April 15, 2006

 

Whose expectations?

Infosys announced its quarterly and annual results yesterday. One of the many reports quoted
The net profit was slightly below the street expectation.
While a few reports also sung the same tune, others said opposite.
Infosys beats street, gives 'best ever' forecast till date
More expectations can be seen here.

The intriguing question is, who sets the expectations? Who are the members of the "street"?

Here is the modus operandi - an agency like Reuters, CNBC TV18 (ie. there are two streets) conducts poll among analysts (read stock brokers) to get their views on the earnings of companies. eg. The analysts predicted net profit of Rs 689 Crores for Q4, and the actual figure was Rs 673 Crores. Now, the actual figure is just 2% off the expected. This can very well be a rounding off error as the revenues are as high as Rs 2,624 Crores.

Amazing! How come these folks predict the earnings of a companies with a the degree of accuracy rivaling that of a fab unit of Pentium 4? Do they have some insider information which aam-aadmi doesn't have? Or do they just do pick up the company's guidance given in earlier quarter, use some complex algorithm to generate a random number and add or subtract from this guidance and give the prediction? (The addition or subtraction operation can be decided with toss of a coin. May be.)

The numbers may or may not beat me, but the process of setting the expectations definitely does!

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