CRISIL Independent Equity Research & IPO Grading

Transcription

1 CRISIL Independent Equity Research & IPO Grading Empowering Investors Sudhir Nair Head Equities September 10, 2011

2 Key Messages Equity investment horizon should be long term (> 3 years) Long term investment should be based on adequate research Indian Equity Markets have inadequate research coverage CRISIL pioneered the concept of Independent Equity Research (IER) and has a coverage of 106 companies Provides common platform to retail & institutional investors Provides independent opinions on two dimensions Company fundamentals Valuation Improves liquidity, facilitates better share price discovery and broadens investor base

3 Basics of equity investments Equity investments are known to give higher returns over most other asset classes over a longer time horizon Since 1990, 35% of times, Sensexhas given negative returns over 1-year period, while the same for 10 years was only 3% 1-year 3-year 5-year 10-year Median returns 15.8% 8.0% 10.1% 11.7% Standard deviation 41.6% 18.1% 12.8% 5.6% % negative returns 34.9% 23.8% 16.0% 2.8% Warren Buffet says, 'If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes' There is no substitute to continuously monitoring one s portfolio

4 Presentation Flow Independent Equity Research (IER) the concept Introduction to CRISIL equity research CRISIL equity research coverage Key benefits of CRISIL equity research to Investors How to access CRISIL equity research CRISIL IPO Grading what it is & what it is not

5 Independent equity research - The concept Independent research has been defined as the equity research carried out by entities other than stock broking firms Investor survey revealed a need for an independent opinion on the equity markets Independent equity research is aimed at providing an independent assessment of fundamentals and a comment on the valuation It can be used by institutional and retail investors as a tool to aid investment decisions Research reports are available free of cost to retail and other investors The equity research is independent and unbiased because it comes from a rating agency an entity that is not connected with the stock market and has an ongoing incentive to maintain its reputation for independence CRISIL Independent Equity Research Service was launched by Shri. C.B. Bhave on 29 th September 2009

6 Independent Research: Different USA, Spitzer Settlement Models Adopted Globally London (AIM), Exchange-Sponsored Research Hong Kong, Company- Sponsored Research Singapore, Exchange- Sponsored Research Malaysia, Exchange- Sponsored Research

7 Indian Equity Market: Inadequate Research Stock Coverage 2,500 2,276 2,000 1,500 1, Source: Bloomberg to 5 6 to to 15 more than 15 Large-cap stocks attract most of the research coverage 76% of all traded companies have no analyst coverage Only 234 companies (8% of traded population) are covered by more than 10 analysts Coverage is driven largely by flavour of the season and is not on-going

8 Research coverage: India Vs Global Indian stock market has one of the lowest coverage Only 7% of companies listed on BSE have coverage of more than 5 analysts as compared to over 20% for developed markets Analyst coverage: % Companies having Exchange Total listed companies >10 analysts >5 Analysts BSE % 7.1% NYSE % 44.1% Shanghai Stock Exchange % 40.2% London Stock Exchange % 19.6% Tokyo Stock Exchange % 21.5%

9 Vicious cycle for Retail investors Low coverage Quality Not independent Time lag Access

10 CRISIL equity research aims to break the vicious cycle CRISIL provides same platform for individual and institutional investors Low coverage: CRISIL provides coverage on companies which have not been researched by other broking houses. In CRISIL portfolio, 89% of companies are under-researched Objectivity: The equity research is independent and unbiased because it comes from a rating agency an entity that is not connected with the stock market and has an incentive to maintain its reputation. Access: The research report is available free of cost on CRISIL website. Also, CRISIL analyst team can be easily accessed by the retail investors for any queries on the companies researched by ing to clientservicing@crisil.com. This service is available free of cost. Timeliness: Report is disseminated at the same time to both individual and institutional investors Quality: The report has in-depth analysis with commentary on management quality and corporate governance

11 Presentation Flow Independent Equity Research (IER) the concept Introduction to CRISIL equity research CRISIL equity research coverage Key benefits of CRISIL equity research to Investors How to access CRISIL equity research CRISIL IPO Grading what it is & what it is not

12 What is CRISIL equity research? Independent opinion on company fundamentals and valuation Fundamental grading is based on an analysis of Business prospects (both industry and company) Management and corporate governance Financial performance and outlook for earnings growth Valuation approach DCF where detailed financial projections for the next 4-5 years are possible with reasonable amount of certainty Multiples like PE, EV/EBITDA based on peer group comparison and historical trends Grading is represented in a unique CFV Matrix (CRISIL Fundamental Valuation) Ongoing coverage: Detailed initiation report; quarterly updates and impact notes

13 CRISIL equity research: A new approach CRISIL Equity Research addresses the first two components of an investor s decision-making process: fundamentals and fair value Analysis of Fundamentals Analysis of Returns Investor Preference Fundamentals Fair Value Investment Advice Addresses the question How good is this company? Addresses the question Is this the right price? Addresses the question Is this the right investment for me? Investment Decision Traditionally, research provides Buy, Hold or Sell recommendations Unique, differentiating factors of CRISIL equity research - Grade assigned on a comprehensive assessment of fundamentals - A fair valuation can serve as a benchmark to assess the current market price (CMP) - No buy, hold, sell recommendations

14 CRISIL equity research: Analytical framework CRISIL Equity Research Framework Industry and Business Prospects Industry dynamics, demand-supply outlook Company s position in the industry and growth prospects Key risks and mitigants Financial Performance and Outlook Past financial performance Key sensitivities Scenario and stress analysis Earnings forecast Management Capabilities Track record of the management Evaluation of the business strategy Track record of market domination, product innovation, successful diversification Corporate Governance Assessment of company s disclosure norms and transparency of reporting Board practices and quality of discussions Profile of the board members Assessment of the independence of the board from the management Fundamental Grading

15 CRISIL equity research: CRISIL Fundamental and Valuation (CFV) Matrix Excellent Fundamentals Fundamental Grade Poor Fundamentals Strong Downside Valuation Grade Strong Upside Fundamental grade of 4/5 indicates superior fundamentals Valuation grade of 4/5 indicates potential upside Fundamental Grade: overall assessment of the fundamentals of the company in relation to other equity securities listed in India The grade facilitates easy comparison of fundamentals across size and industry Grade 5 indicates excellent fundamentals; Grade 1 indicates poor fundamentals Valuation Grade: assessment of the potential intrinsic value of the company s equity stock for an equity investor over a 12-month period. Grade 5 indicates a strong upside from the CMP; Grade 1 indicates a strong downside from the CMP

16 CRISIL equity research: Commissioning of reports CRISIL Independent Equity Research Companies Companies can mandate CRISIL to carry out equity research Investors Institutional Investors, portfolio managers and fund houses can commission CRISIL for equity research Exchanges Exchanges in Singapore, London and Malaysia have mandated an independent agency to carry out research coverage Exchange benefits due to improved liquidity Stock exchanges in India can mandate CRISIL to cover companies listed on the exchange

17 Presentation Flow Independent Equity Research (IER) the concept Introduction to CRISIL equity research CRISIL equity research coverage Key benefits of CRISIL equity research to Investors How to access CRISIL equity research CRISIL IPO Grading what it is & what it is not

18 CRISIL equity research coverage CRISIL has 106 stocks under coverage spanning more than 38 sectors >10 analyst 10% Analyst coverage No analyst coverage 47% 47% of the stocks under coverage has no research coverage Around 21% of the stocks has less than 5 analyst tracking the company & 42% 1-10 analysts tracking 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 1-10 analysts 42% Market cap wise distribution (Rs bn) 39% 22% 14% 16% 9% < >50 % of companies under coverage Companies with limited or no analyst coverage have been the biggest user of CRISIL equity research 61% of companies have a market cap of less than Rs 1000 crores 9% of companies have market cap of >Rs 5000 crores CRISIL has coverage across large, mid and small cap companies

19 CRISIL equity research coverage Distribution based on Fundamental Grading Poor Moderate Good Superior Excelent 3 Distribution based on Valuation Grading Strong downside (>-25%) Downside (-10% to -25%) Aligned (-10% to 10%) Upside (10% to 25%) Strong upside (>25%)

20 Presentation Flow Independent Equity Research (IER) the concept Introduction to CRISIL equity research CRISIL equity research coverage Key benefits of CRISIL equity research to Investors How to access CRISIL equity research CRISIL IPO Grading what it is & what it is not

21 CRISIL equity research Key differentiators Grades companies both on fundamentals and valuations, a unique offering in the market Commentaries on management capability and corporate governance practices Focuses on long-term fundamentals and are not distracted by short-term implications on the company Takes a strong & unbiased view on the fair value

22 Benefits of CRISIL equity research to investors No. of companies Fundamentals Objective opinions on a larger number of companies thereby increasing investment avenues Independent, high-quality research that focuses on fundamentals Continuous Coverage Easy Access Ongoing coverage in the form of quarterly updates and impact notes for all companies Reports are available free of cost at

23 Benefits of CRISIL equity research to investors Fundamental grading, a critical input for long term investment CRISIL study shows that: Higher fundamental grade companies give higher returns Higher fundamental grade companies are less volatile Higher fundamental grade companies command higher P/E

24 Higher fundamental grade companies give higher returns Performance 3 yr 1 yr Grade 4/5 and 5/5 Performance 74% 20% % of companies outperforming NIFTY 67% 62% Grade 3/5 Performance 103% 9% % of companies outperforming NIFTY 42% 40% Grade 1/5 and 2/5 Performance -5% -5% % of companies outperforming NIFTY 29% 38% NIFTY 23% 11% SENSEX 24% 11% MIDCAP 7% 1% SMALLCAP 4% -4%

25 Higher fundamental grade companies IPO grade are less volatile Average Beta No. of companies 1/5 (poor Fundamentals) /5 (Below Average Fundamentals) /5 (Average Fundamentals) /5 (Above Average Fundamentals) /5 (Strong Fundamentals) Total 139

26 Higher fundamental grade companies command higher P/E IPO grades Average P/E multiple (x) No. of companies 1/5 (poor Fundamentals) /5 (Below Average Fundamentals) /5 (Average Fundamentals) /5 (Above Average Fundamentals) /5 (Strong Fundamentals) Total 117

27 Presentation Flow Independent Equity Research (IER) the concept Introduction to CRISIL equity research CRISIL equity research coverage Key benefits of CRISIL equity research to Investors How to access CRISIL equity research CRISIL IPO Grading what it is & what it is not

28 How to access CRISIL equity research reports Research is available free of cost to all investors on and Registered users get s whenever a report is released. For registration, please visit Reports are available on CRISIL research can also be accessed through Bloomberg and Thomson Reuters

29 Presentation Flow Independent Equity Research (IER) the concept Introduction to CRISIL equity research CRISIL equity research coverage Key benefits of CRISIL equity research to Investors How to access CRISIL equity research CRISIL IPO Grading what it is & what it is not

30 CRISIL IPO Grading What it is IPO grading is aimed at providing an independent and relative assessment of fundamentals of the issue. The assessment is in relation to the universe of other listed equity securities in India and expressed as a symbol. It can be used by investors as a tool to aid investment decisions, especially for companies coming out with their initial public offerings. The grade is independent and unbiased because it comes from a rating agency an entity that is not connected with the placement of the issue and has an ongoing incentive to maintain its reputation for independence. Over a period of time, IPO grading can play a role as a tool to price equity securities in a manner similar to the role that credit ratings play in the pricing of debt securities. IPO Grading is mandatory for all issuers who file their offer documents with SEBI after April 30, This requirement does not apply to FPOs

31 CRISIL IPO Grading What it is not A CRISIL IPO Grading is not A recommendation to invest or not invest in the graded instrument A comment on the issue price of the shares being offered, likely listing price or likely movement of price post listing A valuation of the equity offering An assessment of the market risk associated with equity investments An audit of the issuer A forensic exercise that can detect fraud An opinion which has an ongoing validity

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