Consider these views of leading investment banks on the HDFC Bank stock:
Goldman Sachs: 'Sell' with a price target of Rs 540 (8 March 2012). Price on 9 March: Rs 522.
BNP Paribas: 'Hold' with a target of 544 (21 January 2012). Price: Rs 488.
Barclays: 'Overweight' with a price target of Rs 539 (14 December 2011). Price Rs 433.
Bank of America-Merrill Lynch: 'Buy' with a target of Rs 600 (8 March 2012). Price on 9 March: Rs 522
If you happened to read all of them while deciding on investing in HDFC Bank shares, which one would you have gone for? In all probability, you would have been left confused and put the investment on hold. The stock was trading at Rs 523 on the Bombay Stock Exchange, or BSE, on April 9.
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Can research reports by brokerages be the basis of investment decisions?
With almost all brokerages worth their name coming out with research reports on stocks, one should be alert to which ones to be relied upon.
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It is often argued that brokers issue buy/sell/hold calls to generate business for themselves. Experts say the onus is on you to make the best use of information in these reports.
Nobody can be right all the time and nobody can be wrong all the time. It is for each investor to work or trade in the market.
S P Tulsian
"Nobody can be right 100 per cent and nobody can be wrong 100 per cent. It is for each investor to work or trade in the market. They should know whose report is accurate most of the times," says SP Tulsian, an independent advisor.
While it is safe to assume that since a stock has been downgraded/upgraded by several brokerages one should buy/sell accordingly, your decision should be based on your investment horizon. If you intend to hold a stock for a long period, you should not bother much about these ratings.
"One should check if the methodology adopted is absolute or relative. The investor should focus more on absolute returns expected from the investment over his time horizon," says Toral Munshi, head of India equity research at Credit Suisse Wealth Management.
So, depending on your investment horizon, you can check if you want to sell, hold or buy. "Read the reports carefully. They give reasons for the rating. Act on them only when you are convinced," says Tulsian.HITTING BULL'S EYE
Usually, brokerages give buy, hold and sell or outperform, equal-weight and underperform ratings, and a target price for 6-18 months. While the view is for a specified period, it can be altered in the event of a big change affecting the company.
Reports of many brokerages are much sought-after and can make or mar a stock. A downgrade from 'buy' to 'hold' or 'sell', especially by a big brokerage, can pull down a stock, while an upgrade can trigger a surge in demand.
Investors should try to focus more on the absolute returns expected from the investment over their time horizon.
Head of India Equity Research, Credit Suisse Wealth Management
For instance, on March 21, shares of TTK Prestige, a kitchenware maker, surged over 16 per cent to Rs 3,231 on the BSE following a CLSA report recommending 'buy'. The report was based on TTK's growth prospects and rising consumer spends. On March 28, Titan Industries fell 6 per cent following a Morgan Stanley decision to downgrade the stock from 'overweight' to 'underweight' and cut the price target from Rs 231 to Rs 198.
CLSA, on February 26, upgraded Sesa Goa from 'sell' to 'underperform' and raised the target price from Rs 185 to Rs 230. The stock, however, fell 9 per cent the next day. Similarly, Morgan Stanley's March 19 report, which downgraded NTPC from 'overweight' to 'equal-weight' and reduced the price target from Rs 196 to Rs 161, did not impact the stock, which fell 0.6 per cent.WAYS AND MEANS
Every brokerage has its own criterion for making calls which people should be aware about.
"It is important to understand the rating methodology that has been used," says Munshi of Credit Suisse Wealth Management.
The ratings can be relative to absolute returns, sectoral returns or the performance of the country index. For example, a brokerage which gives sector-relative ratings may give an overweight rating if it expects the stock to outperform the sector by a given percentage point.
Generally, a buy or outperform call indicates an upside of 10-15 per cent and above. A sell or under-perform rating means the stock may fall 10-15 per cent. A hold or equal-weight rating suggests that buying should be timed.DATA MINE
Small investors follow these reports closely. One reason for this is that they do not have enough information about companies. Most also lack the ability to predict the impact of various events on stock prices, for example, changes in taxation or government policies. This is where these reports come in handy.
Reports from well-established brokerages give a brief analysis of the company's business, the challenges it faces and gives an estimate of how its earnings will grow. To make a similar assessment, a small investor will have to do a lot of work.TAKING THE CALL
While everyone wishes to invest in a stock with a buy or outperform rating-indicative of over 10 per cent returns-the expected gains may not come due to the uncertain nature of the equity markets.
"It is a person's call. A lot depends on the investment horizon. If a person takes a long-term view, he will not shuffle his portfolio on the basis of these recommendations," says Munshi.
However, these reports are useful in other ways. As Tulsian explains: "Most people find it difficult to understand the implications of an event like the union budget or changes in government policies."
These reports help the reader understand the implications of various events on a company's earnings. For example, the government's recent directive to Coal India to sign fuel supply agreements will benefit power companies, but not all.
If the investor does not know much about the power sector, brokerage reports can provide basic knowledge that can help him decide which stocks will gain.