What Companies don't tell you in their quarterly earnings

Till such time the regulator does not demand better disclosure from companies, the retail investor will never be empowered and will lose out to the larger investors

Companies, I have realised, do not have a very high opinion about journalists or the average retail investor. This thought gets reinforced every earnings season, when I see the earnings releases that companies send to the stock exchanges. These releases are supposed to disclose to the shareholders (which is why the release is first sent to them) how the company has performed during the quarter, but these releases do their best to hide information. 

 

This is rather strange because these companies have actively offered shares to investors (both retail and institutional) by going public and shareholders have a right to accurate information. However, managements or promoters do not believe that these investors have a right to have access to the information that they have to large institutions have. To my mind, this is discrimination of the worst kind.

 

Quarter after quarter, I see companies trying to hide information from the average Joe who has invested his hard earned money into a company's stock. If a given company's earnings have fallen in the given quarter compared to the previous year, the company conveniently chooses not to show the decline in profit. Loss is never mentioned at all, it is left to the investor to peer into the financial statement and calculate the percentage decline in profit or an actual loss. And if the company has done badly compared to last year but is showing an improvement sequentially, the company highlights the sequential increase in sales and profit. A comparison with the previous year is conveniently left out. 

 

Recently, a technology company announced its results and the topline in dollar terms grew at 5.2 per cent sequentially (the revenue growth of technology companies incidentally is analysed on a quarter on quarter basis and in dollar terms) but the company's net profit remained flat year on year. The company in its release conveniently omitted this comparison even though the earnings per share is in rupee terms and therefore profit growth in rupee terms is important. The company chose not to highlight this or give a credible reason in the management commentary on the same. 

 

Several large companies discuss the granularities of their earnings and sales growth with analysts but choose not to share a fraction of this with retail investors or journalists. Many companies, unlike Infosys and Lupin, do not even allow journalists to log into conference calls with analysts. A lot of times when income tends to jump sharply for reasons other than regular operations or declines due to operational reasons, analysts take time to understand it themselves. The retail shareholder needs to be treated with a lot more respect I believe. 

 

At times even the institutional investors complain about the high-handedness shown by companies. One large metals company in India never gives details on realisation per tonne of metal sold, which makes it impossible to judge how profitable its operations are. This company neither holds analyst meets nor does it entertain queries from analysts. 

 

A reason behind such practices could be the reluctance of the regulator to give a prescribed format in which companies file their earnings. In the US, the SEC has a prescribed format called Form 10-K whereby companies have to give detailed disclosures on their operations and other matters to the regulator. There is a segment where the management also gives a detailed disclosure on the company's performance and the reasons behind it. This management discussion are a key part of the disclosure. Some concessions are given to companies that are smaller. 

 

In India there are no such prescribed formats like the quarterly report on Form 10-Q for listed companies in the U.S, which includes management's discussion and analysis on the quarterly results says Sumit Seth, Partner, Price Waterhouse & Co. The annual report in India, he says, has such relevant details, but a lot may happen during the fiscal year that the investors would benefit from knowing, he explains. Till such time the regulator SEBI,  does not demand better disclosure from companies, the retail investor will never be empowered and will lose out to the larger investors.