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What Methodologies Equity Research Firms In India Are Using for Identifying Long Term Investment?

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Methodologies used by Equity Research Firms In India - 2022
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Until a decade back, if you ask any seasoned investor about the best name in stock markets to place your bets on, you would hear definitely hear one name “Reliance”. After all the performance of Reliance Industries under the chairmanship of Dhirubhai Ambani had defied logic and beaten all expectations of equity research firms in India consistently for several decades.

But everything changed post the Reliance Power IPO.

Many leading equity research firms in India had cautioned investors against investing in the Reliance Power IPO as the fundamentals were weak. But despite the caution from equity research firms in India, blindly attracted by the “Reliance” tag, millions of investors subscribed to it.

From vegetable vendors to shopkeepers and taxi drivers, to HNIs and foreign investors, people flocked in masses to invest in the IPO.

The issue was sold out within the first minute of its opening on January 15, 2008, a record for a mega offering of Rs 11,563 crore. The IPO had received a record over 50 lakh bids worth Rs 7.5 lakh crore, and the issue got subscribed by more than 72 times.

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But investors who received allotment were in for a rude shock, as the stock had a terrible start on the listing date of 11th February, 2008. Reliance Power which surged 19 per cent to Rs.538 on opening, dropped to Rs.355 within minutes and closed at Rs.372.50 wiping out billions of rupees of investor wealth, never to recover till date.

The company tried to pacify investors by offering bonus shares in 3:5 ratio, but things never improved.

Research has proven to be a valuable tool in identifying the best opportunities for wealth creation from stock market. That’s why it is very crucial for novice investors to invest under the guidance of equity research firms in India.

Leading equity research firms in India had recommended avoiding the Reliance Power IPO as the company had almost no assets and cash flow. It was riding only on the Reliance brand name and also the euphoria around India’s stock markets.

You would be shocked to know that an investment of Rs.10,000 in Reliance Power made during IPO would be worth just Rs.707 today.

Yet very few retail investors understand the value of detailed research or the importance of seeking professional expertise of equity research firms in India.

And those who do gain from it. On the other hand large institutional investors understand the importance of research very well. That is why they have their own research teams or hire the services of equity research firm in India.

There are multiple methodologies used by equity research firm in India for identifying the best investment opportunities for long term investment

Let’s take a look at some of the most common and effective methodologies used by equity research firms in India For long term investment.

Industry Analysis

Industry and its future outlook are one of the most basic parameter from which an equity research firm in India starts its research as there are many sectors which can lose its steam with time.

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Business Model Analysis

Business model analysis can help equity research firms in India to identify a company’s weaknesses as well as its strengths such as its unique brand identity, loyalty towards it products, customers, and suppliers.

Financial Strength

The financial strength of a company can help equity research firms in India to understand the positives and negatives financially after scrutinizing the company’s balance sheet, income statement, and cash flow statements.

Management Quality

There is a popular saying that there are no good or bad companies, only good or bad managers. That’s why equity research firms in India conduct a detailed research on the quality of management which includes a thorough analysis of their past performance and other businesses in public domain.

Growth Analysis

Stock prices follow earnings, so equity research firms in India make their own estimates by analyzing past figures of sales growth and profit margins, along with profitability trends in that particular industry.

Valuations

Many stocks trade at higher prices in stock markets compared to the actual value. Hence equity research firms in India undertake detailed research to find the right price at which one should enter a stock.

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Bottom line

Leading Equity research firms in India use multiple methodologies to filter out the best investment opportunities.

Stock selection on the basis of very few parameters can be disastrous and hence to be double sure, equity research firms in India use a combination of several factors including the ones mentioned above to choose the best opportunities for investment.

Read more:  How Long-term investing helps create life-changing wealth – TOI


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