Infosys: To guide or not to guide

In a report, JP Morgan says guidance contributes to volatility of Infosys stock

Infosys is a victim of its own success, as far as transparency goes. One of the first companies to announce and popularize Earning Guidance, the company’s stock has been on the receiving end every time it under delivers or even if meets its promise. December 2012 quarter was an exception, when after a long time the stock was rewarded for beating its own target.

JP Morgan in its report titled 'To guide or not to guide' says guidance contributes to volatility of Infosys’ stocks. If in theory, the aim of guidance is to limit stock price volatility, in Infosys’ case, the perception is that it may have achieved just the opposite, adds the report.

JP Morgan says that Investors in India and Asia want Infosys to withdraw its guidance practice. Several investors have directly communicated their views to the company. On the other hand investors in US strongly prefer Infosys to retain guidance in line with other US listed entities like Accenture and Cognizant. Being an ADR listed stock, the company is in an unenviable and tricky position.

However, other companies in US like AT&T, Coca-Cola, McDonald’s, Union Pacific and Ford among others have stopped the practice of guidance entirely. Yet these stock outperformed S&P500 since guidance were withdrawn. In other words, in the long run, it does not really matter even if Infosys withdraws giving guidance.

The question then is how would Infosys adopt to disclose its prospects if it does away with issuance of guidance. One way is to go the TCS way, which indicates growth prospects with respect to industry average.

JP Morgan concludes by saying that withdrawal of guidance in more normal times should not necessarily viewed with suspicion nor should it be compulsorily seen as a harbinger of poor financial/stock performance.