Business Today: Editorial

A Beginning Has Been Made

India's regulatory framework leaves plenty of room for share price manipulation by companies and the loopholes seldom go abegging. Still, for want of a better parameter, we stick to it to determine how companies have been providing value to the investors, especially those to whom the term 'small' is often prefixed. But there are legitimate ways, too, of share price management. The most efficient of them is to simply run a clean ship. A key reason why share prices become volatile is the tentativeness that managements bring to the company's performance-most decisions made by companies turn out to be price-sensitive.

Then, there is the mechanism of buyback. Buybacks, however, betray a defensive, even defeatist, mindset. Sure, it enhances the control of the management over the company by reducing the free-float of a stock and helps spruce up the share price, especially if the buyback is at a price significantly higher than the prevailing market price. But it is also an admission by the management that it cannot think up avenues of deploying resources that can boost returns. The implicit message to the shareholder is: take your money and put it where you can earn better returns; we can't give you more than what you now get from us.

It is reasonable to expect managements to keep an eye on the share price of the company. After all, lower volatility reduces the cost of capital and enables a higher price-earnings multiple, arming the company with a powerful weapon for growth, organic as well as inorganic. But the market need not be the all pervasive concern. No less than 20 per cent of Hewlett-Packard's marketcap was wiped out immediately after it announced its merger with Compaq. But it is bound to bounce back, especially if the merged entity can successfully address some critical issues facing it. The focus, therefore, should be on marketcap in the long-term rather than the short-term.

The emphasis on the long-term is key: the active management of the share price would have been especially difficult, even unwise, during the past 12 months, which have been marked by the second slowdown in the Indian economy in three years. It took a while for the industry, and the government, to acknowledge the slowdown-perhaps because macroeconomic indicators did not reflect it even as consumer confidence dipped. But the acknowledgement promptly brought a series of measures and strategic revisions across sectors.

Consequently, companies are looking to explore markets where none existed before-paper manufacturers, reeling under surplus capacity globally, are now exporting to Africa-and they are taking a critical look at core processes and are seeking to outsource what is not core. it and accounting have emerged as the favourites. A company in the yarn business has outsourced its entire it function to consulting firm Accenture. The employees of the company have become the employees of Accenture. And customer-focus has become sharper than ever. Even commodity companies have started to take a closer look at customer behaviour. The backend has come to the fore. Channel strategies are being revised to achieve top line growth. And supply chain management has become fashionable again.

The past year also marked India's first earnings/profits warnings. The first came from NIIT. Others, mainly software/ technology companies, followed suit. While the NIIT stock came in for a fair bit of hammering post-warning, the move marks another step towards greater transparency. It may take the Indian market a while to handle such warnings with more understanding, but a beginning has been made.

The other side of the coin is to effectively communicate the good news. Most companies are aware of this need, but don't seem to get the content of communication right. Perhaps the most important part is to communicate to investors that the corporate strategy is well founded and value-generative.

At the same time, companies will have to keep focusing on the age old tenets of product, promotion, and distribution. It is believed that a consumer may ask for a product seen the other day on TV. But she seldom asks for it again if it is not available in the shop the first time. Hopefully, by the time we do the honours next year, companies, irrespective of their rankings, will have higher marketcaps to show for their efforts in the next 12 months.

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