% swing eitherways trapping traders and investors on the wrong foot. (Maruti releases results post market hours – not everyone).
- Many companies conduct conference calls with Analysts of Ibanks. The management makes a presentation of the results, followed by Analysts questions. Access to this us available for institutions, but not for the common investors. Company’s should atleast provide “listen only mode” access to investors and a transcript of the meetings.
Retail participation has grown multifold in the past 10 years and will be on the rise in the years to come. Unfortunately Information asymmetry still prevails and it’s a question of Information “Have” or “Have nots”. While the divide will always remain, it just a question of how can the gap be reduced. Its time that the regulatory authorities take a look at the best practices and start implementing them for the common benefit.
