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"How to do in-depth equity research?"
I get this question so often. Here's everything I have learnt in the past 1 year.
Please do bookmark & RT
Thread
CC: @finbloggers
I get this question so often. Here's everything I have learnt in the past 1 year.
Please do bookmark & RT
Thread
CC: @finbloggers
1/
Conduct in-depth research only if you plan to invest in a company. Use a filter to identify companies that are worth the time & effort.
Even a simple filter of ROCE + growth + D/E is enough. Check these parameters for last 10 years to decide if you want to go further.
Conduct in-depth research only if you plan to invest in a company. Use a filter to identify companies that are worth the time & effort.
Even a simple filter of ROCE + growth + D/E is enough. Check these parameters for last 10 years to decide if you want to go further.
2/
If you're doing this for the first time, try to avoid financial companies - banks, NBFC, insurance, AMC.
These companies have fundamentally different business models w.r.t. cash.
Also, avoid highly niche & technical businesses. Start with a simple one.
If you're doing this for the first time, try to avoid financial companies - banks, NBFC, insurance, AMC.
These companies have fundamentally different business models w.r.t. cash.
Also, avoid highly niche & technical businesses. Start with a simple one.
3/
First, I go through the company's website to get a basic idea about its business & products.
Annual report is too complex for this purpose since it's largely for investors.
Website is for everyone so stuff explained there is easier to understand.
First, I go through the company's website to get a basic idea about its business & products.
Annual report is too complex for this purpose since it's largely for investors.
Website is for everyone so stuff explained there is easier to understand.
4/
Next, I create an excel workbook with 5 years of financial statements. I don't download this from screener or other websites.
I hard-code from annual reports. This takes more time but gives me the flexibility and control (which saves time later on).
Next, I create an excel workbook with 5 years of financial statements. I don't download this from screener or other websites.
I hard-code from annual reports. This takes more time but gives me the flexibility and control (which saves time later on).
5/
Screener & the likes don't provide detailed data and they group as per their own classifications.
I want to see the company data as is and then, I can classify and analyze how I want.
Don't forget to make tables for important notes to accounts.
Screener & the likes don't provide detailed data and they group as per their own classifications.
I want to see the company data as is and then, I can classify and analyze how I want.
Don't forget to make tables for important notes to accounts.
6/
Basic analysis includes ratios, comparative and commonsize statements.
Post this, I write down few basic observations that explain the trend of important line items.
Then, I seek to find out the reasons behind the trends that I have observed.
Basic analysis includes ratios, comparative and commonsize statements.
Post this, I write down few basic observations that explain the trend of important line items.
Then, I seek to find out the reasons behind the trends that I have observed.
7/
From financial statements, I move to notes to accounts. These provide important details about the FS items.
This is extremely important.
Understanding notes gives me better direction on what drivers I need to study.
From financial statements, I move to notes to accounts. These provide important details about the FS items.
This is extremely important.
Understanding notes gives me better direction on what drivers I need to study.
8/
Next step is to do some specific analyses - forensic checks, free cash flow, cash and debt, capital structure, operating segments, source & use of capital.
This gives insight into the real financial performance and position of the company.
Next step is to do some specific analyses - forensic checks, free cash flow, cash and debt, capital structure, operating segments, source & use of capital.
This gives insight into the real financial performance and position of the company.
9/
Now, I move to the business aspect. I start reading the most recent annual report.
Most important sections (apart from FS) -
- Management D&A
- Director's report
- Risk management
I go to older annual reports only if there is something specific I need to study.
Now, I move to the business aspect. I start reading the most recent annual report.
Most important sections (apart from FS) -
- Management D&A
- Director's report
- Risk management
I go to older annual reports only if there is something specific I need to study.
10/
First part is to understand the industry -
- Players & market share
- Entry barriers
- Switching costs
- Regulatory environment
- Key risks
- Critical success factors
This sets the context to evaluate the company.
First part is to understand the industry -
- Players & market share
- Entry barriers
- Switching costs
- Regulatory environment
- Key risks
- Critical success factors
This sets the context to evaluate the company.
11/
Then, I try to make notes to simplify the business model -
- Products & Services
- Distribution
- Customer Profile
- Key Inputs/Resources
I also try to find quantitative data that has been created based on business drivers or define my own metrics.
Then, I try to make notes to simplify the business model -
- Products & Services
- Distribution
- Customer Profile
- Key Inputs/Resources
I also try to find quantitative data that has been created based on business drivers or define my own metrics.
12/
In the risk management section, you'll find information about risks, their impact and intended mitigations.
Your job is to analyze the effectiveness of the mitigations by looking at the performance of the company.
In the risk management section, you'll find information about risks, their impact and intended mitigations.
Your job is to analyze the effectiveness of the mitigations by looking at the performance of the company.
13/
At this point, I have fair understanding of business and the finances. However, I still need deeper insights so I frame more questions usually asking 'why' and 'how'.
For this, I turn to conference calls, investor presentations & primary research.
At this point, I have fair understanding of business and the finances. However, I still need deeper insights so I frame more questions usually asking 'why' and 'how'.
For this, I turn to conference calls, investor presentations & primary research.
14/
I start with the transcript of the most recent conference call. Then, I go back to the call 5 years ago to understand what the management intended to do.
I read subsequent con-calls to the most recent one to assess how well the management has delivered on its plans.
I start with the transcript of the most recent conference call. Then, I go back to the call 5 years ago to understand what the management intended to do.
I read subsequent con-calls to the most recent one to assess how well the management has delivered on its plans.
15/
Investor presentations can be tricky because they'd obviously show only the good stuff.
However, they can also be a good starting point to understand the key metrics and drivers of the business I need to study.
Investor presentations can be tricky because they'd obviously show only the good stuff.
However, they can also be a good starting point to understand the key metrics and drivers of the business I need to study.
16/
My primary research has mostly involved speaking to someone who's been working in the industry to understand the ground reality.
Our primary research strengthens only with time as we build a network.
My primary research has mostly involved speaking to someone who's been working in the industry to understand the ground reality.
Our primary research strengthens only with time as we build a network.
16/
After all this work, I can have some understanding about the strategy of the company, evaluate its business model and the performance.
Then, I move to trying to understand its future plans.
After all this work, I can have some understanding about the strategy of the company, evaluate its business model and the performance.
Then, I move to trying to understand its future plans.
17/
Expansion plans (under execution or to be started) is the obvious thing to understand. There's a lot of helpful guidance on this in recent conference calls.
3 things to understand here: source of capital, allocation of capital (existing vs new biz) & impact on margins.
Expansion plans (under execution or to be started) is the obvious thing to understand. There's a lot of helpful guidance on this in recent conference calls.
3 things to understand here: source of capital, allocation of capital (existing vs new biz) & impact on margins.
18/
Future is highly uncertain and it's very difficult to surely know how the company would do (unless you have industry insight & experience).
This is why the track record of the company becomes extremely important.
Future is highly uncertain and it's very difficult to surely know how the company would do (unless you have industry insight & experience).
This is why the track record of the company becomes extremely important.
19/
Before I move to valuations, I try to distil and simplify everything I have learnt into a single page which includes business model, financial performance and what I think are the differentiating factors of the company.
Before I move to valuations, I try to distil and simplify everything I have learnt into a single page which includes business model, financial performance and what I think are the differentiating factors of the company.
20/
With valuations, I follow what I have learnt from Prof Aswath Damodaran (watch his YT channel to learn).
I don't forecast the financial statements (I find that to be a futile exercise). I base my assumptions on my understanding of the business and management guidance.
With valuations, I follow what I have learnt from Prof Aswath Damodaran (watch his YT channel to learn).
I don't forecast the financial statements (I find that to be a futile exercise). I base my assumptions on my understanding of the business and management guidance.
21/
After all this, I prepare an investment thesis where I explain how I think the future performance of the business will pan out and the drivers.
I also fill out a template (will share soon) that includes questions on allocation, holding period, etc. before investing.
After all this, I prepare an investment thesis where I explain how I think the future performance of the business will pan out and the drivers.
I also fill out a template (will share soon) that includes questions on allocation, holding period, etc. before investing.
22/
I conclude with 2 exercises - risk return analysis (where I analyze historical stock prices on a rolling basis) and trend analysis (my father helps me here to identify a good entry point).
I conclude with 2 exercises - risk return analysis (where I analyze historical stock prices on a rolling basis) and trend analysis (my father helps me here to identify a good entry point).
23/
After making the investment, I review with the results of each quarter. I subscribe to the company newsletter and turn on Google alerts to keep receiving information.
After making the investment, I review with the results of each quarter. I subscribe to the company newsletter and turn on Google alerts to keep receiving information.
That's all for now. Thanks for reading. If you found this helpful, please do share.
Obviously, this is neither exhaustive nor absolute. I keep learning to improve my process. Hope this helps you.
Keep learning.
Obviously, this is neither exhaustive nor absolute. I keep learning to improve my process. Hope this helps you.
Keep learning.
