Equity research coverage shrinks as investor interest dims

Equity research firms and brokerages are tracking fewer firms these days as investors’ appetite for small and mid-cap firms decline. Research heads of various brokerage firms confirmed that while the large-cap stocks universe has been consistent, the number of small and mid-cap companies being monitored has come down significantly in the past few years.

“The core trading volumes have always been generated by the top 200-250 stocks and have been investor favourites. But till about a few years back, there was a lot more interest in the small-cap and mid-cap segment because of greater investor interest and institutional participation in these stocks,” said Sonam H Udasi, senior vice-president and head of research, IDBI Capital.

He added that poor market performance had turned retail investors away leading to a drop in queries and request for research reports for these small and mid-sized companies.

With the market conditions turning unfavourable, investor participation has been on a steady decline. Volumes in the cash segment of exchanges have also dried up. With very little retail trading activity, brokerage and equity research firms have been forced to pare down their research teams. Fewer research analysts and thinning retail participation means that few companies in the mid and small-cap segment are covered, say industry officials.

Trading volumes, these days, are largely driven by institutional investors who only invest in the companies in the large-cap space. Research heads that Business Standard spoke to said that on an average, institutions are unwilling to track companies with market-cap below Rs 2,500 crore, while retail and HNI clients do not look to invest in companies with a market-cap of less than Rs 1,000 crore.