Crisil’s IER initiative should benefit investors in the long-run provided the service is available on an ongoing basis
Last month-end, Crisil launched an initiative which could go a long way in helping investors across different classes take a decision regarding investment in a listed company. Crisil launched a new service called Independent Equity Research (IER), which will provide an independent opinion on two aspects of a company viz. fundamentals and equity valuation. While the move looks good and should enhance the research-led coverage on Indian companies especially the smaller sized, there are a few factors that deserve attention as they could restrict the access to such a service. And, the aim of addressing inadequate equity research coverage in the Indian market and providing an additional tool to investors to take informed investment decisions, may not be achieved.
IER
As the name goes, IER is aimed at providing an independent and comprehensive analysis of a company in four key areas, including on industry and business prospects, financial performance and outlook, management capabilities and lastly, corporate governance standards, all in relation to the other listed companies in India. Additionally, it will provide an assessment of the intrinsic value of a stock over a 12-month period. Together, the two are termed as Crisil Fundamental and Valuation matrix (CFV). While the report will provide details on each of the aspects mentioned above, Crisil’s final opinion will be put up in the form of fundamental and valuation grading. Put together, IER is aimed at helping investors take an investment decision. Says Roopa Kudva, managing director and CEO, CRISIL, “Through IER, we aim to deliver high-quality independent equity research, and expand the coverage available for small and mid cap companies.”
Why IER?
The IER can benefit the investing community in many ways. Says Venkataraman S, senior director-research, Crisil, “The IER service seeks to address one of the basic questions an investor would have before taking an investment decision, namely, ‘How good is the company?’ It also provides an independent benchmark for the intrinsic value of a company’s stock.”
On a broader level, Crisil estimates that a large number of listed companies in India are either not covered or are not adequately covered by analysts, and those under regular coverage are mainly the large-cap stocks. Its estimates indicate that of the nearly 3,000 stocks traded regularly, almost 80 per cent are not covered by analysts. Additionally, the coverage is driven largely by “flavour of the season” and is not on-going.
That there are some deficiencies in the existing scheme of things is an accepted fact. Nilesh Shah, CIO and deputy managing director, ICICI Prudential AMC and Prashant Jain, CIO, HDFC AMC, too, believe the same. For instance, at the launch occasion of the service, Jain cited that currently, the sell-side research is mainly focussed on liquidity, which means the research coverage of a stock typically drops as liquidity goes away. The sell-side research also largely focuses on the short-term price movement with little mention on the genuine value in the business. And, while there is some evidence of uniformity in opinion of analysts, they also do not adequately talk about the corporate governance (including past management actions, accounting issues) aspect of a company. Shah, too, had his cup of issues, one of them pointing to the integrity of a sell-side research.
Crisil aims to bridge this gap, by providing an independent and comprehensive assessment on companies. Although it also has business interest in terms of earning fees for undertaking such an exercise, it claims that is has put in place safeguards to ensure that the quality and independence of the research is not impacted.
| THE EVALUATION PROCESS |
| INDUSTRY AND BUSINESS PROSPECTS |
| Industry dynamics, Demand-supply outlook |
| Company’s position in the industry and growth prospects |
| Key risks and mitigants |
| FINANCIAL PERFORMANCE AND OUTLOOK |
| Past financial performance |
| Key sensitivities |
| Scenario and stress analysis |
| Earnings forecast |
| MANAGEMENT CAPABILITIES |
| Track record of the management |
| Evaluation of the business strategy |
| Track record of market domination, product innovation, successful diversification |
| CORPORATE GOVERNANCE |
| Assessment of company's disclosure norms and transparency of reporting |
| Board practices and quality of discussions |
| Profile of the board members |
| Assessment of the independence of the board from the management |
Benefits and concerns
While for companies, the IER would serve in many ways including enhancing its visibility, increased access to financing and so on, investors could benefit from independent and on-going research, especially on smaller companies. The reports will be in two formats viz. retail and institutional, for respective investors. Once a report is released in public domain, Crisil will monitor and provide company updates every quarter (for at least a year) after the quarterly results are announced. Venkataraman says, “However, if there is an unforeseen event or unprecedented development, then the impact of the same would be analysed and the report updated as and when the event materialises.”
But, as every coin has two sides, there are issues that deserve attention. Firstly, there are three modes of provision of the IER—the report could be sponsored by a company, investor or an exchange. This is a key element and would decide on the quantum of benefits (including access to the report) for the retail investor. For instance, if it is a company or an investor sponsored IER, the decision to put the report in public domain will be theirs. In case of a company sponsored IER, it could also not accept the grading given by Crisil. Says Venkataraman, “In a company paid report, it is released in public domain only after the company accepts Crisil Research’s opinion on the fundamental grading.” This would hold true only at the issuance of the first report when it is released in the public domain, but once released, subsequent updates or changes in grade (if any) are not subject to company approval.
Secondly, the company could also go in for only one aspect of grading. For instance, among the 13 IERs released by Crisil, only one company does not have a valuation grading, which is Pantaloon Retail, as the company had requested only for a fundamental grading—the valuation grading is optional and depends on the sponsor.
The other issue stems from the fact that if the sponsoring entity decides to discontinue the grading process after a period of one year, Crisil would not provide subsequent updates. So, the key purpose of providing on-going research, especially on under-covered and smaller companies, is at risk of getting defeated.
Here, only one factor may be able to help resolve the issue pertaining to continuity in company updates. And that is, if the IER is sponsored by the exchange viz. NSE or BSE. Crisil says that globally, there are examples of exchange-sponsored services like its IER---London’s AIM, Malaysia and Singapore are some of them. To sum up, while the initiative is in the right direction and should help serve the needs of investors, especially the retail investors who do not have access to quality research, continuity is a key element if the benefits are to sustain in a meaningful manner.
