Indian equity research has grown up more in the past year than it has in the past two decades. More balance sheets are being studied critically and analysts are now prepared to go beyond the earnings per share and price-earnings ratios. That is a very welcome sign. While Canada-based Veritas has made the biggest splash with its stock-moving, strong-worded reports, there are a number of independent research organisations that have propped up across the country.
For instance, Mumbai has Anil Singhvi-Amit Tandon venture called the Institutional Investor Advisory Services. While Singhvi was an ace deal maker and a corporate honcho, Tandon was leading the operations at ratings agency Fitch India. Bangalore has Ingovern Research Services promoted by former Infosys employee Shriram Subramanian.
The latest to join the list is Stakeholders Empowerment Services, promoted by former regulator JN Gupta. Gupta served as an executive director at the Securities and Exchange Board of India (Sebi) during 2009-11.
The entry of so many eminent people in the field of equity research has lifted the quality of debate and expanded its scope. Earlier brokers had a monopoly over research. Credibility was poor because most brokers are active traders and have proprietary positions. They also had business relationships with companies and promoters they write on.
One such relationship probably encouraged one foreign analyst to write a 'huge' report on a stock giving it a target of Rs 4,000. Today, the stock is trading at a fraction of that number. There was also over identification with the bull market as analysts' bonuses are directly related to the market's fortunes.
Even keeping aside this inherent conflict of interest, many of these reports were full of jargons and ratios often making them simply unreadable. As a result, market and traders relied on easy-to-understand rumours and so-called insider information to allocate capital.
However, over the past few months investors have been exposed to debates on transactions such as AkzoNobel with its promoter-owned entities, Escorts restructuring and Sterlite-Sesa Goa merger. The outfits have also challenged auditor and director reappointments where these have begun to affect their independence. They have also recently questioned the special rights given to private equity investors.
Even some brokers have identified the need to change. Traditional broking outfits such as Macquarie, Credit Suisse and Espirito Santo have recently published critical reports focusing on accounting.
Paraphrasing the great Steve Jobs, the investor did not know what he wanted until now. Now that people have seen and experienced it, a new market for such independent, in-depth and actionable equity research has been created.
The success of Jobs lay as much in creating the demand as in making the consumer pay top dollar for it. These research outfits have succeeded in the first part. Now, they will have to teach the investor to pay for these.
From recent revelations, we know that Veritas charges its customers approximately Rs 25 lakh for its annual subscription. Assuming it comes with five such reports in a year, one report costs Rs 5 lakh. That's a steep price even for big institutions. Sitting in Canada and using resources there, Veritas may not have much room to cut those prices. If Indian outfits are able to use the Veritas blueprint and deliver comparable quality at a fraction of this price, there is a huge market waiting to lap it up. But, the key is to make them pay. Equity research needs its own business model, it cannot be cross-subsidised. The day this happens will be the true Independence Day for the analyst, his research and the investor.
