Credit Analysis – In layman terms, Credit analysis is more about identification of risks in

situations where a potential for lending is observed by the Banks. Both quantitative and
qualitative assessment forms a part of overall appraisal of the clients (company/individual). This
in general, helps to determine the entity’s debt servicing capacity, or its ability to repay.
Credit Analysis Definition –
Credit analysis is a process of drawing conclusions from available data (both quantitative and
qualitative) regarding the credit – worthiness of an entity, and making recommendations
regarding the perceived needs, and risks.
Credit Analysis is also concerned with the identification, evaluation and mitigation of risks
associated with an entity failing to meet financial commitments.
CREDIT ANALYSIS PROCESS
Below diagram shows the overall Credit Analysis Process.

WHAT DOES A CREDIT ANALYST LOOKS FOR?

Ever wondered why bankers ask so many questions and make you fill so many forms, when you
apply for a loan. Don’t some of them feel intrusive and repetitive and the whole process of
submission of various documents seems cumbersome. You just try to fathom, as to what they do
with all this data and what they are actually trying to ascertain! It is definitely not only your
deadly charm and attractive personality that makes you a good potential borrower; obviously
there is more to that story. So here we will try to get an idea about what exactly a Credit Analyst
is looking for.
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
 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.
So, let’s have a look at 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.
 1. Who is the client? Ex. Sanjay Sallaya, reputed industrialist, owning majority share in
XYZ ltd., and some others.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
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.
1. 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.
2. Solvability ratios – These ratios deal with the balance sheet items and are used to judge
the future path that the company may follow.
3. 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.
4. Profitability ratios – These ratios show the ability of a company to earn satisfactory
profit over a period of time.
5. 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.
6. 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
7. 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.
8. 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.

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.
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.

CREDIT RECOVERY

Credit recovery is a term used to describe a wide variety of educational strategies and programs
that give high school students who have failed a class the opportunity to redo coursework or
retake a course through alternate means—and thereby avoid failure and earn academic credit. In
some cases, credit recovery is touted as a dropout-prevention strategy. The most familiar form of
credit recovery is perhaps summer-school programs that allow students to recover credit from
courses they have failed during the regular school year.

Credit recovery is most common at the high school level, although community colleges and other
collegiate institutions may also offer credit-recovery programs. Students may take a credit-
recovery course during normal school hours, after school, on vacation breaks, or over the
summer. In recent years, online credit-recovery courses and programs have quickly proliferated,
many of which are privately developed software applications that districts and schools must
purchase or subscribe to. Schools may use an online service that offers complete courses or one
that specializes in more targeted “micro-courses” that allow students to address
particular learning standards or complete specific units or subsections of a course.

Online credit-recovery programs are still a relatively new learning option for schools and
students, and the programs can vary widely in design and quality. Students may work through an
online program during school hours and under the guidance of a teacher, or they may work at
their own pace after school hours with little oversight. In some cases, students may have video
conversations or chat with teachers and support specialists who monitor progress and provide
feedback and necessary tutoring.

Debate
As more districts and schools have begun using some form of credit recovery—particularly
online programs—debate about the value of such learning options has grown. Some critics argue
that online credit-recovery programs are not as challenging or educationally valuable as
traditional classroom experiences in which students have direct contact and personal
relationships with teachers. Critics may also question the extent to which schools have
established adequate oversight and quality control for online credit-recovery programs,
especially prepackaged, third-party software applications developed by for-profit companies or
outside organizations. One major concern about credit recovery programs—both online
programs and those offered by teachers—is that, in some cases, students are being “pushed
through the system” and earning academic credit for having passed mediocre or watered-down
courses that are inferior substitutes for the real thing. In addition, a credit-recovery program may
or may not be well aligned with the learning expectations or assignments of the course that a
student has failed. Credit recovery also intersects with ongoing debates about grading policies,
since some grading schemes, such as grade averaging, may increase the likelihood that students
will fail a course.

While advocates argue that online learning applications allow students to work at their own pace,
make up lost ground after normal school hours, or complete an activity multiple times until they
truly understand a concept or problem, some critics question whether online credit-recovery
options, no matter how well designed, can replace direct contact with a teacher and peers in a
traditional classroom setting. Yet because credit recovery can vary so widely in design, it’s
important to investigate how the programs are structured and used. For example, some credit-
recovery options may be highly customized to address the distinct learning needs of a specific
student, some may include intensive oversight and support from a teacher, and some may be
hybrids—students may work part of the time online and part of the time with a teacher or
specialist. In addition, online programs typically provide highly detailed information that
teachers would not be able to obtain in a traditional educational setting. For example, software
applications may track precisely how long students worked through a problem or how many
attempts it took a student to complete a learning activity—data that may then be used by teachers
to identify specific student-learning needs or deficits.

In recent years, public schools have faced increasing external pressure to improve academic
achievement and graduation rates. New state and federal policies—not to mention calls for
reform from elected officials, the media, and local communities—have increased scrutiny of
public-school performance, especially quantifiable indicators of success such as standardized-
test scores and graduation rates, which are now widely reported on state websites and in news
stories. Since poor results can have a variety of consequences for districts or schools, ranging
from negative publicity to budget reductions, some critics argue that schools may be more
inclined to embrace quick-fix solutions, including credit-recovery programs that may reduce
dropouts but that do so by lowering academic expectations and awarding credit to students who
remain inadequately prepared.

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?
Equity Research explanation is quite simple. Let us look at this steps below

1. Equity research is all about finding the valuation of a listed company (Listed companies

trade on stock exchange like NYSE or NASDAQ etc

2. 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.
 3. 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.

4. 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)

5. Use the Equity valuation models like DCF, Relative valuations, sum of parts valuation the

company

6. Calculate the Fair price based on the above models and compare the fair price with the

Current Market Price (stock exchange)

7. If the Fair Price < Current Market Price, then the company stocks are overvalued and

should be recommended as a SELL.

8. 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?
 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 –

source – Federated Investor

 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)

 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
  The 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.

RESPONSIBILITIES OF A JUNIOR ANALYST

  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.

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?

 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.

 o

e
  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.

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

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. I earlier wrote a 6000 words step-by-step

tutorial on Financial Modeling. If you want to master Financial Modeling, you can

refer this Financial Modeling Tutorial

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”

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.

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

Here is an excerpts from the Equity Research Job Requirements Description –

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.

What not to expect

A few caveats for investors. Value investing is another name for patient investing. Don’t expect
fireworks from your value picks. “Value investing reduces the downside risk to some extent but
value stocks also take time to appreciate. The stocks may remain at a
discount for a prolonged time,” warns Dinesh Thakkar, Chairman and
Managing Director, Angel Broking.
Then again, you need to hold these stocks for the long term to be able to
get the best returns. Warren Buffett, arguably the most successful
value investor of all time, is still holding stocks he bought 30-40 years
ago. Buffett says his favourite holding period is “forever”. While we do
not agree with this philosophy of investing in perpetuity, the stocks we
have shortlisted for you could offer good returns over the next 8-10
years. Happy (value) investing.

Here’s how we applied 10 filters to identify value stocks from the BSE 200 universe.

1. We started with the 200 stocks in the S&P BSE 200 index. Since it is a large cap
index, small and midcap stocks get eliminated
2. To avoid value traps, only companies that made profits during the past five years
were considered—29 companies fell out, leaving only 171 stocks.
3. Of these profitable companies, only those with at least 10% annualised net profit
growth were considered—67 companies fell out, leaving only 104 stocks.
 4. Next, only companies with positive operating margin were retained to ensure that
the net profit is from business operations and not from other incomes—1 stock moved
out, leaving 103 stocks.
5. While profits are good, they must justify the investment in the business. Only
stocks with at least 10% ROCE were kept—8 companies fell through, leaving us with 95
stocks.
6. Also, the RONW should be at least 15% to ensure that only companies generating
enough profits are considered. 17 companies moved out, leaving only 78 stocks.
7. The next filter was a debt to equity ratio of less than 2. None of the companies
had a debtequity ratio of more than 2 so all 78 stocks remained.
8. Next, only stocks that paid dividends in the past five years and distributed at least
10% of their profits as dividend were kept—20 companies fell out, leaving us with 58
stocks.
9. A good company can be a bad buy at a high price. Stocks with a PE of over 20 were kept
out—40 high priced stocks fell out, leaving us with 18 stocks.
10. Another valuation metric is the price to book value (PBV). The PBV can vary greatly, so
we kept a liberal cut off of 5. Three companies got dropped, leaving us with 15 stocks.
11. Lastly, only stocks with a dividend yield of at least 1% were considered. One company
moved out. Leaving us with 14 value picks.

Of these, we have analysed 10 stocks for you in detail. These 10 stocks have been chosen on the
basis of analysts’ recommendations.

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.