Analysts don’t cover 90% of listed firms: Experts

Research analysts do not cover over 5,300 out of the 6,000 plus companies listed in India. At 90% of the listed universe, the proportion of uncovered companies is more than twice the estimated global average.

Lack of coverage affects these companies’ ability to raise funds and impacts price discovery, according to experts.
It also leaves investors fending for themselves or at the mercy of the legion of scalpers.

Brokerages come out with research reports which provide information about a company to potential investors. These reports are usually provided free to clients and brokerages generate revenue from the commission charged to investors when they buy or sell stock through them.

However, manpower issues in brokerages and lack of liquidity in a majority of stocks have resulted in nine out of ten listed companies receiving no coverage at all.

Around 99% of these un-researched companies are small and mid-caps with a market capitalisation of less than Rs5,000 crore, according to Crisil, a rating agency which provides independent equity research reports paid for by stock exchanges or companies themselves.

“With most of the  research being focused on large cap companies, investors in small and mid-cap stocks face a dearth of adequate  information to make a learned investment decision and have limited knowledge of a company’s financial  strength, management capability and corporate governance standards,” said a Crisil note authored by Rahul Nagpure and Tarun Bhatia, released on Monday.

Globally 35-40% of all publicly traded companies have no sell-side analyst coverage, according to an article on the website of the World Federation of Exchanges (WFE).

Sell-side refers to research generated by analysts working at brokerages “who sell a stock idea” whereby the action recommended could be to either buy or sell a share.
Buy-side research, on the other hand, are conducted by institutions such as mutual funds based on which they buy or sell shares for their own funds or proprietary trades - these are not for public consumption.

The global note which was written in 2009 by Justin Canivet of Forefactor, an independent market research organisation, stated that over 16,000 companies from WFE Member exchanges are unresearched.

Both the Bombay Stock Exchange and the National Stock Exchange are members of WFE and collectively have in excess of 5,300 unresearched companies.

Brokerages do not cover more companies because it becomes unviable to employ so many research analysts.

While institutions do not look beyond top 200-250 companies for investing, the difficulty faced by brokerage houses for initiating retail research is related to manpower issues as one analyst can almost cover 20 odd companies properly feels Lalit Thakkar, managing director (institution) at Angel Broking.

“One has to look from the perspective of market cap covered. The fact that the top 500 companies (by market cap) make up for almost 95% of total market cap, the rest 4000 odd listed companies are not big enough with most of them being penny stocks,” he said.

Lack of depth and liquidity make it unviable to cover a large number of companies, says Murali Krishnan, head - institutional broking, Karvy Stock Broking.   

 “The promoter ownership is very high in Indian companies. This reduces the amount of floating stock and makes it difficult to pick up shares in a company.”

More heavily traded, large-cap companies attract greater sell-side analyst attention, according to  Forefactor. This is because many institutional investors are restricted from buying into companies below a certain market capitalisation and also because, ‘large-caps are more likely to generate higher investment banking fees and their greater liquidity translates into higher revenue from trading commissions.’

Analyst coverage can help price discovery feels D R Dogra, managing director at Care, another rating agency which provides independent equity research.

“There are some stocks with low valuations but very strong fundamentals. Analyst coverage can help these shares get fair valuation which aids them when they hit the capital markets for raising funds. They can raise more money,” Dogra said.