Equity Research

You have followed the stocks section of the newspapers religiously, but just can’t fathom which stock to pick or which of your existing stocks you should sell. Should you wait for your falling stocks to rise again so you can make a profit? Or should you sell now and cut your losses? The stock market can be a tough place. Wouldn't it be nice to have someone tell you which stocks to buy, hold or sell? 

That’s where Equity Researchers come into the picture. Most Investment Banks have an Equity Research (ER) division, which is a team of experts closely following and analyzing listed companies on an ongoing basis. They delve deep into the fundaments of the companies they cover (including industry sector and general macroeconomics), and come out with reports and ratings on whether the stock is a good buy (will appreciate in future) or hold (wait for a better time) or sell it off (likely to fall further). This is similar to a movie review by a critic, only, the movie in question is ongoing and the reviews may keep changing over time. 

These reports are then distributed to the firm’s clients who in turn use the detailed analysis and insights in them to make intelligent decisions about trading the stock. The clients could be private investors, institutional setups or even private equity companies. M&A bankers also use ER reports extensively to build models and value companies. Occasionally, ER teams also produce reports on the broader macroeconomic environment, or a particular industry sector, etc. They may also analyze commodities or bonds (debentures) issued by companies and publish reports on them. 

Fresh candidates join the industry as Associates assisting the more senior Analysts. So the key skills for an entry-level role would be:

  1. Strong analytical and reasoning skills: Associates have to be strong in analytical ability. They need to draw out the story behind a company’s data, whether qualitative or quantitative
  2. Knowledge of financial statements and their analysis: Big banks conduct their own training programs and teach their incoming batches everything from scratch. However, during lateral hiring or in the case of boutique firms that don’t have training resources, a candidate that knows the basics of financial analysis would definitely have an edge over others. Associates are encouraged to invest in a CFA program (Most firms usually refund the exam fees if cleared in the first attempt)
  3. Attention to detail and diligence: Any small error made by the Associate / Analyst in their analysis can cause huge losses for the investors that depend on their opinion. Hence, it is extremely important to be thorough and pay very close attention to detail
  4. Ability to develop industry expertise: To be successful in this field, Associates must aim to become experts in their sectors. This would translate to becoming a top notch Analyst and a force to reckon with among the industry players
  5. Writing and presentation skills: An Equity Researcher must communicate well, at least in the written form to begin with. As he/she becomes an Analyst, apart from coming up with well written reports with reasonable predictions, networking abilities also become important as he/she may have to do marketing events like arranging non-deal roadshows for their clients

How to get in:

  • Make it to the top tier B schools – meaning the IIMs A, B, C or ISB or other institutes in this league. Bulge bracket banks visit these campuses to select Associates for their ER division; either via internships or directly via their global ER program
  • You may also graduate from the next tier of MBA institutes (MDI, IIFT, IIT SOMs etc.), or complete Chartered Accountancy. Supplement this with a CFA charter and / or certifications like the FRM. It may also serve you well to know financial analytics and modeling. This could land you with an ER job in smaller Indian firms. 

At the entry level, candidates join as Associates. Typically they have MBAs in finance or are CAs

  1. Typically the ER division is split into different coverage groups, each coverage group focuses on a specific industry sector. So, Associates will be allocated a particular sector and some companies within that sector 
  2. Associates assist Analysts in publishing reports. The major chunk of work involves research on the general economy, the sector and the companies in question. For this, they may directly contact companies or use secondary data sources (internet or other public sources). They have to constantly keep up with the news and events in their sector. Once the data is gathered, detailed financial models are constructed to come up with company valuations
  3. Every quarter, once the earnings of a company are released, the ER team publishes reports on the company. Apart from this, any new development in the sector or a company may require a separate report to be published. When a new company is going to get analyzed for the first time, the team publishes an ‘Initiating Coverage’ report, which is much more extensive than the usual report, as it analyzes the macroeconomic conditions, sector, competitors, and the company itself in thorough detail
  4. The hierarchy is quite flat. After spending adequate number of years as an Associate and developing the required industry expertise, one can become an Analyst and publish reports in his /her own name. As this point corporate access (or networking with the top guns in different companies) becomes more and more important

Companies to target:

  • Notable International names: Goldman Sachs, JP Morgan, Morgan Stanley, UBS, Nomura, Barclays, Deutsche Bank, Credit Suisse, Citi, Bank of America Merrill Lynch, HSBC, Standard Chartered
  • Notable Indian names: Kotak Mahindra, ICICI Securities, Yes Bank, Avendus, HDFC, SBI Capital, Edelweiss

A day in the life of an Equity Researcher (entry level):

  • A typical day starts off with reading up on all the latest news on the sector / company that the Associate is covering. The Associate then reads up emails he may have received from traders or sales teams. Also, any new market-impacting news is forwarded to the sales team and important clients
  • Once he/she has read up well for the day, he/she may update existing models, do more research on any one or more companies or maybe hunt around data to initiate coverage on new companies. There may also be administrative work to be done for the team
  • Earnings season can be quite busy and the team may occasionally have to put in an all-nighter. Also, they have to balance out other work during this time.

Salary and perks:

  • The starting salary for Equity Research Associates in bulge bracket banks is over INR 25Lakhs/annum. This is just the fixed pay and there is usually a bonus 

  • In Indian boutique investment banks, one may have to start a bit lower at around INR 5-7Lakhs/annum or so and a lower bonus than the bulge bracket firms

Interview with Avinash Ghalke, who shares his experience as an Equity Research analyst with top MNC Investment banks

Proschool: Please tell us about your background and qualifications
Avinash : I completed my PGDM in Finance from XLRI and prior to that, graduated in Computer Science Engineering. I cleared 3 levels of CFA (US) and earned the CFA charter in July 2010. I have worked with the Equity Research Teams at Goldman Sachs, Lehman Brothers and Nomura

Proschool: Why did you decide to pursue ER?
Avinash : I was interested in equity markets and I figured out that research was the best channel for combining my interest and skills

Proschool: How did you get into ER?
Avinash : My journey with ER began with Goldman Sachs, which was a campus offer. After a rigorous interview, I was selected for the Global Investment Research Team

Proschool: A typical Day for an ER Associate/Analyst?
Avinash : A typical day starts with checking the news flow for the companies tracked through Bloomberg and other sources. If there is any news that impacts the companies, it needs to be analyzed for impact on the company financials. The Sales team is informed and important clients are called to inform them about the likely impact of the news. There could be some report or a periodical note that needs to be published and work continues on that. On earnings day, things are a bit different. When the company reports its quarterly or yearly earnings, the numbers need to be updated in the model quickly and the first cut needs to go across to the Sales team and traders. Forecasts are later updated based on the actual reported earnings and the management’s commentary. An updated note is then published based on these changed estimates

Proschool: High points in your ER career so far?
Avinash : High point of my career was when we initiated a BUY report on a company, contrary to the market opinion (most of the other Analysts had a SELL rating on the stock). After publishing the report, we also marketed the report to our clients. Over the next 1 week, the stock went up 25%, implying the market believed our hypothesis for the stock

Proschool: Challenges faced?
Avinash : The main challenge for an ER Analyst is getting data. In order to make informed calls on the market, a lot of data needs to be crunched and the quality of data available is extremely important

Proschool: Outlook for the industry?
Avinash : With the equity markets looking up once again, there will be a tremendous need for ER Analysts. As more investors start taking interest in the markets, the coverage of stocks has to increase, thereby needing more hands to take up the work

Proschool: Career opportunities for ER aspirants in India (and elsewhere)?
Avinash : ER aspirants have options with both Buy and Sell side firms within India. With foreign funds setting up their dedicated research desks, ER Analysts can take up these roles as well. ER Analyst can also find fitment with numerous Private Equity and Venture funds that need expertise in MS - Excel model building and research

Proschool: Word of advice for ER aspirants?
Avinash : Focus more on the role in the initial days than the money. Try to build a good foundation in the initial days and work under a good mentor. Before taking the plunge, make up your mind for a tough work schedule, extending to 16-18 hours occasionally