by Vivek Kaul/DNA Money
“Kyun dare zindagi mein kya hoga, Kuch na hoga to tajurba hoga” – Javed Akhtar
Dheeraj Sharma was going back to his office from a site visit. The company he worked for wanted to set up a new plant to expand capacities. Sharma was deputed to take a look at various locations and file a report, so that the management could finalise a site for the new factory.
Sharma was skeptical about his company’s decision to expand capacity but really could not do anything about it. He thought the expanded capacities would do no good to the company and just bring down prices, without really expanding the market.
When Sharma had started working around two decades back, he was of the opinion that it’s difficult for investors to figure out the future of the company. But people who ran the company (both managers and owners) would find it a lot easier being in the position they were.
Now, after two decades of work, he felt how wrong he had been. His experience had taught him that managements of businesses at times turn out to be as wrong about the future of a business as investors are at other times.
Sharma thought about the town of Modinagar he had to cross on his way to his hometown, Meerut, from New Delhi. Over the years, this town had turned into an industrial graveyard. One could see rows of dilapidated factories of cement, steel, textiles, etc. The family of Gujarmal Modi had tried to enter almost every business, unsuccessfully.
All this made Sharma wonder, “Why can’t the management of a company, being in the position where it is, see the future coming?”
Debashis Basu in his book, Face Value, Creation and Destruction of Shareholder Value in India, points out, “Managers are usually too full of their own strengths and cannot see the pitfalls ahead in their business when the market does.”
Further, it also does not help when the top management collect ‘yes men’ around them who go with what they are told instead of trying to question decisions.
Basu further points out, “Management assumptions always overestimate the future sales and underestimate the costs needed to get the projected level of sales. Actual performance rarely lives up to these rosy projections – as most project reports and analysts’ research reports testify.”
At times, the management is so focussed on the demand side of the business that they forget the supply side. In a climate where everyone is optimistic, managements tend to look at the growth opportunity that has presented itself without realising that there are many other companies in the market getting ready to tap the same market. This leads to a supply-side glut. Two excellent examples are the American and European consumer durable companies, which have come into India, but over the years really haven’t been able to make a dent into the market.
As Basu points out, “On the supply side, there are hundreds of drug companies in India fulfilling the basic needs of people. Like foreign consumer products companies, foreign pharma companies have to face doughty Indian competitors who happen to be more enterprising in changing their business model to discover new revenue sources.”
But the stock market usually figures out which way the company is headed in the days to come. This information gets reflected in the price of the stock. The stock market, at times, even ignores good financial results of a company. A good result is past data. What the stock market is interested in is the future. And if it feels that the future of the company is not clear, excellent financial results have no impact on the price of the stock.
The example is hypothetical