For India Inc as well as the government, the weight of expectations is proving burdensome.
It’s been a tough results season for India Inc so far. Not because they have done badly — in fact, given the slowdown both at home and abroad, most of the corporate heavyweights have managed to show commendable topline and bottomline growth — but because what they have delivered has not been in line with market expectations.
DECENT RESULTS, BUT…
Take information technology giant Wipro, for example. Wipro’s shares tanked as much as 8 per cent after the results were announced. And this was not because the company did badly! On the contrary, despite tough conditions, India’s No.3 software and services provider had delivered an 18 per cent year-on-year growth in profits, managed to add around 50 odd new clients and added more than 2,300 staff during the quarter.
At any other time, such a stellar performance should have sent the company’s share price soaring, not tanking, and analysts should have been scrambling to put ‘buy’ recommendation on the stock, rather than downgrading it, which is what they did.
Another bluechip companion of Wipro in the stock indices, consumer goods giant Hindustan Unilever Limited (HUL) fared little better. HUL managed to post pretty decent results for a difficult year – it managed to record a 14.6 per cent growth in profits. The company's domestic sales rose by 15 per cent to Rs 6,158 crore from Rs 5,360 crore in the year-ago period.
But in morning trade on Wednesday, the HUL scrip slid over 6 per cent, after top brokerages downgraded the stock. Once a staple in the portfolio of almost all serious investors in Indian markets, the HUL stock, after these results, was quickly downgraded to an underperformer.
Why did these investors and analysts do what they did? If lay investors are urged to read the numbers in balance sheets and then invest, why are professional investors doing the exact opposite, after looking at the same numbers?
A look at what the pros had to say about these results gives us a clue. In a note mailed to investors, V. Srinivasan, a research analyst with Angel Broking, said, “HUL has delivered a disappointing set of numbers for 3Q FY2013, with the 5 per cent underlying volume growth for domestic consumer business being the lowest in last three years. Net sales rose by 10.3 per cent year-on-year to Rs 6,434 crore.
While the low margin Soaps and Detergent division posted a 20 per cent sales growth, Personal Products division disappointed with a modest 13 per cent sales growth.” As regards Wipro, Barclay’s, while maintaining its ‘underperform’ rating, said, “Wipro IT Services' December 2012 quarter revenue growth of 2.4 per cent Q-o-Q was higher than our estimates. However, this continues to position it as a laggard in the sector.” To my mind, the key takeaway in both these views, quoted as representative examples of what market players had to say about these stocks, is that the performances by these companies, regardless of how good they may have been on a stand alone basis, did not ‘meet expectations’.
In other words, well as the managers of these companies did, market players were punishing them for not doing as well as they expected them to do, which was even better! In fact, one analyst on a TV channel said, while talking of Wipro’s results, that the company “did not pull any rabbit out of the hat”! So this is the new challenge for India Inc. It’s not just about growth, its not just about profits. If you want to be the darling of investors, you have to exceed their expectations, any and every time.
INDIA AT DAVOS
The government too, is learning the same lesson, in an equally painful way. Wintry Davos offers a prime example of what failure to meet expectations can do. Six years ago, it was “India everywhere”.
In a high pressure campaign, India occupied centre stage at the resort town. Ministers and CEOs were sought after attendees at the various events — and more importantly, the after event parties – and everybody wanted to know how to get a piece of the action in the unfolding India Growth Story.
Six years on, that story has unfolded — into an outline which still has dazzling possibilities, but has details missing even at the base level. India is, if media reports are anything to go by, nowhere at Davos.
There is only one single session where India features, where Kamal Nath will fly the flag. More than 100 Indian CEOs have made it to the global investor mela, but as mere attendees, not as eagerly awaited ambassadors. The message is clear — walk the talk, or save your breath.
That was more or less the message from the major credit rating agencies as well. True, one of them, Moody’s, has maintained India’s current investment grade rating on the back of recent moves by the government to shore up investor confidence and bridge the yawning fiscal gap.
But the other two continue to dangle the Damocles’ Sword of a ratings downgrade over our heads, and will be taking a hard look at the numbers on the deficit that Finance Minister P Chidambaram, currently still talking the talk to potential investors in Hong Kong, manages to come up with in his budget for the next financial year.
If the Finance Minister fails to “meet expectations” — or better still, exceed them — then he too, will be punished the same way the stock of Wipro or HUL were punished. He, or rather, India, will be dubbed an ‘underperformer’ and investors will look elsewhere.
That is the trouble with building up expectations. In the pre-reform era, a company was considered a safe bet for investment if it made profits and paid dividends regularly. In fact, the big news during the results season was the announcement of the dividend pay out, not the results per se. Today, dividends scarcely find a mention, while ‘outlook’ and ‘guidance’ rule the roost.
But the boom years changed all that. For corporates today, it is no longer sufficient to record growth in turnover and profits alone — they must also hold out an enticing promise of yet more growth and even more profits to come. Any failure to deliver to deliver on those promises is ruthlessly punished.
CEOs, of course, work on a cruel time table. Wipro’s 15 consecutive better than expected quarters were forgotten in a single quarter of disappointment.
Governments — and elected ministers — have a much easier time scale. Chidambaram is re-rated at best from budget to budget, and is under serious pressure once in five years, when elections roll around.
But time, as the saying goes, flies. And even five years, which looks like an eternity to deliver on promises at the start of one’s term, can vanish pretty quickly. This is when the real weight of talk becomes evident.
For governments as much as companies, it is delivery that counts.