Transparency pays: How Marico's profit warning helped

Companies unsure about when and how much to disclose to investors, would do well to take a leaf out of Marico’s book. And if they are worried about the impact such disclosure(s) could have on their stock prices, Marico’s share price performance since the company’s profit warning is a useful pointer.

Midway this month, the fast-moving consumer goods company warned that its profits and operating margins could be much lower than what investors/equity analysts are expecting from it. The stock plunged more than 10 percent in the trading session the day after the announcement. But the share price has since stabilised, and Marico has not done too badly when compared to its peer group.

From the time of the profit warning, Marico shares are down 9 percent till date. During the same period, the Hindustan Unilever Ltd (HUL) stock fell 6 percent, ITC dropped 4 percent and Dabur shares fell 5 percent. One could argue that the slide in Marico shares may have been cushioned by a partiality for FMCG stocks in general, given the turmoil in the broader market.

[caption id=“attachment_92076” align=“alignleft” width=“380” caption=“From the time of the profit warning, Marico shares are down 9 percent till date. Screengrab from marico.com”] [/caption]

True, FMCG stocks have fared better than their counterparts in most sectors. Yet, there was no compulsion for investors to buy Marico shares, when the management had clearly stated that profits and margins could be under pressure at least till the end of this financial year.

Almost all analysts and fund managers admit that FMCG stocks have become overvalued, thanks to sustained interest from investors looking for ‘safe havens.’ That being the case, it would make sense to avoid a stock like Marico where disappointing earnings growth is an added worry. The company had cited three reasons for lower earnings projections -unusually volatile raw material costs (especially of copra, its key ingredient), higher advertising spends, and slowing down of the economy.

While the underlying factors were clearly mentioned, the press release was somewhat vaguely worded, and did not give any indications about the extent to which profits and margins could fall. There could be two reasons for this: One, despite the seemingly stable nature of the business, wild swings in input costs and aggressive pricing strategies by rivals could throw projections off the mark. Two, putting a number/range for operating margins/profits would lead to investors expecting similar projections every quarter.

It may be too early to say if Marico’s decision to flash the red light well in advance has won it the trust of the market.

In uncertain market conditions, it is clear investors would prefer to stick with companies which are more open in their communication with shareholders. Yet, there is a strong possibility that the market will factor in the transparency multiple even when things start looking up.

Here is a look at the performance of companies that unveiled nasty last minute (unpleasant) surprises for their investors.

Crompton Greaves: In July this year, the engineering major reported dismal first quarter earnings without any warning. Investors were also angered at ex-managing director (currently non-executive vice-chairman) SM Trehan selling all his shares in the company a few days before the numbers were announced. Crompton shares are down 38 percent since then, compared to a 16 percent decline in the BSE Capital Goods index during the same period. The stock has performed worse than companies like Punj Lloyd (-27 percent) and Suzlon (-24 percent) which have strained balance-sheets. Crompton promoters have mopped up close to 50 lakh shares over the last one month, but it looks like it could be a while before they regain the confidence of the market.

Mphasis: When the company’s quarterly numbers were announced in February, it emerged that the management had not disclosed that a component of the previous quarter’s revenue was courtesy a one-off arrangement with parent HP. Things have never been the same for Mphasis shares ever since. Of course, the IT sector in general has been through a rough patch of late because of the macro-economic problems in the US and the Europe, and most stocks have taken a beating. But Mphasis easily ranks among the worst performers, having fallen 47 percent since February, compared to an 18 percent drop in the BSE-IT index.

State Bank of India: Higher provisions towards bad loans and pension liabilities wiped out nearly the entire net profit for the fourth quarter of financial year 2011-12. The market was caught off-guard by the net profit figure, which was a fraction of what analysts had estimates. Should the bank have given some inkling to the market about the forthcoming disastrous numbers? From the time the earnings were declared in May, SBI shares are down 19 percent till date, compared with a 13.5 percent drop in the BSE Banking index. SBI has fared worse compared to its public sector peers like Punjab National Bank (-8.3 percent), Bank of Baroda (-10 percent) and Oriental Bank of Commerce (-13 percent).