Research Analyst Syllabus Outline PDF

Syllabus Outline with Weightages Chapter No. Chapter Name Weightage Chapter 1 Introduction to Research Analyst Profession 3 Chapter 2 Introduction to Securities Market 4 Chapter 3 Terminology in...

Syllabus Outline with Weightages Chapter No. Chapter Name Weightage Chapter 1 Introduction to Research Analyst Profession 3 Chapter 2 Introduction to Securities Market 4 Chapter 3 Terminology in Equity and Debt Markets 4 Chapter 4 Fundamentals of Research 5 Chapter 5 Economic Analysis 10 Chapter 6 Industry Analysis 10 Chapter 7 Company Analysis – Business and Governance 8 Chapter 8 Company Analysis – Financial Analysis 16 Chapter 9 Corporate Actions 5 Chapter 10 Valuation Principles 16 Chapter 11 Fundamentals of Risk and Return 5 Chapter 12 Qualities of a Good Research Report 4 Chapter 13 Legal and Regulatory Environment 10 CHAPTER 1: INTRODUCTION TO RESEARCH ANALYST PROFESSION LEARNING OBJECTIVES: After studying this chapter, you should know about: Role of a research analyst Primary responsibilities of a research analyst Basic principles of interaction with companies and/or clients Important qualities that are desired in a Research Analyst 1.1 Primary Role of a Research Analyst Imagine you've decided to buy a new phone. What would be your process of selection? For the price range decided, you would short list a set of brands, compare various technical specifications and depending upon what factors are important to you - whether it’s the battery-life or the megapixels of camera, you take the decision. This process is very similar to the kind of work Research Analysts (RAs) do, to help their clients take investment decisions. There is Research - collection of information from various sources and then Analysis - processing of data to take decisions. Data and information are imperative to the function of the research analyst. RAs need information pertinent to the investment being evaluated. This would include information about the macro and micro economic factors, industry-specific information and company-specific information. Economic information may be collected from government statistics and data provided by the central bank i.e. the Reserve Bank of India. Data on global factors may be collected from International agencies such as the International Monetary Fund (IMF), Asian Development Bank (ADB), World Bank and other Global Development Financial Institutions. Industry-specific journals and publications may be used to collect information on industries/sectors. Company-specific information may be collected from various sources including the financial statements/Annual reports filed by the companies as part of regulatory compliance requirements, meeting officials of the company authorized to provide it and other sources such as plant/factory visits, market surveys and employee/stakeholder interviews. Analysis and decision making process is a combination of understanding qualitative factors that affect operational performance, such as efficiency of operations, competitiveness, business plans and work ethics of the management among others and quantitative factors such as revenues, costs, profitability and risks to these financials. Therefore, RAs spend lot of time interacting with companies and others, accumulating data, analysing it and arriving at a decision on whether to buy, hold or sell a particular security/stock. Research Analysts are defined by the nature of analysis they do, the coverage, and use of the recommendations they provide. Let us understand some of them: Sell-side Analysts - They typically publish research reports in public domain on the securities of companies or industries with specific recommendation to buy, hold, or sell the subject security. These recommendations include the analyst’s expectations of the future earnings of the company and future price performance of the security (“price target”). These analysts work for firms that provide investment banking, broking, advisory services for clients. Buy-side Analysts - They generally work for Asset managers like mutual funds, hedge funds, pension funds, Alternative investment funds, Foreign Portfolio investors or portfolio managers that purchase and sell securities for their own investment accounts or on behalf of their investors/clients. These analysts generate investment recommendations for their internal consumption viz. use by the fund managers within organization. Research reports of these analysts are generally circulated among the top management/investment managers of the employer firms as these reports contain recommendations about which securities to buy, hold or sell. These reports are usually only for internal consumption and are not available in public domain. Independent Research Analysts - They work for research originators or boutique firms separate from full-service investment firms and sell their research to others on a subscription basis. Their clients could be investors, institutions, investment bankers, regulators, stock exchanges, fund managers etc. They also provide customized research reports on the businesses or industries or sectors on specific requests. The purpose of these reports could vary from investment activity to understanding competition landscape to mergers and acquisition etc. Apart from these three main categories, entities such as newspapers, media and consolidators of information also provide research reports. In a nutshell, role of a research analyst is that of a selector - to do a comprehensive study of companies, evaluate their past performance, analyse how a company is expected to perform in the future and make recommendations based on this analysis. 1.2 Primary Responsibilities of a Research Analyst As stated before, Research Analysts’ primary role is to understand and evaluate the growth of industries and companies. Let us briefly look into the aspects which the Research Analysts explore while evaluating industries, companies and/or economies. Understanding economy: British economist John Maynard Keynes (1883–1946) believed that governments could change economic performance of its industries by adjusting tax rates and government spending. Therefore, as growth depends, to a great extent, on the economic environment, it becomes important for analysts to understand the economy. For this, the following are their focus areas: Changes in various macro-economic factors like - National income, Inflation, Interest rate and Unemployment rate Fiscal and Monetary Policies and their impact on the economy Flows from Foreign Direct Investment (FDI) and Foreign Portfolio Investors (FPIs) Savings and investment patterns Global factors that impact the GDP growth based on export and import transactions We shall know more about economic analysis in Chapter5. Understanding industry: Different industries face different challenges and opportunities. Their growth drivers could be significantly different. Accordingly, Research Analysts need to understand thoroughly the regulatory environment prevalent in the industry, business models, competition, operating factors, sensitivity of demand to price changes, consumers’ behaviour etc. We shall explore the methods for Industry analysis using various tools and techniques in Chapter 6. Understanding Companies: Rahul Dravid and Virender Sehwag were both great batsmen, but were two very different players. Their statistics (in terms of strike rate and so on) and their style (defensive and aggressive) are very different from each other. If one asks - who would perform better? Then a deeper analysis of the pitch, game type and the opposition team’s bowling strengths may help us answer the question, although only with probability and not with certainty. Just as in the case of players' statistics and style, companies in the same industry may vary significantly in their approach towards business. Based on their styles, product configuration, business model, customers segment, their financials could also vary dramatically. Accordingly, companies are also studied by analysts in two dimensions - Qualitatively and Quantitatively. Qualitative understanding is more about understanding why a particular business is better when compared to its peers, what are the strengths and weakness of the business model, how qualified and capable the management is and so on. Quantitative understanding would be more mathematical in nature. In this, analysts try to understand the balance sheets and profit and loss statements of last few years, cash flows, assets and liabilities and so on. We shall look at both the approaches (Qualitative and Quantitative) of company analysis in great detail in Chapters 7 and 8 respectively. 1.3 Basic Principles of Interaction with Companies/Clients Though the power of internet gives an analyst the ability to acquire a lot of information, it cannot substitute direct interaction with companies and clients. Personal communication with management helps them to get a better insight in to the vision of the company and its strategy to achieve the desired goals. However, it may also happen that management mislead the analysts by deliberately exaggerating positives about business (painting rosy pictures) to encourage them to write positive stories to influence the market prices positively. Therefore, it is always advisable for analysts to cross verify the claims of the management prior to their recommendations. This communication with management, like any other, requires analysts to have clarity of thoughts and good listening ability but there are a few additional principles that analysts must keep in mind while talking to the management of a company. The following are a few: Pre-meeting Research - While the management is generally open to interview with Research Analysts, they must bear in mind that these opportunities do not come very frequently and therefore must be made full use of whenever they come. Before going to meet a company's management, they must thoroughly learn about the company’s products, industry and competitors. Analysts must be familiar with the financial information of the company, also read previous year’s annual reports to understand the direction of the company and whether the company has been able to achieve the goals it had intended to. Independence and Neutrality of view - During the research, analysts must have an unbiased opinion and should always hold their independence. Their analysis should be based on factual information and not led by personal inclinations. Also, they must make it clear with the management to not reveal any information which is not available in the public domain. Network - Analysts may use their network to acquire more contacts relevant to the research, who would be able to provide meaningful insights into the company’s performance and plans. The person who is responsible for the important activities and understands the heartbeat of the company would be the most relevant contact and this person may not necessarily be from top management. Competitors and other stakeholders of the business such as suppliers, distributors, retailers and customers can also provide meaningful inputs to analysts in the research process. Clarity of questions - As analysts start analysing a company, there would be certain aspects on which they might need more clarity. Time with management would be effectively used if analysts have clear and specific set of questions in mind. It is advisable to go with a questionnaire to have a better understanding of the company's operations and future progress. Once analysts are done with research and research report is prepared, they need to communicate their findings to the clients. There are certain guidelines that an analyst could follow in their communication with clients. They must be realistic in suggesting companies to their clients. Suggestions should be based on facts and figures and not contain an optimistic/pessimistic/biased view on the subject company. Communication, done through written research reports, should be simple, clear and concise. If there is any conflict of interest (e.g. RA holds shares of the subject company), such information should be disclosed beforehand. Assumptions, if any, must be clearly stated in the research reports. Abbreviations/Jargons should either be avoided or explained clearly in simple words. The role of RAs is to collect data/information from different reliable sources, interpret the data/information and convert it into recommendations that their clients can use. While doing so, it is expected that RAs would perform their role with utmost sincerity, honesty and ethics without any bias, following all the rules and regulations as specified by SEBI both in words and spirit. For this, it is also recommended to make use of technology like recording devices while interviewing management and communicating with clients, only after taking their due consent for recording. 1.4 Important Qualities of a Research Analyst The job of research analysts requires quantitative and qualitative skills. An analyst needs to have a high degree of comfort in dealing with numbers to be able to analyse various financial factors, identify trends and see the inter-relationship between different factors. At the same time, he needs to be methodical, have an enquiring mind and be discerning to know where to find relevant information. Ability to understand business models and competitive dynamics in a business is another important quality an analyst must possess. Using these skills, a research analyst comes to the conclusion whether he would be in favour of or against investing in a particular industry or company. Qualities that are desired in a good research analyst are: Good with numbers Good Excel (spread sheet) and other data analytical tools  Clarity in financial concepts Ability to read and comprehend financial statements and reports Ability to ask pertinent questions Attention to details Communication Skills – Written and Verbal Sample research reports: https://www.bseindia.com/investors/Research.aspx https://www.nseindia.com/education/content/reports/eq_research_reports.htm Sample Questions 1. What is the role of Research Analyst? a. RAs are only involved in the analysis of data b. RAs are only involved in collection of the data c. RAs help their clients take informed decisions d. RAs help in financial planning of their client 2. Analysis and Decision making, the two imperative parameters involved in are affected by which of the following factors? a. Management Ethics b. Revenues and Costs c. Efficiency of operations d. All of the above 3. Sell side Analyst generally work for money managers like mutual funds, hedge funds, portfolio managers who purchase and sell securities for their own investment accounts or on behalf of their clients. State whether True or False. a. True b. False 4. Which of these Qualities are desired in a good research analyst? a. Knack for numbers and interpretation b. Clarity in financial concepts c. Ability to read and understand financial statement d. All of the above