Category Archives: Equity Research and Valuation

Introduction to Equity Valution

Equity valuation is the next step after equity research. After completing research as explained in previous post in this section we need to now conduct a valuation exercise which is the most crucial part of analysis. It is the process of arriving at value for a company or business. There are many models and formulas to arrive at a forecast value but i will explain you some common model’s in near future.

Equity value is the job to find out how much a company is worth currently and what it is likely to be in near future. It the current market price is lower than the future valuation then we shall buy that stock or business and vice-versa. A valuation model is generally expressed in Formula. Valuation model specifies what we have to forecast and than method to convert this forecast to valuation.

Valuation has became integral part of the financial sector where we are witnessing higher numbers of Mergers and Acquisition taking place on global platform. Valuation model remains common across globe so it becomes easy to value a company in any currency. We will further get into the approach of fundamental valuation in upcoming posts.

Prerequisite of Fundamental Research

Before starting of with Fundamental research on any particular stock you must have a deep understanding of that business and the sector. There are two broad categories of information which is required i.e., Qualitative and quantitative information for analysis.

Qualitative Information includes insight of the business and industry working which could be obtained through material readings, newspapers , company announcements, recent company development reports, Annual reports of company, management discussion, detailed discussion with management or promoter. For going more deeper, some analyst also interact with employees and customers of company to get a taste of how company works in and out.

Quantitative information includes financial reports i.e., Balance sheet, profit and loss account, Cash flow statement and all other possible reports which marks company’s performance in numeric term.

These prerequisite information is required to project revenues, earnings and other financial parameters of the companies which results into valuation of each share of a company.  Generally, analysts forecast 3-5 years of Financial parameters based on the history available. Though there is no fixed rule on the number of years to forecast as it purely dependents on company to company.

However there are few limitations to Equity research as in developing country or under-developed country, industry information is little bit difficult to get as data collection is not that accurate, Secondly, many management of companies are not willing to talk with the analyst or not want to disclose crucial information which could act as a hurdle while carrying out fundamental research.

So this was a brief about what is required to carry out research and what are limitations faced while carrying out research.

Increasing demand of Research

Lets now get through about where and how can we use Equity Research and on what does it depend on!

Equity research depends on the maturity of financial markets in an economy and the extent of market depth and breadth. Indian markets have developed over last two decades and its matured enough to research for. Maturity in developing countries such as India can be seen with Foreign Institutional investment in Equity markets. We could notice that number of registered Foreign Institution Investors have been rising as seen in the graph below which increases breadth of our markets 

 

Fii_registered

For the depth of markets we could notice in the graph below that we are receiving FII regularly though they have been in and out quite often depending on the market condition. But if we net it than inflows has been more than out flows in last 5 years

fii_investement Domestic factor which could judge depth and breadth of the markets is the number of companies that are coming for Initial Public Offerings (IPO). Below graph is the funds raise in recent time by India Companies through IPO. We could see a constant offering which means that market depth is increasing from domestic side too

ipo

As our market’s depth and breadth is increasing, need of Equity research rises as we need to analysis our each investment call from different angles and in dept before taking a call. With such a growth in capital markets, brokerage houses and investment bankers have started carrying out research services for their clients.  Though such research is more or less targeted towards large institutional investors but now even a small investors are demanding for research before taking investment call. Recently SEBI has also announced Research Analyst Regulations  which allows independent firms to carry out research. This step by SEBI has given opportunity to many small start-ups like us (Luvkush Finserve) to carry out professional and verified services in vast field of Research.

Major Uses of Equity Research:

  • Making investment decisions
  • To determine IPO pricing
  • To value mergers and Acquisitions
  • For strategic investments in other firms

Now we could get an idea from the above information that Equity research is gaining importance in india and avenue for its uses are increasing. So its crucial for us to understand and learn Equity research for making crucial investment decisions.

Equity Research

Equity research can be simply termed as research of Equities.

Equity means common shares or stock of Businesses.

Businesses can be

  • Proprietorship
  • Partnerships or
  • Companies

For Equity research or valuation we should be concerned about the companies part only

Research implies thorough understanding of the company under study. We study their strength, weakness and finances to predict what lies in future for the company.

Thus Equity Research is aimed at unraveling value of companies especially those listed on Equity markets. Good research could help investor to create wealth by investing in such researched equities.

So this was the basic idea about what actually is Equity research. In next post we shall learn about its uses in detail and what factors does it depend on!