The equity markets have taken almost everyone by surprise in the last couple of weeks. Nobody quite expected the benchmark indices to run up the way they have. All that everyone is asking is what to buy and what to sell. One would expect that analysts are best equipped to answer this question, but looking at the divergent opinions expressed by different brokerages, investors should read disclaimers along with stock recommendations. More importantly, reading the annual report and tracking the company’s performance would not be such a bad idea.
For instance, a domestic brokerage has put Bhel on hold for the last 10 months, the period during which both the power and capital goods sectors have come under serious stress. After the second quarter numbers in FY12 (report dated 15 September 2011), the market price of Bhel was Rs 317 and the brokerage gave a hold call on it with a price target of Rs 376. The stock price has steadily come down since then, but the brokerage has retained its “hold” call. After the Q1 FY13 numbers, the analyst said the stock was “attractively valued” and that there was no problem with the company’s performance and all was well. Incidentally, most other brokerages had a negative view on the stock.
There are times analysts suffer from a willing suspension of disbelief when it comes to select well-known companies and on the others they simply are unable write what they believe in. For instance, an analyst with a foreign brokerage has been raising questions against the lending practices of public sector banks and their financial performance. During one of our interactions he said that foreign investors were not at all interested in financials as there was so much under-reporting of bad assets and the incremental provisioning was low so that profitability could get a boost. However, this brokerage has a “buy” call on the country’s largest lender, the State Bank of India.
While there are some who cannot publish reports and analysis they believe in, there are other brokerages that do not have any sell calls. One analyst at another domestic brokerage spoke extensively of how the forex exposure would impact an auto company during the first quarter, but the brokerage had a “hold” call on it as analysts at that brokerage do not give sell calls.
It took the markets several quarters to realise that the poor performance put up by Infosys was not an aberration but a secular trend. Each time the company failed to meet its own guidance, leave alone the market’s expectations, analysts would come out with reports, justifying a higher target price. After Infosys consistently underperformed, did one brokerage write a stinging report on the company and the issues it was facing. Many other analysts sniggered at this and asked what the analyst was “smoking” before the report, as the analyst is known to have gone wrong in the past.
With markets rebounding after a series of announcements – globally and in India – most brokerages are likely to be further confused. It’s best to take advice from brokerages with a pinch of salt.
