Vijay Kumar Gaba

The stock price of few top IT services companies in the country recently corrected sharply after declaration of 4QFY21 results. The explanation commonly offered and widely accepted for the fall in stock prices was that “the results were not as per the street expectations”. I find this little intriguing, especially in the current market environment.

It is well acknowledged that in recent times, the non-institutional investors (“retail investors” in common parlance) have been the dominant players in equity markets world over. In my past 30years of interacting frequently with this category of investors in India, I know that a large majority of these non-institutional investors are not well versed with financial analysis, especially related to the forecasting of financial performance and deriving fair price based on such forecasts.

Moreover, there is an insignificant minority in this category of investors which actually relies on the target prices forecasted for a security by “fundamental analysts”. This simply because they invest in a stock for much larger gains than an average analyst can possibly forecast.

Therefore, I find it little hard to accept the explanation that not meeting consensus forecast disappointed the “market”, even though the results are good and the forward guidance provided by the company is even better.

Another disturbing fact is the level of discussion on TV channels and social media about the future performance of reputable company. For example, I heard some young enthusiastic analysts having 6-8years of post qualification experience in equity analysis, questioning the guidance of the managements of companies like Tata Steel, Infosys, TCS, etc. I saw an analyst, who has spent just 5hours in a cement plant; has never purchased a bag of cement for himself; has always been a commerce student; learned the chemistry of cement from St Google, rejecting the demand forecast made by the management largest cement company in India.

Obviously, these analysts’ forecasts will eventually prove to be way of the mark. However, that is none of my problems. My problem is whether an investor should be relying on the forecast and guidance of the management, which has consistently delivered on its guidance; or go by the “street expectations”; particularly, when few are aware about the constituents of this “street”. It may be pertinent to note that in case of many mid and small cap stocks only 2-3 nondescript brokerages release their estimates. Thus the “street” in these cases may be extremely narrow, dark and stinking.

In this context, the following findings of a recent study by UBS Securities are also interesting to note:

(a)   In past one decade, the market consensus has overestimated one year forward Nifty EPS by an average of 20%, at the beginning of the relevant financial year. E.g., the earnings of FY22 are likely to be overestimated by 20% on 1 April 2021.

(b)   The analysts were so off the mark that even on the last day of the relevant financial year when only one quarter of earning was remaining to be declared, there was usually an overestimation by ~9%. In past year this error has ranged between 10% to 15%. Implying that even on 31 March 2021, the consensus Nifty EPS for FY21 could be overestimated by ~9%.

So before you call your broker to execute a trade based on what the anchor or analyst on TV is telling you about the earnings forecast, street expectations, forward guidance etc, please hold for a second and think “do you actually want the TV anchor or a random analyst to drive your investment decisions?”