Unwelcome duties

There is no winning against the'noise' in the market, especially when analysts behave like blood-thirsty gladiators. Quarterly reporting of financials surely increases transparency for investors, but over time it has made companies focus on meeting or beating the market's short-term expectations. Analysts tend to arrive at earnings estimates of companies and when companies deviate from these estimates, all hell breaks loose.

The noise has become so loud even in the US that President Donald Trump has asked the Securities and Exchange Commission to study the merit in companies reporting financials every six months instead of every quarter. Over the last couple of decades, the number of listed companies in the United States has come down and the Wall Street Journal recently reported, "The rise of private markets where companies are free from quarterly reporting is already reshaping the makeup of public markets." Warren Buffett, boss of Berkshire Hathaway, and Jamie Dimon, CEO of JP Morgan, have called for an end to quarterly earnings guidance by listed companies to end short-term swings.

The story in India is no different. At the start of the earnings season this fiscal, Bajaj Auto faced the wrath of analysts after the company announced its results. The Bajaj story in some sense embodies the dichotomy that markets pose before promoters and managements. The Bajaj Auto story is interesting simply because the company was criticised a few years ago for sticking to high-margin products and its refusal to chase growth in the commuter-bike segment, where rival Hero ruled. So chatter in the market was hard to comprehend when the company reported motorcycle volume growth of 40 per cent year-on-year and 80 per cent growth in three-wheelers in the June quarter of the current fiscal. And it has aggressively priced one entry-level bike, which helped it increase market share, too. The company's shares fell sharply the day after its results, as analysts decided that an intense telecom-like 'price war' had broken out. This assumption was based on the change in Bajaj Auto's product mix coupled with operating margins coming in below the 20 per cent mark (18.4 per cent in June 2018). Such was the panic that Rajiv Bajaj, Managing Director of Bajaj Auto, had to give a detailed interview where he explained that the company was not facing 'unusual margin pressures' and the company was seeing growth in all segments.
Interestingly, in 2014, Antique Stock Broking in a report said, "Though one might debate Bajaj Auto has lost share to peers in volume terms, not value terms, it is time it focused on growth and regained volume share through new brands and unique products with mass appeal and value proposition, rather than debating and defending the existing topic." Now that Bajaj Auto has a product very attractively priced in the commuter-bike segment, the market is worrying about margin decline, which in the latest quarter was also impacted by rising input costs. A few years ago, Infosys under the stewardship of D Shibulal was badgered by the market to chase growth even if it meant sacrificing margins. This is a dangerous trend to say the least as analysts seemingly want companies to be run on their whims.

History is replete with examples of entrepreneurs following their vision despite the opposition from the market, which is how it should be. In 2007, Kumar Mangalam Birla's Hindalco made a bid for Novelis. At that time, the market was very skeptical as Novelis was thrice the size of Hindalco (net worth was `9,500 crore at the end of March 2009). In FY18, Novelis contributed 56 per cent of the group's operating profit. A decade later, Hindalco has made another acquisition (Aleris), in 2018, making it the largest aluminium company in the world.

It is not for nothing that equity capital is referred to as risk capital because it is supposed to bet on an entrepreneur and his ability to take risks to grow the business. Back in 2007, Kumar Birla stuck to his decision on Novelis despite stiff opposition from the market.

Analysts don't just stop at arriving at quarterly estimates that they expect companies to meet. Some of them also end up giving advice on operational issues. For instance, some analysts have been advising Parag Milk Foods to cut back on its umbrella of brands and consolidate all value-added dairy products under a single brand. If analysts had their way, they would have Go Cheese and Go Ghee sitting on the same shelf or, even better, Gowardhan Cheese alongside Gowardhan Ghee. Not surprising then that entrepreneurs like Jack Ma, founder of Alibaba, believes that shareholders come third in his list of priorities - it is customers first and employees second.