The Hindu Business Line : Earnings guidance

With the onset of the results season, it is not surprising to see market participants around the world diligently keeping a tab on the earnings announcement of companies. But what may perhaps keep them more hooked on to the results announcement this time is the management’s outlook on the future prospects of their companies. Earnings guidance, as is the common christening of the prediction of future earnings by company’s management, is eagerly sought after as it sets the trend for the coming year. Investors and analysts alike base their decisions on the company depending on what the outlook is. For instance, the recently announced earnings outlook by the Infosys management for FY-10, which pegged the revenue and profit growth at 1.7 per cent and 7.6 per cent respectively, was disappointing as it made investors dump the stock; the stock closed the day 3 per cent lower.

The objective

In India, it is usually only the IT bigwigs that meticulously come out with their earning predictions every year. In doing so, the management shares insights and gives a sneak peek of sorts to its many investors and stakeholders into the what could possibly lie ahead of the company, in terms of affecting their investments. Earnings guidance requires companies to forecast their expected revenue and profit growth for the coming year, after providing for the many macro headwinds and internal challenges.

Wipro, which made its earnings announcement on Wednesday, gave its revenue guidance in the range of $1.009 billion to $1.025 billion for the first quarter of 2010, lower than $1.05 billion in the March quarter of 2009. In its regulatory filing to the stock exchanges, the company reasoned its lower guidance to the impact of global recession.

But how sacrosanct are these earnings guidance considering that these are predictions straight from the horse’s mouth? Though these projections help investors get a clearer view on the future prospects of the company, that these ‘prophecies’ come from the management and, hence, may be sprinkled with vested interest or prejudice has remained a point of contention. As a matter of policy companies such as Tata Consultancy Services and HCL Technologies don’t give out their guidance.

The market impact

Infosys’ earning numbers in the middle of this month flagged off the latest stream of results announcements. Even though the company’s revenue for the March-09 quarter remained quite within its guidance band of Rs 5494- 5699 crore, the market wasn’t quite happy with its next year guidance. The result: Not only did Infosys’ stock price plunge, it took the whole lot of IT stocks down with it as investors began benchmarking even the other IT companies with that of the bellwether’s. No wonder, the BSE IT index was down 2 per cent that day, while the Sensex had put in a neat 3 per cent gain!

In essence, whenever the earnings guidance is perceived to be below expectations, a ruthless marking down of the stock follows it. A hearty welcome, however, is dished out to stocks when the guidance is promising.

More Stories on : Corporate | Financial Performance | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page