Mumbai: Rating agency Crisil Ltd, a subsidiary of Standard and Poor’s, on Tuesday launched India’s first independent equity research service for assessing fundamentals and valuations of listed firms.
It will not give “buy”, “sell” or “hold” recommendations on individual stocks but focus on a fair valuation of stocks, based on parameters such as business prospects, management capability, governance standards, financial performance and outlook for earnings growth.
These grades will be on a 1-5 scale, with 5 being the highest and 1 the lowest grade.
Crisil will put up detailed equity research reports on each graded company on its website and update them every quarter for a year after the first report is released.
On a new scale: Crisil managing director and CEO Roopa Kudva says the agency aims to deliver high-quality independent equity research, and expand the coverage for small- and mid-cap firms.
To begin with, the agency has evaluated 13 companies including three stocks that are part of the Bombay Stock Exchange’s benchmark Sensex index— NTPC Ltd, DLF Ltd and Hero Honda Motors Ltd.
NTPC has got the best rating on fundamentals and Everest Kanto Cylinder Ltd and JM Financial Ltd have received the best rating on valuations.
Currently, eight of these 13 firms have been tracked by six or fewer analysts.
“Through Crisil IER (Independent Equity Research) we aim to deliver high-quality independent equity research, and expand the coverage available for small- and mid-cap companies,” said Roopa Kudva, managing director and chief executive, Crisil.
According to Bloomberg data, only 170 firms, or 6% of some 3,000 stocks traded on the exchanges, are covered adequately by research analysts, while another 435 firm are tracked but by less than 10 analysts covering each of them. The rest, 2,395 firms, are not studied at all.
According to institutional investors, independent research analysis can certainly add value and help them make informed investment decisions.
“Sell-side research reports focus on liquidity. When the market was booming, there were a number of research reports on real estate stocks. There was a lot of coverage when there was no value. When things turned, there was great value for research but there was no coverage,” said Prashant Jain, chief information officer, HDFC Asset Management Co. Ltd, manages Rs93.874 crore worth of assets.
Currently, research on listed firms is primarily done by brokers, whose revenues are linked to commissions that are generated by the trade that may result from their buy or sell recommendations. Some brokers also have investment banking units that at times work on deals related to the company researched. Hence, investors and fund managers often find their research subjective and ridden with conflicts of interest.
Nilesh Shah, deputy managing director of ICICI Prudential Asset Management Co. Ltd, which has Rs77,967 crore worth of assets under management, said: “When I see these reports, the first thing I do is to try and understand the analyst’s bias. When someone recommends ‘hold’, does it genuinely mean hold? We are constantly trying to read between lines to understand the compulsions of the person writing the report.”
According to Shah, independent research would act as a benchmark with which such sell-side reports can be compared. “It could be a lighthouse for buy-side,” he said.
Institutional investors also point to the herd mentality among the sell-side analysts. Often, when one puts a “buy” report on a stock, others follow suit. Jain of HDFC Asset Management Co. highlighted this aspect saying, “Often one sees consensus and uniformity in research reports. Genuine diversity of opinion is not available. Even price targets are close to one another.”
Globally, three models are practised for independent research reports. In Hong Kong, equity ratings are sponsored by companies while in Malaysia and Singapore, exchanges pay the researchers. There is yet another model where investors commission such research reports. Crisil will be “open” to all three models and Kudva said the agency has set up adequate firewalls to ensure its marketing function is independent of its analysis. The first set of 13 firms rated by Crisil have paid fees for the exercise.
Capital market regulator Securities and Exchange Board of India chairman C.B. Bhave said investors must look at these equity research reports with the knowledge of who has commissioned the report. “If companies are reluctant to part with information for reports commissioned by investors, Crisil should make a note (of non-cooperation by the company) in their reports. Besides giving investors an idea, it will help regulators to focus on such companies.”