Five companies that need to do a Marico

Recently, Marico, a fast-moving consumer goods company, practically created stock market history by issuing a warning that its profits and operating margins could be much lower than what investors/equity analysts had pencilled in.The stock plunged more than 10 percent in the trading session the day after the announcement, but has stabilised since. Indeed, Marico has not done too badly compared with its peer group.

Marico has not done too badly compared with its peer group. Reuters

In a market where investors are used to getting nasty surprises only during results season, Marico's action warning investors of tough times ahead is a lesson in good corporate governance to other companies who often hold back on breaking bad news until the very last minute.Firstpost believes that other companies could also adopt Marico's approach and warn investors of exactly what lies ahead. Here's our list of companies we wish would do a Marico:

Reliance Industries:One company that the market desperately wants to know more about always is Reliance Industries. The company has been a non-performer both in terms of investor returns and financial performance. Last week, reports surfaced that there could be a possible delay of four years before production from its gas well is restored to earlier levels. More clarity from the company on the progress of its gas well will go a long way in improving investor sentiment.

Furthermore, the company is sitting on nearly $10 billion of cash. Analysts have been constantly complaining about the need of more information from the company on how it intends to use this cash.

Another operation that needs more explanation is the selling of its own shares held by its treasury. Reliance's treasury has been selling the company's shares in accordance with international accounting standards, which is putting pressure on the stock's prices. Regular updates on the number of shares awaiting sale can help market gauge the supply of the shares in the market more accurately. Will Reliance measure up?

Tata Motors:Please, please, please tell investors what is exactly happening to production and sales of vehicles this quarter. According to a Wall Street Journal report, it seems that India's largest auto maker by sales is likely to produce about 12,000 cars this month, one-third lower than the number it produced a year ago. September's production cut follows a similar move in August. Why the production cuts? Because of poor demand.

In August, sales plunged to 1,202 units, down 88 percent from April 10,012 units and perilously close to November 2010's all-time low of 509.The Nano has been particularly battered by evaporating demand: the company made 1,143 Nano cars in August, a sharp decline from 7,739 units in August 2010.

According to the WSJ report, the company last month shut a plant for a fortnight in the western state of Gujarat where it makes the Nano for regular maintenance and to trim inventory. In addition, there are increasing doubts about how its overseas markets will fare given the increasing uncertain global economic outlook. For sure, investors need clarity on these issues to make a clear investment decision.

Maruti Suzuki: India's largest car maker's widely reported labour problems - and the resultant strike - have dented hopes of the company capitalising on the festival season that has now started - car sales jump during this period, as purchases made during this period are considered auspicious.

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While the workers' issue has not been resolved yet, Maruti claims it can roll out over 17,500 units of the newly-launched Swift in a month, by hiring additional workers at the strike-struck Manesar plant and by starting production operations in Gurgaon.

Yet, at the moment, there is a lot of uncertainty about how the September-ending quarter will end for Maruti, given that its sales have been plunging since July.The company maintains that it will be able to pump up sales during this season, but analysts question that assessment.

A recent Sharekhan note says, "The earlier growth expectation of 10-15 percent has been downgraded to single digit growth. Unlike in FY11 (April-March 2011), which had an element of a positive surprise, the future is laden with uncertainties."The labour dispute has already cost Maruti a production loss of 18,000 units or Rs 900 crore, according to one estimate.

The strike's impact on exports has also to be factored in. Definitely more information needed, please.

JSW Steel:The big question with this company revolves around whether it will be able to procure adequate iron ore supplies given the iron ore mining ban in Bellary and neighbouring areas.

The fact that it will have to procure iron ore from far-off locations well into the next financial year, resulting in higher costs, is bound to affect margins. There are conflicting reports about how much iron ore it's actually sourcing at the moment, and how much inventory of the raw material it really has. More clarity on these issues will allow investors to judge the impact of the lower iron ore supplies on the company's future performance. While a recent e-auction of iron ore is expected to provide some breather, the company's profitability is still expected to be affected because of the high prices at which the iron ore was sold.

State Bank of India: The steep jumps in India's largest lender's loan loss provisioning in recent quarters have definitely got investors worried about the quality of the assets the bank is carrying on its books.

True, historically, the bank's asset quality has always been one of the problems for investors. Higher provisions towards bad loans and pension liabilities wiped out nearly the entire net profit for the quarter ended March 2011.

Given the deteriorating local economic environment, there's a strong suspicion that asset quality will deteriorate further this year. Not surprisingly, provisioning costs are expected to increase. IIFL estimates that Rs 550 crore in additional provisioning might be required in the current quarter.

Uncertainty about the provisioning levels and a lack of official guidance on what the bad loans at the gross level will be make it difficult for analysts to make a fair assessment of the bank's business outlook. Is SBI listening?


Published Date: Sep 26, 2011 03:43 pm | Updated Date: Dec 20, 2014 02:43 pm


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