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.