Understanding economy:
Understanding industry:
Understanding Companies:
British economist John Maynard Keynes (1883–1946) believed that
governments could change economic performance of its
industries by adjusting tax rates and government spending.
For this, the following are their focus areas:
Changes in various macro-economic factors like - National
income, Inflation, Interest rate and Unemployment rate
Fiscal and Monetary Policies and their impact on the economy
Flows from Foreign Direct Investment (FDI) and
Foreign Portfolio Investors (FPIs)
Savings and investment patterns
Global factors that impact the GDP growth based on export and
import transactions
Different industries face different challenges
and opportunities. Their growth drivers could
be significantly different.
Accordingly, Research Analysts need to
understand thoroughly the regulatory
environment prevalent in
industry
consumer
business
s’
models,
behaviour
Understanding
industry
sensitivity of
demand to
competition
price
changes
Operating
factors
Accordingly,companies are
also studied by analysts in two
dimensions - Qualitatively and
Quantitatively
Understanding Companies
Qualitatively Quantitatively
• Qualitative • Quantitative understanding
understanding is more would be more mathematical
about understanding in nature.
• why a particular • In this, analysts try to
business is better when understand the balance
compared to its peers ? sheets and profit and loss
• What are the strengths statements of last few years,
and weakness of the cash flows, asset and
business model? liabilities and so on
• How qualified and
capable the
management is and so
on.
Though the power of internet gives an analyst
the ability to acquire a lot of information,
It cannot substitute direct interaction with
companies and clients.
Personal communication with management
helps them to get a better insight in to the
vision of the company and its strategy to
acquire the desired goals.
However, it may also happen that
management mislead the analysts by
deliberately exaggerating positives about
business (painting rosy pictures) to
encourage them to write positive stories to
influence the market prices positively
Also, sometimes, managements speak
negative about their business so as to
discourage people from buying their stocks.
Therefore, it is always advisable for analysts
to cross verify the claims of the management
prior to their recommendations.
This communication with management, like
any other, requires analysts to have clarity of
thoughts and good listening ability
but there are a few additional principles that
analysts must keep in mind while talking to the
management of a company. The following are a
few:
Pre-meeting Research
Independence and Neutrality of view
Network
Clarity of questions
Pre-meeting Research
Before going to meet a company's
management, they must thoroughly learn
about their products, industry and
competitors’ steps.
Analysts must be familiar with the financial
information of the company, also read
previous year’s annual reports to understand
the direction of the company and whether the
company has been able to achieve the goals it
had intended to.
During the research, analysts must have an
unbiased opinion and should always hold
their independence.
Their analysis should be based on factual
information and not led by personal
inclinations.
Also, they must make it clear with the
management to not reveal any information
which is not available in the public domain
Analysts may use their network to acquire more
contacts relevant to the research, who would be
able to provide meaningful insights into the
company’s performance and plans.
The person who is responsible for the important
activities and understands the heartbeat of the
company would be the most relevant contact and
this person may not necessarily be from top
management.
Competitors and other stakeholders of the
business such as suppliers, distributors, retailers
and customers can also provide meaningful inputs
to analysts in the research process.
As analysts start analysing a company, there
would be certain aspects on which they might
need more clarity.
Time with management would be effectively used
if analysts have clear and specific set of
questions in mind.
It is advisable to go with a
questionnaire to have a better understanding of
the company's operations and future progress.
1. They must be realistic in suggesting companies to
their clients. Suggestions should be based on facts
and figures and not contain an
optimistic/pessimistic/biased view on the subject
company.
2. Communication, done through written research
reports, should be simple, clear and concise.
3. If there is any conflict of interest (e.g. RA
holds shares of the subject company), such
information should be disclosed beforehand.
4. Assumptions, if any, must be clearly stated
in the research reports.
5. Abbreviations/Jargons should either be
avoided or explained clearly in simple words.
Following all the rules and regulations as
specified by SEBI both in words and spirit.
For this, it is also recommended to make use
of technology like recording devices while
interviewing management and
communicating with clients, only after taking
their due consent for recording.