UNIT V

1.CREDIT ANALYSIS
Credit analysis is the method by which one calculates the creditworthiness of a business or
organization. In other words, It is the evaluation of the ability of a company to honor its financial
obligations. The audited financial statements of a large company might be analyzed when it
issues or has issued bonds. Or, a bank may analyze the financial statements of a small business
before making or renewing a commercial loan. The term refers to either case, whether the
business is large or small.
The objective of credit analysis is to look at both the borrower and the lending facility being
proposed and to assign a risk rating. The risk rating is derived by estimating the probability of
default by the borrower at a given confidence level over the life of the facility, and by estimating
the amount of loss that the lender would suffer in the event of default.
Credit analysis involves a wide variety of financial analysis techniques, including ratio and trend
analysis as well as the creation of projections and a detailed analysis of cash flows. Credit
analysis also includes an examination of collateral and other sources of repayment as well as
credit history and management ability. Analysts attempt to predict the probability that a borrower
will default on its debts, and also the severity of losses in the event of default. Credit spreads—
the difference in interest rates between theoretically "risk-free" investments such as U.S.
treasuries or LIBOR and investments that carry some risk of default—reflect credit analysis by
financial market participants.[1]
Before approving a commercial loan, a bank will look at all of these factors with the primary
emphasis being the cash flow of the borrower. A typical measurement of repayment ability is
the debt service coverage ratio. A credit analyst at a bank will measure the cash generated by a
business (before interest expense and excluding depreciation and any other non-cash or
extraordinary expenses). The debt service coverage ratio divides this cash flow amount by the
debt service (both principal and interest payments on all loans) that will be required to be met.
Commercial bankers like to see debt service coverage of at least 120 percent. In other words, the
debt service coverage ratio should be 1.2 or higher to show that an extra cushion exists and that
the business can afford its debt requirements.
Credit analysis seeks to provide a fundamental view of a company's financial ability to repay its
obligations. While factors such as operating margins, fixed expenses, overhead burdens, and cash
flows might be the same in equity and credit analyses, the emphasis is different for each. And
while a strong credit rating does not seek to forecast strong equity performance per se, an
understanding of credit ratings can help assess the equity performance potential of a company.

Credit Analysis is also concerned with the identification, evaluation and mitigation of risks

associated with an entity failing to meet financial commitments.

Elements of a credit analysis

Financial circumstances
The financial assessment of a borrower looks at its revenue and cost structures, both in isolation
(using a cross section of meaningful ratios and metrics) and in relation to peer-group and
industry benchmarks.

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A company can be considered strong for credit purposes when it has a cost structure that allows
it to produce generally higher-than-average profits during all phases of its business cycle. Such
companies should show near-optimal capacity utilization at peak times and will also tend to
produce above-average results even under the financial stress of a business downturn. In
addition, a strong company should show that it has pricing power; that is, the ability to pass
along any increases in its raw material and component costs to its customers in the form of
higher prices. It should also show that it has management flexibility to adjust its production and
labor costs in response to changing market conditions.
A company can be considered weak for credit purposes when it can only generate better-than-
average performance during the peak of its business cycle when it has strong demand. A
company is also considered weak when it can be regularly hobbled by burdensome fixed costs
and has a limited track record of successful cost reduction, especially if its costs are already
higher than its peers.
Competitive position
A company's competitive position in its market can have a significant bearing on its ability to
sustain its financial position, so detailed credit analysis may consider competitive factors and
positions.
Indicators of a strong competitive position include a business strategy that appears consistent
with industry trends and is adaptable to changes in the market. A strongly competitive company
also demonstrates track records of product development, service quality, and customer
satisfaction and retention. Strong companies may also benefit from high barriers to competition
with strong patent and copyright protection, protective regulations, and franchise, permit, or
licensing agreements.
Indicators of a weak company include a poorly articulated business strategy or one that is clearly
at odds with market trends, products that show little or no price premium over competitive
products, high rates of customer defection or dissatisfaction, and a low rate of reinvestment
relative to peers.
Business environment
Some factors may have only an indirect impact on a company's financial positions, but they may
still provide significant dimensions of a credit analysis. Country risk is an assessment of how the
company's business activities may be adversely affected by variations in the political, legal,
regulatory, social, and tax climates in the countries where it does significant amounts of
business. Currency risk in the broad sense considers not just the immediate balance sheet impact
of adverse foreign exchange movements but also how changes in currency value might help or
hinder the ability of the company to sell products or obtain components and raw
materials. Industry risk considers how the industry's business dynamics, legal and regulatory
climate, and market factors could impact the performance of the individual company.
Indications of company strength include isolation from these risk factors. Some examples:
Significant supply chain currency exposures may be well hedged; the company may have
strategic alternatives to circumvent potentially problematic areas; the company's earnings could
vary relatively little as its industry moves though a technology cycle.
Indications of weakness, on the other hand, could include costs that vary significantly due to
frequent currency translation gains and losses and earnings that change substantially as the
company moves through the peaks and valleys of an industry cycle. Other indications might be
susceptibility to business disruption from social unrest or variations in the political, legal, or
regulatory climate.
Using the insights of credit analysis in equity investing
The fundamental factors evaluated in credit analysis tend to be the same factors considered in
equity analysis: financial efficiency ratios (returns on equity, sales, assets, etc.), capital
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utilization, cash flow, gross margin, cost, and revenues. So are environmental factors such as
regulatory climate, competition, taxation, and globalization. A typical credit rating is built from a
weighted combination of these factors and provides a single score intended to reflect a
borrower's ability to repay its debts relative to other borrowers in its universe. For example, an
AAA rating for a state government may not signify the same overall investment risk profile as an
AAA rating for a corporation, but in each universe, the AAA-rated borrower can be considered to
pose much less investment risk than a B-rated or C-rated borrower of the same universe.
Similarly, among business borrowers, a top bond rating does not consider all the factors that
could help determine equity returns. Dividend payout rate, growth rate, and consistency, for
example, could be important to shareholder value but not necessarily to creditors (except to the
extent that dividends might be seen as competing for cash resources with debt service). But that
said, there are indications that higher credit ratings may be associated with stronger equity
returns.
Consider that among the 500 companies that make up the S&P 500, the median 5-year return of
those companies with a primary S&P credit rating of A or stronger was 10.74% (for the period
ended August 30, 2013), compared with a median of 6.53% over the same time frame for those
with a primary credit rating of BB or weaker.* To be sure, there were strong equity performers
among those with weak credit ratings and weak performers among those with strong ratings. But
results such as these may underscore that a consideration of credit factors could add value to
equity investment selection.

Classic credit analysis[edit]

Traditionally most banks have relied on subjective judgment to assess the credit risk of a
corporate borrower. Essentially, bankers used information on various borrower characteristics –
such as character (reputation), capital (leverage), capacity (volatility of earnings), conditions
(purpose of the loan), and collateral – in deciding whether or not to make a given loan. These
characteristics are commonly referred to as the 5 Cs. [2] Developing this type of expert system is
time-consuming and expensive. Incorporating certain soft (qualitative) data in a risk model is
particularly demanding[3], however successful implementation eliminates human error and
reduces potential for misuse. That is why, from time to time, banks have tried to clone their
decision-making process. Even so, in the granting of credit to corporate customers, many banks
continue to rely primarily on their traditional expert system for evaluating potential borrowers.

Credit scoring system

In recent decades, a number of objective, quantitative systems for scoring credits have been
developed. In univariate (one variable) accounting-based credit-scoring systems, the credit
analyst compares various key accounting ratios of potential borrowers with industry or group
norms and trends in these variables.
Today, Standard & Poor's, Moody's, and Risk Management Association can all provide banks
with industry ratios. The univariate approach enables an analyst starting an inquiry to determine
whether a particular ratio for a potential borrower differs markedly from the norm for its
industry. In reality, however, the unsatisfactory level of one ratio is frequently mitigated by the
strength of some other measure. A firm, for example, may have a poor profitability ratio but an
above-average liquidity ratio. One limitation of the univariate approach is the difficulty of
making trade-offs between such weak and strong ratios. Of course, a good credit analyst can
make these adjustments. However, some univariate measures – such as the specific industry
group, public versus private company, and region – are categorical rather than ratio-level values.
It is more difficult to make judgments about variables of this type.
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Although univariate models are still in use today in many banks, most academics and an
increasing number of practitioners seem to disapprove of ratio analysis as a means of assessing
the performance of a business enterprise. Many respected theorists downgrade the arbitrary rules
of thumb (such as company ratio comparisons) that are widely used by practitioners and favor
instead the application of more rigorous statistical techniques.

THE 5 C’S OF CREDIT ANALYSIS

CHARACTER

This is the part where the general impression of the protective borrower is analysed. The
lender forms a very subjective opinion about the trust – worthiness of the entity to repay the loan.
Discrete enquires, background, experience level, market opinion, and various other sources can
be a way to collect qualitative information and then an opinion can be formed, whereby he can
take a decision about the character of the entity.

CAPACITY

Capacity refers to the ability of the borrower to service the loan from the profits
generated by his investments. This is perhaps the most important of the five factors. The lender
will calculate exactly how the repayment is supposed to take place, cash flow from the business,
timing of repayment, probability of successful repayment of the loan, payment history and such
factors, are considered to arrive at the probable capacity of the entity to repay the loan.

CAPITAL

Capital is the borrower’s own skin in the business. This is seen as a proof of the
borrower’s commitment to the business. This is an indicator of how much the borrower is at risk
if the business fails. Lenders expect a decent contribution from the borrower’s own assets and
personal financial guarantee to establish that they have committed their own funds before asking
for any funding. Good capital goes on to strengthen the trust between the lender and borrower.

COLLATERAL (OR GUARANTEES)

Collateral are form of security that the borrower provides to the lender, to appropriate the
loan in case it is not repaid from the returns as established at the time of availing the facility.
Guarantees on the other hand are documents promising the repayment of the loan from someone
else (generally family member or friends), if the borrower fails to repay the loan. Getting
adequate collateral or guarantees as may deem fit to cover partly or wholly the loan amount bears
huge significance. This is a way to mitigate the default risk. Many times, Collateral security is
also used to offset any distasteful factors that may have come to the fore-front during the
assessment process.

CONDITIONS

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 Conditions describe the purpose of the loan as well as the terms under which the facility
is sanctioned. Purposes can be Working capital, purchase of additional equipment, inventory, or
for long term investment. The lender considers various factors, such as macroeconomic
conditions, currency positions, and industry health before putting forth the conditions for the
facility.

CREDIT ANALYSIS CASE STUDY

From times immemorial, there has been an eternal conflict between

entrepreneurs/businessmen and bankers, regarding the quantification of credit. The resentment
on the part of the business owner arises when he believes that the banker might not be fully
appreciating his business requirements/needs and might be underestimating the real scale of
opportunity that is accessible to him, provided he gets sufficient quantum of loan. However, the
credit analyst might be having his own reasons to justify the amount of risk he is ready to bear,
which may include bad experiences with that particular sector, or his own assessment of the
business requirements. Many times there are also internal norms or regulations which force the
analyst to follow a more restrictive discourse.

The most important point to realize is that banks are in the business of selling money and
therefore risk regulation and restrain are very fundamental to the whole process.Therefore, the
loan products available to prospective customers, the terms and conditions set for availing the
facility and the steps taken by the bank to protect its assets against default, all have a direct
forbearance to the proper assessment of the credit facility.

what does a loan proposal looks like:

The exact nature of proposals may vary depending on subsequent clients, but the
elements are generally the same.

**To put things into perspective let’s consider the example of one Sanjay Sallaya, who is
credited to being one of the biggest defaulters in recent history along with being one of the
biggest businessmen in the world. He owns multiple companies, some sports franchises, and few
bungalows in all major cities.

Who is the client? Ex. Sanjay Sallaya, reputed industrialist, owning majority share in
XYZ ltd., and some others.

Quantum of credit they need and when? Ex. Starting a new airline division, which would
cater to the high end segment of society. Credit demand is $25 mil, needed over the next 6
months.

The specific purpose the credit will be employed for? Ex. Acquiring of new aircrafts, and
capital for day to day operations like fuel costs, staff emoluments ,airport parking charges, etc.

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 Ways and means to service the debt obligations (which include application and
processing fees, interest, principal and other statutory charges) Ex. Revenue generated from
flight operations, freight delivery and freight delivery.

What protection (collateral) can the client provide in the event of default? Ex. Multiple
bungalows in prime locations offered as collateral, along with personal guarantee of Sanjay
Sallaya, one of the most reputed businessmen in the world.

What are the key areas of the business and how are they operated, and monitored? Ex.
Detailed reports would be provided on all key metrics related to the business.

Answers to these questions, helps the credit analyst to understand the broad risks
associated with the proposed loan. These questions provide the basic information about the client
and help the analyst to get deeper into the business and understand any intrinsic risks associated
with it.

CREDIT ANALYST – OBTAINING QUANTITATIVE DATA OF THE CLIENTS

Other than the above questions the analyst also needs to obtain quantitative data specific to the
client:

Borrower’s history – A brief background of the company, its capital structure, its
founders, stages of development, plans for growth, list of customers, suppliers, service providers,
management structure, products, and all such information are exhaustively collected to form a
fair and just opinion about the company.

Market Data – The specific industry trends, size of the market, market share, assessment
of competition, competitive advantages, marketing, public relations, and relevant future trends
are studied to create a holistic expectation of future movements and needs.

Financial Information – Financial statements (Best case/ expected case/ worst case), Tax
returns, company valuations and appraisal of assets, current balance sheet, credit references, and
all similar documents which can provide an insight into the financial health of the company are
scrutinized in great detail.

Schedules and exhibits – Certain key documents, such as agreements with vendors and
customers, insurance policies, lease agreements, picture of the products or sites, should be
appended as exhibits to the loan proposal as proofs of the specifics as judged by above
mentioned indicators.

It must be understood that the credit analyst once convinced will act as the client’s
advocate in presenting the application to the bank’s loan committee and also guiding it through
the bank’s internal procedures. The details obtained are also used to finalize the loan
documentation, terms, rates and any special covenants which need to be stipulated, keeping in
mind the business frame-work of the client as well the macro – economic factors.

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CREDIT ANALYSIS – JUDGEMENT

After collating all the information, now the analyst has to make the real “Judgement”,
regarding the different aspects of the proposal which will be presented to the sanctioning
committee:

Loan – After understanding the need of the client, one of the many types of loans, can be
tailored to suit the client’s needs. Amount of money, maturity of loan, expected use of proceeds
can be fixed, depending upon the nature of the industry and the credit worthiness of the
company.

Company – The market share of the company, products and services offered, major
suppliers, clients and competitors, should be analysed to ascertain its dependency on such
factors.

Credit History – Past is an important parameter to predict future, therefore, keeping in

line with this conventional wisdom, client’s past credit accounts should be analysed to check any
irregularities or defaults. This also allows the analyst to judge the kind of client we are dealing
with, by checking the number of times late payments were made or what penalties were imposed
due to non compliance with stipulated norms.

Analysis of market – Analysis of the concerned market is of utmost importance as this

helps us in identifying and evaluating the dependency of the company on external factors.
Market structure, size and demand of the concerned client’s product are important factors that
analysts are concerned with.

CREDIT ANALYSIS RATIOS

A company’s financials contain the exact picture of what the business is going through,
and this quantitative assessment bears utmost significance.Analysts consider various ratios and
financial instruments to arrive at the true picture of the company.

Liquidity ratios – These ratios deal with the ability of the company to repay its creditors,
expenses, etc. These ratios are used to arrive at the cash generation capacity of the company. A
profitable company does not imply that it will meet all its financial commitments.

Solvability ratios – These ratios deal with the balance sheet items and are used to judge
the future path that the company may follow.

Solvency ratios – These ratios are used to judge the risk involved in the business. These
ratios take into picture the increasing amount of debts which may adversely affect the long term
solvency of the company.

Profitability ratios – These ratios show the ability of a company to earn satisfactory profit
over a period of time.

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 Efficiency ratios – These ratios provide insight in the management’s ability to earn a
return on the capital involved, and the control they have on the expenses.

Cash flow and projected cash flow analysis – Cash flow statement is one of the most
important instrument available to a Credit Analyst, as this helps him to gauge the exact nature of
revenue and profit flow. This helps him get a true picture about the movement of money in and
out of the business

Collateral analysis – Any security provided should be marketable, stable and transferable.
These factors are highly important as failure on any of these fronts will lead to complete failure
of this obligation.

SWOT analysis – This is again a subjective analysis, which is done to align the
expectations and current reality with market conditions.

CREDIT RATING

Credit rating is a quantitative method using statistical models to assess credit worthiness
based on the information of the borrower. Most banking institutions have theirown rating
mechanism. This is done to judge under which risk category the borrower falls. This also helps in
determining the term and conditions and various models use multiple quantitative and qualitative
fields to judge the borrower. Many banks also use external rating agencies such as Moody’s,
Fitch, S&P etc. to rate borrowers, which then forms an important basis for consideration of the
loan.

LESSON LEARNED – MR. SANJAY SALLAYA

So, let’s illustrate the whole exercise with the help of an example of Mr. Sanjay Sallaya, who is a
liquor barron, and a hugely respected industrialist, who also happens to own a few sports
franchises and has bungalows in the most expensive locals. He now wants to start his own
airline, and has therefore approached you for a loan to finance the same.

The loan is for a meagre $1 million. So, as a credit analyst we have to assess whether or
not to go forward with the proposal. To begin, with we will obtain all the required documents
which are needed to understand the business model, working plan and other details of his new
proposed business. Necessary inspection and enquires are undertaken to validate the veracity of
his documents. A TEV i.e Techno Economic Viability can also be undertaken to get an opinion
from the experts in aviation industry about the viability of the plan.

When finally we are satisfied with the overall efficacy of the plan, we can discuss the
securities that will collaterally cover our loan (partly/fully). Mr. Sanjay Sallaya being a well-
established industrialist holds a good reputation in the business world and therefore will hold
good recommendations. Such a proposal if it meets all other aspects can be presented for
sanction, comfortably, and generally enjoys good terms from the bank’s side as the risk
associated with such personalities are always assessed to be less.

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 Therefore, to conclude, Mr. Sanjay Sallaya will get a loan of $1 million approved and
will go on to start his airline business, however, what the future holds can never be predicted,
when a loan is sanctioned.

Also, checkout the difference between Equity Research vs Credit Research

CONCLUSION

Credit Analysis is about making decisions keeping in mind the past, present and the
future. As a Credit analyst, two days in life are never the same. The role offers a plethora of
opportunities to learn and understand different types of businesses as one engages with a
multitude of clients hailing from different sectors. Not only is the career monetarily rewarding
but also helps an individual grow along with providing good opportunities to build one’s career.

2. EQUITY RESEARCH
Equity Research primarily means analyzing company’s financials, perform ratio analysis,
forecast the financial in excel (financial modeling) and explore scenarios with an objective of
making BUY/SELL stock investment recommendation. Equity Research analyst discuss their
research and analysis in their equity research reports. In this in-depth article on Equity Research,
we discuss the nuts and bolts of Equity Research –
WHAT IS EQUITY RESEARCH?
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Equity Research explanation is quite simple. Let us look at this steps below
Equity research is all about finding the valuation of a listed company (Listed companies
trade on stock exchange like NYSE or NASDAQ etc
Once you have the company under consideration, you look at the economic aspects like
GDP, growth rates , market size of the industry and the competition aspects etc.
Once you understand the economics behind the business, perform the financial statement
analysis of the historical balance sheet, cash flows and income statement to form an opinion on
how the company did in the past.
Based on management’s expectation, historical performances and industry competition,
project the financial statements like the BS, IS and CFs of the company. (also called as Financial
Modeling in Equity Research)
Use the Equity valuation models like DCF, Relative valuations, sum of parts valuation the
company

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 Calculate the Fair price based on the above models and compare the fair price with the
Current Market Price (stock exchange)
If the Fair Price < Current Market Price, then the company stocks are overvalued and
should be recommended as a SELL.
If the Fair Price > Current Market Price, then the company shares are undervalued and
should be recommended as a BUY.
ROLE OF EQUITY RESEARCH
Equity Research plays a very critical role that fills the information gap between the
buyers and sellers of shares.
Reason is that at all levels (individual or institutional) may not have the resources or the
capabilities to analyze every stocks.
Additionally, full information is not provided by the management due to which further in-
efficiencies are created and stocks trade below or above the fair value.
Equity Research analyst spend lot of time, energy and expertise to analyze stocks, follow
news, talking to the management and provide an estimate of stock valuations.
Also, equity research tries to identify the value stocks out of the massive ocean of stocks
and help the buyers to generate profits.
WHAT IS THE TYPICAL HIERARCHY IN EQUITY RESEARCH FIRMS?
Equity Research Hierarchy

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A typical hierarchy at an Equity Research firms starts with the Head of Equities/Head of Equities
at the top.
Thereafter there are Analysts (senior) covering different sectors. Each analyst mostly
cover around 10-15 companies in a specific sector.
Each Senior analyst may be supported by an Associate, who in turn may be supported by
a couple of Junior Analysts.
WHAT IS THE ROLE OF HEAD OF RESEARCH?
Head of Research act as a key member to manage the Equity research analyst team,
providing the team with leadership, coaching and guidance to ensure that the brokerage goals
and objectives are met.
They oversee research reports publications, its editing as well as monitor the process of
analysis and brokerage recommendations
They ensure that adequate support is provided to sales and trading teams
Contribute to Equities by providing expert level inputs for overall strategy, goals,
initiatives and budgets
Responsible for Analyst hiring, compensation, development and performance
management
Liaison with fund managers and the research teams.
WHAT IS THE JOB OF THE SENIOR ANALYST?
Below is an excerpt from a job requirement of a Senior analyst –

Typically an equity research senior analyst would cover a sector with not more than 8-15
stocks. Coverage implies tracking these stocks actively. Senior Analyst tries to bring maximum
companies under coverage in the sector he/she tracks (initiating the coverage)
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 Many senior equity analyst cover companies that investors may want to invest in. These
companies are like the high market capitalization companies or the ones with higher trading
volume and there could also be cases where investors want to invest in small cap or mid cap
companies with less analysts coverage.
One of the most important responsibility of Senior Analyst is to come up with Quarterly
Results Update – results summary, expectation and performance against those expectations,
updating forecasts etc.
Talking to the clients (buy side) and showcasing their calls on the stocks. They have to
diligently communicate buy sell recommendations of stocks. Additionally, they have to articulate
clearly why a certain stock should be included in their portfolio.
Write important industry event updates like conferences or management meeting updates
To update the Sales team, dealing and trading team about the latest news in the sector and
the company and keep them updated with the brokerage’s view on the same.
Attending conference calls for important company updates, results etc
Attend trade shows, meet company management, suppliers meetings etc
RESPONSIBILITIES OF AN ASSOCIATE

Associate Responsibilities
primary job of an associate is to support the Senior Analyst in best way possible.
An associate has a prior experience of around 3 years or so in similar industry.
Updating the financial model, verifying the data and preparing the valuation models
Working on various client requests like request of data, industry analysis etc
Prepare draft Equity Research Reports (update of results, events etc)
Work on client requests
Participate in meetings and calls with clients on the stock under coverage.

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RESPONSIBILITIES OF A JUNIOR ANALYST
Junior Analyst Responsibilites
The main responsibilities of Junior Analyst is to support the Associate in every format.
Majority of the work done by Junior Analyst is related to data and excel etc
Also, Junior Analyst may be involved in doing primary research, industry research,
coordinating with clients etc
Maintaining the industry database, charts, graphs and financial models etc.
TYPICAL DAY AT AN EQUITY RESEARCH FIRM
Previously, I had worked with companies like JPMorgan and CLSA India as an Equity
Research Analyst. I covered Indian Oil & Gas sectors with stocks like ONGC, BPCL, HPCL,
GAIL etc. Below was my typical day as an Equity Research Analyst.

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Typical Day at an Equity Research Firm

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7:00am – Reach office
Check emails from traders and sales people
Check the stock markets (Asian Markets that open first)
Check for all the news related to your sector
7:30am – 8:00am Attend Morning Meeting
Morning meeting is nothing a formal discussion of the recommendations before the market
opens along with Sales & Trading Team
In this morning meeting, all analysts present their views on key developments in their sector
along with the Head of Research or Equities presenting their views on the general markets.
9:00am – Market Opens
Follow the Market, look for key developments in your sector
Try to rationalize if there is any rapid stock price movements
10:00am – Regular Work
Perform regular research analyst duties like Client Requests, Financial Model updates,
Follow the News and keep a close check
11:00am – Regular Work / Client Discussions
Discussion with buy side clients for any explanation of research/calls
Continue doing your regular maintenance work
3:30pm – Market Closes
Capture the market movements of the company under coverage for the day closure.
Check if there is anything that the clients should know and work accordingly.
4:00pm – Work on New Research Publications
Work on the new research piece for publication (next day or in coming days)
Generally, a research analyst targets atleast 1 to 2 research pieces every week.
7:30-8:00 – go Home
If there is no earning season (company results), then the typical go home time is 7:30-
8:00pm. However, during earning seasons there is no surety when you will reach home.You need
to fully prepare the result update report and keep it ready for next day early morning publication.
WHO PAYS FOR EQUITY RESEARCH?

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 For Independent Equity Research firms: Independent equity research firms do not have a
trading and sales division. They perform financial analysis with an idea of charging a Fees on per
report basis. Also, see Equity Research vs Sales and Trading
For Major Equity Research firms: Fee income is earned by brokerage trades (Soft
Dollars). To understand this in detail, let us look at the diagram below –
Client Brokerage Relationship
As noted above, on one side is the Buy Side firms like Hedge Funds, Pension Funds,
Insurance Companies, Mutual funds etc.
On the other side are the sell side firms like JPMorgan, GoldMan Sacks, Credit Suisse
etc.
The buy side firms manage portfolio and they are required to invest their portfolio as per
the investment objective.
Investment objective may mandate these companies to keep a portion of their assets in
Stocks etc.
In such cases, the buy side analysts seek advise of the sell side analyst for investment
decisions.
The advise or the idea provided by the sell side analyst is literally for FREE.
Once the buy side analyst has take the decision of investing in the stock, the buy side
analyst may look forward to executing the trade through the Trading division of the sell side firm
The trading division will in turn charge a commission for executing the trade at the
lowest price.
The commission in return are basically the earnings of the research firms.
EQUITY RESEARCH PROFESSIONAL APPROACH
So what is your work like as an Equity Research Professional. Equity Research analysts
follow stocks and make recommendations on whether to buy, sell, or hold those securities using
Fundamental Analysis. Equity Research is a very challenging job, where an analyst may be
required to spend more than 12-14 hours a day.
For creating a professional Equity Research Financial model, an expert analyst
recommended approach is as follows –
ECONOMIC ANALYSIS / INDUSTRY ANALYSIS / COMPANY ANALYSIS
The very first thing you need to take care of while doing a professional analysis is to
learn about the economic parameters affecting the industry, the industry dynamics, competitors
etc.
For example, when you are analyzing Alibaba, you should know about each and every
sub divisions of Alibaba and its competitors.
alibaba-comparison
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FUNDAMENTAL ANALYSIS
You should be awesome at Fundamental Analysis. Fundamental Analysis means
performing Ratio Analysis of the company under consideration.
Before you start ratio analysis, you should populate atleast the last 5 years of financial
statements (Income Statement, Balance Sheet and Cash Flows) in excel.
You should prepare a blank excel sheet with Separate Income Statement, Balance Sheet
and Cash Flows and use neat formats
Populate the historical financial statements (IS, BS, CF) and do the necessary adjustment
for Non-recurring items (one time expenses or gains).
Do the Ratio Analysis for Historical years
An example is presented below in Colgate Ratio Analysis
Colgate Ratio Analysis - Operating Profitability
PREPARING A PROFESSIONAL FINANCIAL MODEL
Company management does not provide the future financial projections of the company.
Therefore, it is important as a research analyst to project this data. Forecasting the financials of
the company is known as Financial Modeling.
Completing the Balance Sheet
VALUATIONS – DCF
Valuation is primarily done using two methods – a) Discounted Cash flow and b)Relative
Valuations.
Once your financial model is ready, you can perform Discounted cash flows as given in the steps
below –
Calculate FCFF as discussed in class and the handbook
Apply a suitable WACC post the calculation of the capital structure
Find the Enterprise Value of the Firm (including the Terminal Value)
Find Equity Value of the Firm after the deduction of Net Debt
Divide Equity Value of the Firm by the total number of shares to arrive at “Intrinsic Fair Value”
of the company.
Recommend whether to “BUY” or “SELL”
Alibaba FCFF

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VALUATION – RELATIVE VALUATIONS
Relative valuation is based on comparing the valuation of the company under
consideration with valuation of other firms. There are valuation multiples used to value
companies like PE Multiple, EV/EBITDA, PBV ratio etc.
Box IPO Comparable Analysis Comp
The common approach is given below.
Identify the comparable based on the business, Market Capitalization and other filters
Identify the suitable valuation multiple to be used for this business.
Use the average valuation multiple to find the valuation of the company
Suggest “Undervalued” or “Over-valued”.
RESEARCH REPORT
Once you have prepared the financial modeling and find the fair valuation of the
company, you need to communicate this to your clients through Research Reports. This research
report is a very professional in nature and is prepared with lot of caution.
Below is a sample of Equity Research Report. You may learn about Equity Research Report
Writing here.https://www.wallstreetmojo.com/wp-content/uploads/2015/03/Reliance-
Petroleum.pdf
EQUITY RESEARCH SKILLS-SET

Associate Qualifications

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KEY HIGHLIGHTS TO NOTE FROM THIS EXCERPT IS –
MBA is a plus (not a necessity). If you are an MBA then you have certain advantages, but
if you are a graduate, you should not get disheartened. You have a chance if you prove your
interest in finance. Please do have a look at Can an engineer get into an Investment Bank
A financial discipline is not essential, but you must have a strong interest in the financial
markets with excellent quantitative and analytical skills.
You should be fluent in English and have excellent verbal and written communication
skills.
You possess intellectual curiosity, focus and creativity, and have a keen research instinct
with creative problem-solving abilities.
Strong proficiency in Microsoft Excel and Powerpoint
CFA designation – This is one important designation that the finance industry respects.
Try to ensure that you take CFA examination and pass atleast a couple of levels.
The top 5 skillset required to enter the Equity Research Industry are –
Excel Skills Financial Modeling Valuations Accounting and Report Writing
You can get an indepth understanding of the skillsets here – Equity Research Skills
TOP EQUITY RESEARCH FIRMS
Institutional Investors ranking suggests that in 2014, the best research firm was Merril Lynch
Bank of America, second place was taken by JPMorgan and Morgan Stanley came third.

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Apart from the top 3 above, there are other notable equity research firms (listed below)

Deutsche Ban Standard Chartered Bank

Credit Suisse Cornerstone Macro
UBS Wolfe Research
Barclays BNP Paribas Securities
Citi CIMB Securities
Nomura Cowen and Co.
Goldman, Sachs & Co. Berenberg Bank
CLSA Asia-Pacific Markets Citic Securities
Wells Fargo Securities CRT Capital Group
VTB Capital Empirical Research Partners
Sberbank CIB J. SafraCorretora
Santander Keefe, Bruyette& Woods
ISI Group Kempen& Co.
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Daiwa Capital Markets Otkritie Capital
Jefferies & Co. Raymond James & Associates
Mizuho Securities Group Renaissance Macro Research
SMBC Nikko Securities SEB Enskilda

EQUITY RESEARCH EXIT OPPORTUNITIES

Sell Side research analyst have various Career Opportunities –
WITHIN EQUITY RESEARCH FIRM
If you joined as an associate, then you can move up the ladder to become Senior analyst
assuming full responsibility of the sector coverage.
Later you can move further up to become Head of Research and Head of Equities.
PRIVATE EQUITY ANALYST
Sell side analysts also move to Private Equity domain working as Private Equity Analyst.
Instead of analyzing public companies, they analyst private companies from the point of
view of investments.
They can move up the hierarchy to become Private Equity Fund manager. Checkout the List of
Top Private Equity Firms
INVESTMENT BANKING ANALYSTS
Movement of sell side analysts to Investment banking is slightly tough but not
impossible.
Sell side analysts are fully aware of financial research and modeling related work.
What they haven’t worked on is the transaction related work like IPO filing documents,
Pitch books, registration work etc. If you are confused between Investment Banking and Equity
Research, read this article – Investment Banking vs Equity Research
BUY SIDE FIRMS
Sell side analysts sometimes are also absorbed as buy side analysts (working for Mutual
funds etc).
The buy side analysts assume the responsibility of fund managers over a period of time.
CORPORATE FINANCE
Sell side analyst work a lot on financial analysis, analyzing company projects and its
effect on the overall company’s financials. Hence, they get into a typical Corporate finance roles
of large corporates (take care of financial analysis, planning Projects etc)

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 Another unique role they get into is Investor Relation. As a sell side analyst, they get
equipped with the FAQs and how to deal with critical information and its sharing etc. Due to this
they also become eligible for Investor Relation jobs.
CONCLUSION
Equity Research essentially means preparing an estimate of company fair valuation for
recommending the buy side clients. Though, as a research analyst you may spend 12-16 hours a
day at office, however, this is a dream job for many who love Finance and Financial Analysis. If
you like to work in a challenging and dynamic environment, then this is one career you must
consider. Not only equity research job rewards analyst with relatively higher compensation, but
also, it provides excellent exit opportunities.
3.Business analytics (BA)
Business analytics (BA) is the practice of iterative, methodical exploration of an
organization's data, with an emphasis on statistical analysis. Business analytics is used by
companies committed to data-driven decision-making.

BA is used to gain insights that inform business decisions and can be used to automate
and optimize business processes. Data-driven companies treat their data as a corporate asset and
leverage it for a competitive advantage. Successful business analytics depends on data quality,
skilled analysts who understand the technologies and the business, and an organizational
commitment to data-driven decision-making.

Business analytics examples

Business analytics techniques break down into two main areas. The first is basic business
intelligence. This involves examining historical data to get a sense of how a business department,
team or staff member performed over a particular time. This is a mature practice that most
enterprises are fairly accomplished at using.

The second area of business analytics involves deeper statistical analysis. This may mean
doing predictive analytics by applying statistical algorithms to historical data to make a
prediction about future performance of a product, service or website design change. Or, it could
mean using other advanced analytics techniques, like cluster analysis, to group customers based
on similarities across several data points. This can be helpful in targeted marketing campaigns,
for example.

Specific types of business analytics include:

 Descriptive analytics, which tracks key performance indicators to understand the present
state of a business;
 Predictive analytics, which analyzes trend data to assess the likelihood of future
outcomes; and
 Prescriptive analytics, which uses past performance to generate recommendations about
how to handle similar situations in the future.

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 While the two components of business analytics -- business intelligence and advanced
analytics -- are sometimes used interchangeably, there are some key differences between these
two business analytics techniques:

Business analytics vs. data science

The more advanced areas of business analytics can start to resemble data science, but
there is a distinction. Even when advanced statistical algorithms are applied to data sets, it
doesn't necessarily mean data science is involved. There are a host of business analytics tools
that can perform these kinds of functions automatically, requiring few of the special skills
involved in data science.

True data science involves more custom coding and more open-ended questions. Data
scientists generally don't set out to solve a specific question, as most business analysts do.
Rather, they will explore data using advanced statistical methods and allow the features in the
data to guide their analysis.

Business analytics applications

Business analytics tools come in several different varieties:

 Data visualization tools

 Business intelligence reporting software
 Self-service analytics platforms
 Statistical analysis tools
 Big data platforms

Self-service has become a major trend among business analytics tools. Users now demand
software that is easy to use and doesn't require specialized training. This has led to the rise of
simple-to-use tools from companies such as Tableau and Qlik, among others. These tools can be

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installed on a single computer for small applications or in server environments for enterprise-
wide deployments. Once they are up and running, business analysts and others with less
specialized training can use them to generate reports, charts and web portals that track specific
metrics in data sets.

Once the business goal of the analysis is determined, an analysis methodology is selected and
data is acquired to support the analysis. Data acquisition often involves extraction from one or
more business systems, data cleansing and integration into a single repository, such as a data
warehouse or data mart. The analysis is typically performed against a smaller sample set of data.

Analytics tools range from spreadsheets with statistical functions to complex data
mining and predictive modeling applications. As patterns and relationships in the data are
uncovered, new questions are asked, and the analytical process iterates until the business goal is
met.

Deployment of predictive models involves scoring data records -- typically in

a database -- and using the scores to optimize real-time decisions within applications and
business processes. BA also supports tactical decision-making in response to unforeseen events.
And, in many cases, the decision-making is automated to support real-time responses.

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