January 4, 2024

How equity analysts rate a stock?

Guest Author | Equity Investing, Opinion

Hey folks, 

Check out the following snip!

Have you seen these kinds of phrases in the news before? 

If you are someone who has pressed the remote button to switch to CNBC News or clicked your mouse to a MoneyControl article, I am sure you are no stranger to it! 

The keyword I want you to look at above is “initiate.”

Millions of shares trigger the market moves over an undefined period, just based on the solid reasoning of an analyst put behind this word!

Just like a top-tier spy/thrill movie keeps its audience bound until the end for its climax plot, the opportunity to reveal the climax for us, sell-side analysts, comes at the very start of the movie! Because the initial few minutes of the investors we borrow while pitching a stock idea entails revealing the entire plot there itself!

Bang on!

A bit confusing?

Let me be utterly simple and direct, unlike some company’s management commentary. 🙂

Among many day-to-day tasks that an equity research analyst carries out on the sell side, one of the most crucial tasks is to expand the existing coverage of a sector’s stocks! 

For example, say, under the consumer durables sector, which I currently also cover, we cover stocks like Havells, Voltas, Crompton Greaves, etc. So, to expand the universe, we have ample more names in the universe like Symphony, Orient Electric, etc., which we shall decide to cover fully! Here comes the role of an IC or Initiating Coverage Report! 

Why do we need IC?

Firstly, it’s needed to fulfill the clients’ demand and respect the investors’ interest in and attraction to that particular stock. Secondly, an analyst initiating new stocks/sectors to garner more votes from the buy-side fund managers and build overall reputational value (a topic for some other blog!).

Ways to bring a new stock?

  1. An individual initiating reports on any stock
  2. An Anchor report, wherein 3-5 stocks are usually initiated together to bring coverage for an entirely new sector! Say, if you wish to initiate the QSR Industry, you can release a report together on Sapphire Foods, Devyani International, Westlife, etc.

Coming to the main & lengthy part of the reading!

How is the research conducted, and how does it lead to the final Target Price (TP) of the stock?

Let’s do it for one of our recent companies that we initiated in the Consumer Durables space, Eureka Forbes! 

Drink filtered water at your home from ‘Aquaguard?’ This is the company that owns this brand name! GO and fetch yourself some water because here we begin😊

1. At the junior analyst level, your lead analyst discusses with you the initiation plans as per the client’s request/interests, i.e., the deadline for initiation, company know-how, etc.

2. We, here, use external software to build our reports, so the initial base format for the report is already set; one has to punch in the text, upload the chart, tables, images, etc., inside the report using the software’s functions

3. Various sections to be included in a report are (Front Page Commentary, Industry Analysis, Market Sizing, Key Investment Risks, Company Analysis, Valuation Summary, Charts, Tables, Images, Appendix, Ratios, etc.)

4. The initial model is made by the junior analyst. In my case, it was me (Putting historicals, linking statements, making quarterly and annual forecasts, building operating metrics and DCF, formulating ratios, etc.)

5. The assumptions for major growth drivers (Revenue, Operating & and non-operating expenses) are left at the end to be molded by your senior analyst! For that, we keep meeting with the company management to get certain queries answered, especially regarding the plans of the company, and get a broader understanding of the company!

6. The interesting part comes from the industry & competitor analysis. Let’s deep dive here- 

Eureka Forbes operates in majorly three segments

  • Water Purifier 
  • Vacuum Cleaners
  • Air Purifiers 

The company is a leader in water purifiers, with its most famous brand ‘Aquaguard.’.  So, how do you go about studying the industry and competition?

Industry Analysis:-

  • Tap Water Connections (Rural & Urban)
  • Methods of Treatment of Drinking Water
  • Market Share by players across channels
  • Stages and Methods of Filtration
  • Parameters to choose the right water purifier

Competitor Analysis:-

I did a lot of primary research by calling various dealers and salesmen from Croma, Vijay Sales, etc, to gauge the

  • Category Pricing for Kent, Aquaguard, Pureit, etc 
  • Key Brands under each segment
  • AMC renewal charges for various categories i.e. servicing costs for your RO 
  • New Innovations in the market
  • Qualitative and Brand appeal among consumers
  • Various Model Ranges under different Brands
  • Financial snapshot for competitors

7. We finalized the report with a “Neutral” rating after considering all the qualitative and quantitative factors!

8. Once the entire report’s first draft is finalized by the sector analysts, the report is sent to the SA (Supervisory Analyst) for review, wherein he highlights 

  • Major/minor grammatical errors
  • Target Price errors, if any 
  • Any source confirmation, etc.

 Every single equity research report needs to be approved by an SA before it’s published and disseminated to clients.

 9. Internal review by the senior mgt (Head of Research) to understand the rationale for the buy, neutral, and sell rating of the stock! A Q&A round is carried out after the initial presentation! Once the head flags off a green light, the report gets published in the next few days, in the nonmarket hours!  Yes, i.e., not anytime between 9:30 am and 3:30 pm, before the market hours or after the market hours as per the SEBI guidelines! 

10. The report gets published on the Nomura portal and individually sent to the clients, buy-side fund managers, and other institutional investors!  The sales guys do all these tasks proficiently! 

Some of you might be wondering: 

If the notes are disseminated to clients’ inboxes directly, why is there a need for salespeople? The reason: Clients have access to 30+ sell-side firms who all send research reports to them every morning. Do you think they saw your analyst’s note? Equity salespeople add value by amplifying the research reports by calling the clients personally and pitch the stock to the best of their abilities!

How are the bucks earned through these time-consuming reports?

  • Whichever buy-side fund is impressed by the story after his fund’s own due diligence and wishes to invest in the stock could do so through their registered broker account with Nomura.
  • If the stock hits the target price, the analyst’s rating and reputation flourishes in the market, and he earns more votes and gets new clientele requests on top of that!

The way the votes are distributed is a talk for some other blog! 

So, Yes, I understand that was too much to grab! In a nutshell, the work doesn’t end till the price of the stock is finalized! That’s honestly just half the work done. Equity research is not an “if you write it, they will read” profession! What happens after that w.r.t report completion, review, pitching, marketing, etc., is a tedious and long process, which makes the entire process exhaustive.

That’s it for now, folks!

Have a great day. Leave your comments for any kind of doubts. I would be happy to answer😊

This is a guest post by Raghav Gupta, an equity research analyst at Nomura.


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  1. Sankar Madhavan says:

    That is a beautiful picture what goes behind a Buy/ Sell recommendation.

    Very informative. Thanks.

    Can you tell how much time involved (estimated) to complete the research as I feel conducting industry analysis itself is a lot of work?

  2. Raghav Gupta says:

    Thanks a lot for your kind words Sankar!
    The time it takes to conduct Industry research is very subjective, depending primarily on the sector in discussion, coupled up with the mode of primary research (offsite visit, calls etc.)

    For this, it took around 3-4 weeks to complete the entire industry research and 2 months to make the entire report from scratch

    Hope this helps

  3. Mohan Rajeev says:

    Thanks Raghav for giving us an insight into what goes on behind the scenes at an analyst firm’s office. I had one question. Quoting from your post:

    “Whichever buy-side fund is impressed by the story after his fund’s own due diligence and wishes to invest in the stock, would have to do so by their registered broker account with Nomura. So, we earn brokerage on that!”

    I’m keen on understanding the “So, we earn brokerage on that!” bit. Isn’t it against SEBI rules to earn brokerage for trades made based on your recommendation?

  4. Raghav Gupta says:

    Hi Mohan

    We hope that the buy-side fund would trade with us after reading our report. Have re-worded the text to avoid confusion.
    Thanks for your comment

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