Quarterly Guidance in India - A relook?

I am not very sure when Quarterly reporting of earnings started in India. I think it was sometime around 1999 - 2000 (please correct me if am wrong - I am unable to prove it on google or SEBI website). It coincided with the IT boom in India and while IT boom is very well known, there was another boom as well - Equity Research (ER).

Seriously, till about 2000 or so (again am not fully convinced of the year; all I remember is that it was this time ET started carrying news on such stuff), ER was crude and only a few broking houses did it. Most importantly, the smart tribe (MBAs and CAs) were not too attracted to the sector. But the effects of liberalisation (1991-92), the IT boom post 1995 and Wall street firms going gung-ho on India changed all that. India always had a decent accounting system and time was ripe to create wall street type ER reports.

So it began, companies started issuing quarterly earnings and someone had to read them and put it into a report which could be then, presumably, be the basis to advice your client to trade on. And along with popularisation of many terms (even ones like EBITDA, IPO; seriously) came the mighty guidance. Companies began issuing guidance for the coming quarters and years.

In a bull market, guidance act like a shot of tequila on an already drunk person. And companies began to calibrate their guidance or earnings to meet their guidance. Now I am not telling that guidance is solely responsible for financial crimes or behaviour of companies. But they surely add fuel to the fire. Guidance becomes the only metric that ER analysts and fund managers focus on and companies try their best to meet them. Of course, if the "best efforts" in meeting the guidance was true and actual operational performance, then one could say that guidance really and truly served the purpose. But as everybody know, this is not the case.

A quarter has 90 days out of which one can report reasonably for about 70 to 75 days. And how is it possible in an uncertain business world that companies can keep up their promises up all the time. Companies also became smart on their type of guidance - Infosys for example, always (mostly) beats guidance. That is they give a low conservative number which is topped by the actuals (very similar to a 5th standard kid telling mom that he got 90 in history only to show 95 in his actual report card). The risk is that now Infosys always has to top it's guidance. If it meets them, then it is like not having met the guidance. Some companies always top the consensus guidance and some companies have such stable Q-o-Q growth that one can just gape at the sheer smoothness. Of course many companies have resisted from giving guidances. TCS is a famous example. I recall having read a few years ago in Business India that an ER analyst or a fund manager actually had the balls to tell Mr. Ramadorai that TCS should try and smoothen the earnings !

And one another aspect, the quality of ER analysts. After the 2001 bust, the ER boom slowed down. So when the 2003-2008 boom started, there were hardly any experienced analysts around. And this boom, unlike the 2001 boom, was broad based on all sectors in India and not just on IT. So, you needed analysts across sectors, across companies. This was a golden chance for people to become industry experts. And you had people which 6 month experience writing reports on companies. All you needed to be an industry expert was to read a few other ER reports on that indsutry!

Ideally speaking, either the ER analyst should have worked for some time in that particular industry to cover it or at least have a few solid years of talking to people in the industry and knowing companies in and out before writing reports about them. Many analysts were only 6 months into the job and that too covering multiple sectors. Wow, some experience that. Today the situation is slightly better because of a few years of ER experience, but only slightly. So, an inexperienced, gullible or plain lazy (or smart enough to be lazy) ER analyst concentrates on that single figure - guidance - to decide what he writes on reports and the CFOs and investor relations PR person gives him exactly that.

The current trend in US is, correctly, against guidance and so should it be in India. Even if is banned outright, a few companies will still covertly give them but that's for later; at least companies can officially stop giving guidance and take a longer term view of their business.

On a closing thought, let me make it very clear- our quarterly reporting needs to be much better, we need our companies to give not only the P&L but also balance sheets and other operational data. Funny, we didn't borrow this detailing level from the 10-Q quarterly US filings. But along with the reporting, there is no need of guidance to the exact decimal. A broad based business outlook is what companies should do on an annual basis and then see what the ER analysts do without their crutches.

Outliers by Malcolm Gladwell

Well, Malcolm Gladwell, after his "Tipping point" and "Blink" has reached a certain stage from where one can't ignore his books. And so definitely one picks up "Outliers" to see what is new this time.

His subject is that of "successful people" and how a host of environmental factors have had a great role to play in the success and not individualism per se. In other words "right time and right place" are almost as crucial as talent in separating the successful from the not so successful.

Outliers starts with the Canadian hockey team and shows how the date of birth affects selection and consequent chances of being picked for the highest versions of the game. Then for sheer talent, he supports the "10,000 hour" rule which is quite popular these days in telling that 10,000 hours of practise of any skill makes you talented in it. What the book says is that because of the environmental factors (family, Geo-political conditions, Technological changes) successful people got to practise these 10,000 hours in their skill while the others where not so lucky.

To support this, he goes to on to explain the early lives of Bill Gates, Steve Jobs, Bill Joy and the Beatles were subject to this 10,000 hour rule. And he continues with the detailed analysis of the life of Joe Flom, a successful lawyer.

After this, the book takes a slight detour to example how conditions affected the life of immigrants in early US and how despite the early struggles, the period really set in a base for the fortune of the coming generations. From the US immigrants, the book proceeds to the rice fields of China to explain how rice cultivation helps Chinese in mathematics. Good stuff, especially the rice cultivation stuff. Towards the end is the explanation of the success of a popular "Jamaican" author !!

All in all, the book surely makes you think about how important are the external factors in shaping a person. Sure enough the book states that people had innate talent and skills; but it is the environment that enabled the talent to shine. The example of Chris Langan vs. Einstein tries to show that after a point IQ stops mattering and it is circumstances and choices that determine the outcome. Of course, many things in the books may sound controversial to people who believe in the self-made person theory. Nevertheless, the book is a good starting point even for those people to think in broader terms. As for the writing, of course the book is a breezy quick read and never gets boring.

To just bring in the connection to investing, doesn't this book explain what the great Warren Buffett has been talking about these days. He says he was lucky to be born to a good family, started reading early, practising his stuff, rejecting what he did not work for him, was taught investing by Benjamin Graham and so on. No one doubts his "internal wiring" for investing but after that wasn't it the environment that played a great role ? Warren himself thinks so and accepts that (so does Bill Gates in this book).

Of course questions remain? Why did all the people born in the same era as Bill Gates not succeed? What explains the sheer talent of so many people who did not have formal training in subjects (The great mathematician S. Ramanujan, for example). Anyways, Go ahead and pick this one. It is a good starting point of thinking about success from a a broader point of view.