NISM RA study kit
Chapter 13 of 15

Qualities of a good research report

Worth 5 marks of 100Book pages 247 to 254About 25 minutes

Every analyst reads the same annual reports. The good ones stand out by how clearly they write, and they stay disciplined with a checklist.

Chapter mapThree parts. Tap to jump.
13.1A good reportGround rules, writing steps, what to avoid, rating terms 13.2Why a checklist?Discipline, fewer errors 13.3A sample checklistQualitative, quantitative, valuation
13.1

What makes a good research report

A research report does three jobs: it presents an investment idea, gives a market perspective, and offers a detailed company analysis.

All analysts have roughly the same information (annual reports, quarterly reports), and good analysts of a sector often say similar things. So they stand out by how they present their views, conclusions and recommendations. Communication is as important as analysis. Writing a report is partly creative: the analyst takes in a lot of financial information and gives out an understandable version of what it means.

Five ground rules for a good report

Clarity of idea

Simplicity of delivery

Presenting the argument clearly

Narrative structure

Customised for the reader type

Three steps: planning, drafting, editing

Writing a report

Plan

Decide how to approach each section and set a deadline for each. Discipline matters most in results season, when delays cascade.

Draft

Work section by section, usually in the firm's own template. Use charts: visual data is easier to grasp than numbers.

Edit

Recheck financial figures, spelling and grammar.

The major sections of a report: company business, peer group analysis, shareholding pattern, key strengths, key concerns, industry overview, company fundamentals, key financial indicators and financials.

Fact-based and view-based sections
Fact based

Mostly copy and calculate

Peer group analysis, shareholding pattern, company fundamentals, key financial indicators, financials.

Sources: annual reports, quarterly reports, calculations.

View based

Needs understanding

Company business, key strengths, key concerns, industry overview.

Sources: communication with management; personal understanding of the business and industry.

What is NOT a research report

The book lists communications that do not count as a "research report" (citing SEBI's FAQs on research analysts):

  1. Comments on general trends in the securities market
  2. Discussions on broad-based indices
  3. Commentaries on economic, political or market conditions
  4. Periodic reports for unit holders of mutual funds or AIFs, or clients of portfolio managers and investment advisers
  5. Internal communications not given to current or prospective clients
  6. Offer documents or prospectuses circulated under SEBI regulations
  7. Statistical summaries of companies' financial data
  8. Technical analyses of demand and supply in a sector or the index
  9. Any other communication SEBI may specify
A commentary on economic conditions, a discussion of a broad-based index, or a statistical summary of a company's financials is not a research report under this list.

Why most reports get ignored

Thousands of reports come out every results season; only a few get attention. The book's reasons for failure:

Unnecessary details

Long sentences

No proper structure

Inconsistent views

Complex language

A good report is like a good map: it leaves out most of the terrain so you can see the road.

Rating conventions

Common recommendations: buy, overweight, hold, underweight, sell. They reflect the analyst's view on a stock's total return over a set period, or its return relative to the market or peers. Each research firm may define them differently, so the definition is usually printed in the report.

Rating terms and what they compare againstThe book's examples; firms set their own definitions
RatingsCompared withBook's example meaning
Buy, hold, sellAbsolute total returnBuy: more than 10% over 12 months. Hold: between −10% and 10%. Sell: less than −10%
Accumulate, reduceExpected triggers in the time frameA view that triggers will play out in the period, so the returns materialise
Outperformer, performer (neutral), underperformerThe sector or marketExpected return relative to sector or market; the analyst may state by how much
Overweight, equal weight, underweightThe marketOverweight: better than the market. Equal weight: in line. Underweight: worse
Before acting on a rating, check what the analyst means by it. "Buy" at one firm may not mean the same as at another.
13.2

Why use a checklist?

With so much information, some of it contradictory, it is easy to drown. Writing down the key decision drivers keeps decisions consistent. The market rewards disciplined investing and often punishes emotional, distracted, disorganised approaches. Pilots have used checklists for decades to avoid accidents; investors can too.

Avoids lazy mistakes and short-cuts

Ensures the analyst does what they intend, in a disciplined way

Supports objective, fact-based decisions

Leaves a decision trail that can be corrected over time

The Checklist ManifestoDr. Atul Gawande separates errors of ignorance (not knowing enough) from errors of ineptitude (not using what we know correctly). He argues that checklists can largely prevent the second kind.
13.3

A sample checklist

The book's questions are indicative only; readers may add, delete or edit them. The financial thresholds are for reference.

The book's sample checklist, in four parts
Qualitative
  • Do I understand the business? Any technology collaboration?
  • Revenue model and segment mix, now and ahead
  • Is the output a necessity or a choice? Any substitutes?
  • Distribution channels; is the business scalable or a good franchise?
  • Demand-supply gap and how long it lasts
  • What will the business look like in a decade?
  • Moat or competitive advantage, and how lasting
  • Risks; pricing power on output and on inputs
  • Competition and entry barriers
  • Management quality: able, honest, with integrity
  • Promoter stake, insider buying or selling, pledges
  • Buybacks in the last three years; corporate governance report
  • Shareholding pattern and its changes over 5 years; top 10 holders
  • Any catalyst? Can a fool run this business?
  • Strengths, weaknesses, opportunities, threats, and how the company handles each
Quantitative
  • Equity history
  • Consistent revenue growth, with visibility ahead
  • Stable, growing profitability: NPM above 10% and EPS growing every year for 5 years
  • Low leverage: D/E below 1 and interest coverage above 3, every year for 5 years
  • Returns: ROE above 15% and ROCE above 15%, every year for 5 years
  • At least a 5-year dividend record, stable and growing
  • Positive operating and free cash flows every year for 5 years
  • Auditors' qualifications; notes to accounts (intangibles, derivative MTM, guarantees); accounting policy changes
  • Capex plans and how they will be financed
  • Financial discipline: quality of assets, earnings and cash flows
Valuation
  • Intrinsic value, and how confident am I?
  • Cheap relative to itself, peers and market on P/E, P/BV, price/sales over the last 5 years?
  • What margin of safety? At what discount to intrinsic value?
  • Why is the market mispricing it, and will that correct?
Final decision

The book closes with final decision parameters and points to sample research reports on the BSE and NSE websites.

Know where each item sits. Leverage (D/E, interest coverage) is a quantitative parameter. Management quality and moat are qualitative. Intrinsic value, P/E and P/BV are valuation parameters; demand and supply of securities is not.

All exam traps in this chapter

  1. A report presents an investment idea, a market perspective and a detailed company analysis.
  2. Analysts stand out by how they communicate, not by having different information.
  3. Five ground rules: clarity of idea, simplicity, clear argument, narrative structure, customised for the reader.
  4. Three steps: planning, drafting, editing.
  5. Fact-based sections: peer group, shareholding, fundamentals, financial indicators, financials. Sources: annual and quarterly reports, calculations.
  6. View-based sections: business, strengths, concerns, industry overview. Sources: management and personal understanding.
  7. Not research reports: market trend comments, index discussions, economic commentaries, internal communications, prospectuses, statistical summaries, technical analysis of sector or index demand and supply.
  8. Reports fail through unnecessary detail, long sentences, poor structure, inconsistent views, complex language.
  9. Book example: buy above 10%, hold between −10% and 10%, sell below −10% over 12 months.
  10. Overweight, equal weight, underweight compare with the market. Outperformer and underperformer compare with sector or market.
  11. Checklists help avoid errors of ineptitude (Atul Gawande, The Checklist Manifesto).
  12. Sample quantitative tests: NPM above 10%, D/E below 1, interest coverage above 3, ROE and ROCE above 15%, over 5 years.

For the group discussion

  1. Pick a broker's research report. Does it follow the five ground rules? Where does it fail?
  2. Run a company you know through the book's quantitative checklist. How many tests does it pass?
  3. Is "can a fool run this business?" a fair test? Name a business that passes and one that fails.
  4. Why would SEBI not treat a market commentary as a research report?
  5. Two firms rate the same stock "buy" and "accumulate". Can both be right?