Introduction to Research Analyst Profession

1The role of a research analyst

Research analysis is two steps: research (collecting information) and analysis (processing it to reach a decision). Under the SEBI (Research Analysts) Regulations, 2014, a research analyst is a person who, for consideration, provides research services, including part-time analysts. The analyst's job is to help clients make informed investment decisions, ending in a view to buy, hold or sell.

Sources of information:

• Economy: government statistics and the RBI.
• Global factors: the IMF, ADB, World Bank and other development institutions.
• Industry: industry journals and publications.
• Company: annual reports and regulatory filings, meetings with authorised officials, plant visits, market surveys, and interviews with employees and other stakeholders.

Analysis combines qualitative factors (efficiency, competitiveness, business plans, management ethics) and quantitative factors (revenues, costs, profits and the risks to them).

Types of analyst:

• Sell-side: work for brokers, investment banks and advisory firms; publish reports with buy, hold or sell calls, earnings forecasts and price targets.
• Buy-side: work for mutual funds, hedge funds, pension funds, AIFs, FPIs and portfolio managers; their research is for internal use by fund managers and is not public.
• Independent: work for research boutiques separate from full-service firms and sell research on subscription, including custom reports, to investors, institutions, bankers, regulators, exchanges and fund managers.

Newspapers, media and information consolidators also publish research. In short, the analyst acts as a selector: studying companies, judging past and expected performance, and recommending.

Remember

• Sell-side: public reports with price targets. Buy-side: internal use. Independent: subscription.

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2What analysts study: economy, industry and company

Economy: Keynes argued that governments can change economic performance through taxes and government spending. Analysts track national income, inflation, interest rates and unemployment; fiscal and monetary policy; FDI and FPI flows; savings and investment; and global factors acting through exports and imports.

Industry: each industry has its own drivers, so analysts study regulation, business models, competition, operating factors, price sensitivity of demand and consumer behaviour.

Company: firms in the same industry can differ as much as two batsmen with different styles. Analysts look at:

• Qualitative factors: the business model's strengths and weaknesses, management quality, brand, employee skills, customer satisfaction.
• Quantitative factors: several years of balance sheets, P&L and cash flows, plus non-financial numbers such as production, capacity utilisation, employee productivity, geographic reach and market share.

Remember

• Top-down layers: economy → industry → company.
• Qualitative = intangibles; quantitative = numbers.

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3Dealing with companies and clients

The internet cannot replace direct contact with management, which gives insight into vision and strategy. But managements may paint a rosy picture to get positive coverage, so analysts must cross-verify claims before recommending.

Principles for meeting management:

• Pre-meeting research: meetings are rare, so study the products, industry, competitors, financials and past annual reports (did the company meet its earlier goals?).
• Independence and neutrality: base views on facts, not personal leanings, and make clear that management must not share unpublished information.
• Network: talk to knowledgeable people, who need not be top managers, and to competitors, suppliers, distributors, retailers and customers.
• Clear questions: go with a specific questionnaire.

Communicating with clients:

• be realistic and fact-based, not optimistic or pessimistic by bias;
• write simple, clear and concise reports;
• disclose any conflict of interest (for example holding the company's shares) beforehand;
• state assumptions clearly;
• avoid or explain jargon and abbreviations.

Analysts must work with honesty and without bias, following SEBI rules in letter and spirit. Recording meetings with management or clients is advisable, but only with their consent.

Remember

• Cross-check management claims; never seek unpublished information.
• Disclose conflicts and assumptions.

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4Qualities of a good analyst

The job needs both quantitative and qualitative skills: comfort with numbers and trends, a methodical and enquiring mind, knowing where to find information, and understanding business models and competition. Desired qualities:

• good with numbers;
• skilled in Excel and other data tools;
• clear on financial concepts;
• able to read and understand financial statements;
• able to ask pertinent questions;
• attention to detail;
• strong written and verbal communication.

Remember

• Numbers, tools, concepts, reading statements, questions, detail, communication.

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