Portfolio

The disclosure dilemma

Adarsh Gopalakrishnan | Updated on August 26, 2011

How much does how many matter?

HYDERABAD 23/11/2008:.Labourers unload bags of cement from lorry at a warehouse in Hyderabad following a fall in prices. This is a relatively sharp decline in cement prices in the eastern part of the country which softened by as much as Rs 10 - Rs 12 for a 50-kg bag compared to the northern and southern markets where prices have fallen by Rs 2 - Rs 4 a bag over the last fortnight. ...Photo:Mohammed_Yousuf   -  The Hindu

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Letting the markets know what, how much and where you sold your goods could help temper investor expectations on performance.

Would you like to buy the stock of company that gives you minute details of its sales or one that plays its cards close to its chest? That's essentially the debate now raging around Samsung's decision to stop disclosure of its Smartphone sales to the markets.

So what does Samsung achieve by not telling the world know how many smart phones it sells?

HOW OFTEN

Companies, often those making consumer or industrial goods, like to let the markets know how much of a product they've sold. Disclosures on volumes made by companies and industry associations on how many cars, cement, steel bars they've sold, helps investors know what to expect in terms of financial results.

For example, steel companies such as Tata Steel and JSW Steel let you know, at the beginning of every month, how much and what kind of steel they have produced over the last month. With a general idea of how steel prices were through the quarter (indicated by price cuts or hikes, weak demand) and how costs stood (raw materials, sudden tax hikes), investors could go into a quarterly or annual results session with a fair idea of what to expect. This saves them the pain or shock and the resultant panic which often accompany a bad set of results during volatile times.

The automobile industry association, SIAM, has monthly releases to help investors and consumers know how car sales are shaping up. It includes details on how individual segments have been doing. This could provide the investor or industry participants an idea of what is working in the automobile markets. Trends in consumer preferences or how a new car has performed, can be discerned from such data.

On the flipside, companies could claim that giving away sales and production numbers lets their competitor know how well (or badly) they are doing. This could, in turn, be used by competitors to make adjustments to their own output, product mix or enter product segments they currently do not compete in. Case in point, the decision by two cement majors which dropped out of Cement Manufacturers Association led to the quality of regional data on cement despatches deteriorating. Much like Samsung, the two cement majors which stopped providing despatch data may have believed they were giving their competitors too much information.

KEEP ‘EM GUESSING

So the simple premise on which Samsung operates is: Let Apple and the markets keep guessing how many units of the wonderful Samsung Galaxy S2 we are selling. Maybe markets in their exhuberance will push the share price higher or nervous competitiors rush a half-baked product into the market.

Data points from an industry may have three different uses . Investors use the data to supplement publically available information (steel, iron ore or coal prices). They may extrapolate it (historic margins, cost-structure) to forecast earnings and future potential.

Consumers such as the media use the same data and see a specific product or company doing well may make choices based on the data. Other industry participants, including suppliers (raw material, machinery etc) and competitors, use the data to make decisions on how to price their similar products and which markets to target with their products.

Case in point, Rio Tinto or BHP Billiton would jump at the earliest signs of life in the steel sector to hike the prices of iron ore and coking coal. Hypothetically, watching Tata Steel's auto-grade steel volumes soar could get companies such as SAIL and JSW rush in and possibly cut prices to get a piece of the action.

In the light of the above two scenarios, is it still in Tata Steel's interest to give away monthly steel production data?

Is it in Suzuki's interest to continue letting competitors know how well its new Swift model is selling, if the guys supplying seats and steel decide they deserve a hike in prices given the product's success? What if Ford, Toyota, among others, decides to build their own A2 segment car and undercut Suzuki's price to compete with the Swift?

BEING ORIGINAL

The notion that not disclosing how well a certain product is doing in terms of volumes can throw your competition off-guard does have its merits. Anecdotes are aplenty about an optimal product mix or blockbuster product which pushes a company into a higher growth orbit.

However, do the anecdotes really serve the purpose of informing investors? Probably not, as they provide only one piece of the puzzle that makes up a company's financial picture for a particular quarter or a year.

Of the multitude of factors (realisations, raw material costs, fixed costs, and existing products) which drive the sales of companies such as Samsung, how well new products are doing is just one. However, it can be important, as the smart phone category is a relatively recent addition to the fray. Being able to gauge a company's success on the front is crucial to gauging its near-term prospects and long-term potential.

In a more homogenous product such as cement or steel, letting the markets know ‘what', ‘how much' and ‘where' you sold your goods could help temper investor expectations on performance. This is especially true during volatile times where several external factors such as raw material costs could play spoil-sport with earnings even when underlying demand holds.

As for how the lack of disclosures affects competitors, in a dynamic category such as smart phones, product research and development precede launches by anywhere between six months and several years.

The decisions which have a direct bearing on how well your product is doing today were taken a long while earlier. Is not letting the markets know how many you are selling going to shape that decision? Probably not, judging by the ongoing smart phone battle.

It may buy the company a few months of uninterrupted face-time with the consumer, but the features your ‘successful' product boasts will pop up in competitor's products.

It comes down to a compromise between keeping the company's investors in the know about a big product and not letting your competitors steal a march over you.

Published on August 20, 2011

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