The capital market provides interesting opportunities for the finance professional. Apart from the opportunities in the area of Sales- trading & Dealing, Equity Research is one of the most sought after career for finance professional. Let us look at various career options that one can explore as Equity Research Analyst.
What is equity research analysis?
Equity Research primarily means analyzing financial results (quarterly half yearly/ annual) of the Company. The analysis includes working out various ratio analyses, putting financial numbers into perspective and interpret the financial results announced by the Company. Once done with basic analysis, the most crucial part is to forecast the financials & financial modelling so as to arrive at Buy/Sell/ Hold recommendation. All such recommendations are issued in well documented research reports which the research house publishes and distributes to its clients. The clients can be institutional or retail.
Equity Research Analyst- The Opportunities
Essentially the market is consists of two sides; Buy side and Sell side. A buy side is represented by money managers- fund managers. They are the one who manages the funds/ money and sell side is represented by the one who generate the idea to make the money- research analysts, sales team and investment bankers.
Buy side analysts
Typically, Buy side analysts are required for various Mutual fund houses, Private equity firms, Venture capital firms, Investment Companies, Family offices, hedge funds etc. The buy side analyst teams usually are a small team, consisting up to 3-4 analysts at the most. However this purely depends on the overall size of the investment house. A mutual fund house may require higher number of research analysts compared to say a family office, where one research analyst might be needed to support the investment managers.
Sell side analysts
Sell side analysts are part of various equity broking firms, research houses, investment banks and any other investment advisory firms. An equity broking firm generally have sector specific research analyst. Bigger the size of the firms, higher numbers of research analysts are required. Also to support the equity research analysts, there are Associate positions. So again typically, an Associate supports/ helps around 2-3 Equity Research analysts. The main difference between buy side and sell side is that-; the sell side analyst is the one who generate the ideas while the buy side analyst aggregates these ideas from sell side and presents them to fund managers.
Equity Research Analysts- Profile
So let’s understand the profile of equity research analyst at a typical broking firm/ research house. Essentially as a research analyst, he or she will focus on doing top down or bottoms up research based on sector allocation and generate research ideas on the companies of that particular sector and do proper equity analysis.
Overall the profile of the research analyst includes following responsibilities;
- Understanding the business model of the Company
- Understand the industry/ sector profile
- Monitor the trend of the particular industry as well as the Company under coverage
- Meeting and interaction with the Company management
- Preparation of financial projections with help of financial model
- Actively tracking quarterly earnings announcements (quarterly/ yearly)
- Preparation of equity research report with Buy/ Sell/ Hold recommendation with price targets. The report needs to proper mix of quantitative as well as qualitative analysis of the Company under coverage.
- Interaction with the investment houses/ fund houses to pitch the research ideas
- Keeping constant touch with the equity sales team and keep generating required details/ data/ information as per the need and requirement of the sales team
In the overall responsibilities, the most challenging part is that of making financial projection. The individual needs to have very strong analytical ability to interpret the financial numbers and financial statement. A strong financial modelling skill will help an analyst to make realistic projection. Financial modelling plays a very critical role as based on these financial modelling and projections, the analyst works on valuation of the Company.
A financial modelling is a mathematical model to construct the financial representation of the Company. With available historical financial data of the Company, the analyst is expected to create a financial model that provides practical insights into financial performance of the Company in the future, may be about next 2- 3 years.
Financial modelling is needed to calculate, project or realistically estimate financial numbers for coming quarters/ years. Such model can be simple or can be very complex excel sheets, depending the skill as well as information level that an analyst have. A strong financial modelling is very critical for an analyst as based on this, research analyst will arrive at the valuations which will form part of his/ her Buy or Sell or Hold recommendation on the stock.
The financial modelling may have various valuation tools like
- Discounted Cash flow (DCF)
- Internal rate of return (IRR)
- Some of the Part valuation (SOTP)
- Price earning multiple
- Price to Book value multiple; EV/ EBITDA multiple
Eventually the goal of any research analyst is to recommend idea that makes money for the client. There is lot of competition amongst the analyst to beat each other to come out with new and interesting ideas. So an analyst has to stay ahead of everyone that makes money for the client. The ultimate satisfaction for an analyst is when the investment managers/ fund managers appreciates/ acknowledges his/ her recommendation.
Apart from broking and fund industry, there is active requirement for the research analyst in various Investment banks and wealth management firms.
Investment Banks (IB):
Investment banks are specialised segment of financial services that helps/ organises raising of funds for corporate. Apart from raising of funds, Investment banking teams actively explores various Merger and Acquisition (M&A) deals across various segments of the industry. To certain extent the need of an analyst here is niche. A strong knowledge or work experience in any particular industry or sector is big advantage for any candidate who wishes to make career in investment banking.
An IB usually works on following deals for their corporate clients;
- Fund raising- IPO, FPO, private Placement
- Exploring M&A options
- Demerger of business unit(s)
However the above areas of business activities are not exhaustive. The clientele of IB can be private corporate, government or any such organisation or association.
As far as over all profile or responsibilities, it remains more or less same as that of in any other broking or research house. However, an equity analyst working with any IB does not necessarily make equity research report with his or her recommendation on any particular stock. Their primary responsibility is to work on a particular transaction or deals as mentioned above.
An IB equity analyst need to prepare and present a comprehensive industry/ sectoral research, prepare a due diligence report with all the quantitative (financial details/ projection etc.) and qualitative details which will help the IB team to pitch for the business for their corporate clients. Here the analyst works with the sales team directly so meeting the timelines/ deadlines are critical for an analyst. Many time it is observed that while working on a typical IB deal, the analysts works round the clock to meet the deadline.
Another area of opportunity for the Analyst is with the Wealth management firms. Today we frequently here the term wealth management from various quarters like, financial advisors, consulting and advisory firms, global banks, domestic private banks etc. Wealth management firms primarily offers services to the High Networth individuals (HNIs), Family offices, Private clients groups etc. A typical wealth management Company offers wide range of investment products to its clients. So this type of firms offer good opportunity to an analyst where he or she is expected to plays much wider role. Many times, the research analyst also joins the sales team for the client meetings and pitch for the business. Overall profile and responsibilities are similar to that of an equity analyst. To work with wealth management firm, individual need to have strong knowledge on most of the asset classes including equities. Here research analyst’s job is to recommend an asset class – a bouquet of investment options to the target clients. Here the idea is to provide holistic view on well diversified investment portfolio. The investment portfolio includes;
- Mutual Funds
- Real Estate
- Commodities/ Precious commodities
- Structured products
- Insurance products
Again in terms of responsibilities, the analyst is expected to make his/ her recommendation on the asset class that will eventually make money for the clients of wealth management firm. As an analyst, it is very critical for him/ her to understand and recommend decent mix of portfolio of investments amongst various asset classes that meets the need or the objective of the potential clients.
To conclude, let’s summarize the most important skill set for being a successful equity analyst;
- Understanding and Interpretation of Financial Statements
- Up-to-date knowledge on the economic and financial environment
- Anticipation on future movement of the financial market and economic environment
- Financial Modelling and Projections
- Strong understanding of the Valuation methodology
- Very good Writing and strong communication skill
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