Crisil forays into equity research

Crisil, the country’s leading rating agency, forayed into the equity research space today by launching grades on 13 companies — NTPC, DLF, Hero Honda, Pantaloon, Apollo Hospital, JM Financial, EID Parry, Phoenix Mills, Everest Kanto Cylinder, Indiabulls Securities, JBF Industries, Aarti Industries and Dolphin Offshore.

Under the name Independent Equity Research (IER), Crisil will provide opinions on two most important dimensions of an investor’s decision-making process — the company’s fundamentals and valuations of its equity. Crisil IER will focus mainly on mid-cap and small-cap segments.

However, Crisil IER’s research reports will not have buy, hold and sell recommendations.

What prompted the rating agency to foray into equity research was one of its surveys which found that there was an inadequate research coverage of listed stocks. The survey indicated that out of 3,500 active listed firms, only the top-100 received reasonable coverage.

According to Roopa Kudva, managing director and CEO of Crisil, large-cap stocks attract most of the research coverage. She further said that 80 per cent of the traded companies did not have analyst coverage. “Coverage is driven largely by flavour of the season and is not an ongoing process,” she said.

To begin with, the agency will first look at the fundamentals of the listed entity and address the question of how good the company is, followed by an analysis on fair value.

In order to come up with a fundamental grade, Crisil IER will do an overall assessment of the fundamentals of the company in relation to other equities. The grade, which will be spread between 1 and 5, will facilitate easy comparison of fundamentals.

Similarly, on the valuation front, IER will do an assessment of the intrinsic value of a company’s equity for an investor over a 12-month period.

The analytical framework of IER will include four items: industry and business prospectus, financial performance and outlook, management capabilities and corporate governance.

This will help improve flow of information on a larger number of companies which, in turn, will result in more liquidity.

It will also enable the investor to get objective opinions on a larger number of companies, thereby increasing the visibility of firms that have been victims of less research coverage.

More importantly, IER’s research will cover 125 sectors which account for 85 per cent of the banking sector’s corporate loans.