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Top 5 Equity Research Skills


April 1, 2015 by Dheeraj 33 Comments

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It has been seven years since I leftmy research analyst job at CLSA India. I
co-founded eduCBA to train studentson Investment Banking & Equity
Research. Since then we have trained more than 10,000 students on different
research topics. However, each time we see the same set of questions and
one common question isWhat are theTop Equity Research skills that one
should acquire to be successful in Research
I think the best way toget ananswerto this question is to see the actual
output of Equity Research (Equity Research Report).Below is a sample
Research Report prepared byus when I was atCLSA , we downgraded
Reliance Petroleum.We sawexcellent response to this report in the market.
Reliance Petroleum Stock tumbled by 18% in just 1 day.
Click here to know more Reliance Petroleum Downgrade

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source: CLSA Research Report


If you wish to learn Equity Research professionally, I have an awesome offer
for you. I have created an epic bundle of 99 courses on Investment Banking
and Equity Research
Now assuming that you have seen the research report, let me ask you a
couple of questions
What are your key observations in general about the report?
What do you think are the key skillsets required to prepare a research
report like the one above?
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Do you currently possess theseskills?


Till date, I have conducted more than 200 seminars across college
campuses and I still receive the sameresponses. Most answers revolve
around securinghigh GPAs, high quantitative analysis, analytical abilities,
Intelligent, communicationetc.
However, Mytop 5 Equity Research Skills are as per below

#5 Writing Skills
Writing Skills is at number #5. Equity research report is the most
important communication from a securities firm to its clients. This report
has a very specific purposei.e. it is intended to help an investor takea
decision about the allocation of resources.
First thing First One important aspect is that the research report is no
where close to novels from Dan Brownwherein the best is saved for the
last!. In research report the stock target and price recommendations
comes first.
KISS Principle Keep it Simple Silly is the golden rule. It is important to
be to the point and precise.
Less is More Another important aspectto note here is that you are not
required to write a full PhD thesis here, a single page note or a couple of
pages of reports would be great.Readers hardly have 1-2 minutes to read
your full report. They may not even scan even till the 2nd page.

#4 Accounting Skills (More than


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Numbers!)
Number#4 is Accounting! Accounting here is not about Debits and Credits.
Infact is is much more than that.
Be proficient in Financial Statement Analysis The key word here is
FinancialStatement Analysis.This means you are expected to be
proficient in vertical analysis, horizontal analysis, ratio analysis, cash
conversion cycles, ROEs, ROCEs etc.
Sourcing of Right Data Another aspect where I see lot of challenges is
to sourcing the right data. For example, if you require Annual Report of a
company, would you visitcompanys website or SEC website. In
addition, which other documents will you refer to draw your
conclusions.Typical key sources to look for information are thePress
Releases, Conference Calls, SEC Filings etc.Financial Statement Analysis
done on wrong set of numbers will lead to results which will mislead the
analysis. Hence, as an analyst the primary challenge is to fetch the right
data.
Identify the Shenanigans Our main focus in Analyst specific
Accounting is identify and predict the accounting malpractices by
companies.These are normally hidden away. You can see below the
confessions inSatyam Fraud Case

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#3 Valuations (Lies in the eyes of


beholder!)
Valuation Skills is at Number #3. Equity Valuation is the process of
estimating the potential market value of a financial asset or liability.
Valuations are required in many contexts including investment analysis,
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capital budgeting, merger and acquisition transactions, financial reporting,


taxable events to determine the proper tax liability, and in litigation. You
should be aware of the following
Intrinsic Valuation methods Intrinsic Valuation Method (DCF) which
means primarily determines the value by estimating the expected future
earnings from owning the asset discounted to their present value
Extrinsic Valuation Method Relative value models determine the value
based on the market prices of similar assets. This includesvaluation
ratios like PE, P/CF, P/BV and many more
Key is to identify the right valuation methodology There are more than
15 valuations approaches including DCF, Enterprise Valuation Methods
and Equity Valuation Methods.Important thing to know is why a
particular valuation Methodology is used in a specific sector.For
example, Banks are valued using Price/Book Value, however, other
sectors may not use Price/Book Value as a key valuation metric.

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source: CLSA Research Report

#2 Financial Modeling (Cliffhanger!)


At number #2 is Financial Modeling. Financial modeling means forecasting
the future of the company or an assetby way ofan Excel Model that is
easy to understand and performscenario analysis. In the context of our
discussion here,Financial Modeling includes professionally forecasting
future financial statements like Income Statements, Balance Sheets & Cash
Flows. Unfortunately, in graduation and post graduation, every other
subject is taught exceptFinancial Modeling and Excel.
Financial Modeling follows Modular Approach The primary approach
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taken is Modular one.Modular approach essentially means that we


buildcore statements likeIncome Statement, Balance Sheet and Cash
Flowsusing different modules/schedules.
Provide Additional Schedules for clarity The additional schedules are
the depreciation schedule, working capital schedule, intangibles
schedule, shareholders equity schedule, other long term items schedule,
debt schedule etc.The additional schedules are linked to the core
statements upon their completion
Free Financial Modeling Training If you want to learn Financial
Modeling from grounds-up, you can refer to the Free Financial Modeling
Course.Please note that Financial Modelingskill may not be very easy to
acquire. It requirestime and patience to master this skillset.

#1 Excel Skills(Most Obvious is Most


Dangerous!)
At number #1 is the Microsoft Excel Skills! Neither I am joking, norI am
drunk. Equity Research Analyst spend around 10-12-14-16 hours each
dayworking on excel doing financial modeling, valuations and financial
statement analysis. Important points to note in Excel are
Formattingis most important It is important for analyst to produce an
output that is error free and neat. There is lot of money riding on the
research reports published by analyst and the last thing one needs is to
lose a client due to loosely formatted tables and excel models.
Speed &Accuracy Timely delivery of reports, models is required in
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Equity Research Industry. MSExcel is the only place I can say where
there are Shortcuts to Success!I have hardly seen research using
mouse and majority of them aremasters in Excel.
Analysis One should be able to use Excel tools like Pivot, Filter, Sort,
VLOOKUP, HLOOKUP etc to analyze complexdata andclient requests.
Scenario Building It is important for to create different scenarios for
Modeling like Optimistic, Pessimistic and Most expected. In addition,
your client may want to change a few assumptions to see how they
affect the target price. Hence, it is important for you to be well aware of
Data Tables, Goal Seek etc so that you can provide these features to your
clients.
Graphs & Charts A picture speaks more than thousand words!You will
find majority of the research reports contain neat and informative graphs
and charts and less of written material. You should try and master
thisdata representation technique.

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source: CLSA Research Report

What next?
If you learned something new or enjoyed the post, please leave a
comment below.Let me know what you think.Many thanks and take care.
Happy Learning!

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Comments
By Gowtham on June 17, 2015 at 4:43 pm

Nice article Dhiraj. I enjoyed reading it.


Reply

By Dheeraj on June 18, 2015 at 11:31 am

Author

Thanks Gowtham!
Reply

By shrikant on April 9, 2015 at 7:02 pm

Hi Dhiraj,
I am shrikant ex banker , served in credits in analysing
balance sheets and preparing project reports for ccs/TLs
and side by side I develop passion about cap market,
interested in pursuing financial modelling. Kindly
communicate which is good course for me and its
prospectus.
regards,
shrikant
Reply
By Neeraj on April 5, 2015 at 1:11 am

Very informative for aspirants in Financial and Business


Performance Analysis Cheers
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Reply

By deepak on April 4, 2015 at 2:41 pm

its a very useful information and i wanna to know more


abut courses that i should pursue in financial carrier as sir
am actually a student of 2nd year. am waiting eagerly for
ur reply.
Reply

By Dheeraj on April 4, 2015 at 6:25 pm

Author

Thanks Deepak for the note. You should look at


developing 2 skills primarily, a) financial Modeling b)
excel. You can take any course on this. Infact, on this
website there is a free step by step tutorial on
financial modeling as well.
Hope this helps,
Dheeraj
Reply

By savi on July 5, 2015 at 8:20 pm

Is this free financial modeling course enough to


make me able to get the thorough knowledge of it.
Reply
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By Dheeraj on July 6, 2015 at 11:03 am

Author

Hello Savi,
this free financial modeling course is actually
good enough to get knowledge on financial
modeling. However, it is upto you to take your
learnings ahead by applying the financial
modeling methodologies learnt to other set of
companies. More you practice, better you will
become.
All the very best,
Dheeraj
Reply

By mohamad adityo nugroho on April 3, 2015 at 9:52 pm

Thank you very much, Dheeraj


Your article will guide me to be a good equity analyst
Greetings from Jakarta
Reply

By Dheeraj on April 4, 2015 at 11:05 am

Author

thanks Mohamad!
Reply

By Raj Kotecha on February 19, 2016 at 11:02 am


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Hello Sir,
I am a first year MBA Student and have cracked
Equity Research analyst internship in an investment
bank. I currently read Bloomberg Business,
Business Today and Mint Newspaper everyday. Sir,
I request you if you can guide me on other sources
of data I should be reading apart from these 3
sources of data to get information that is beyond
between the lines.
Awaiting for your reply.
Thank You.
Reply

By Dheeraj on February 22, 2016 at 6:43 pm

Author

wow. Congratulations Raj. You are doing


great! I think if you wish to do really well as an
intern, learn financial modeling and
valuations.
Hope this helps.
Dheeraj
Reply

By Prateek Bali on April 2, 2015 at 9:31 pm

It would be great if you could upload the financial model


as well.
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Reply

By mahendra on April 2, 2015 at 6:33 pm

Thanks Dheeraj,
each and every time i learn new things with the help of
your articles
Reply

By Dheeraj on April 2, 2015 at 6:45 pm

Author

Thanks Mahendra, I am glad you find these articles


helpful.
Reply

By Michael Samonas on April 2, 2015 at 3:33 pm

Very usefull post as always. Dheeraj thanks for sharing so


usefull subject with the rest of us. If you do not mind I
tweet your posts and I share them with various groups at
linkedin.
BR
Michael
Reply

By Dheeraj on April 2, 2015 at 3:39 pm


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Author
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Many Thanks Michael! I really appreciate your help in


sharing these posts in your group.
Best,
Dheeraj
Reply

By bruks on April 2, 2015 at 1:05 pm

Thanks Rafael. I would like a specific example lets say a


simple Balance Sheet, Income statement Cash Flow to
build in Excel financial model with graphics.
Reply
By Vanshja Gairola on April 2, 2015 at 12:57 pm

Nice article. Very informative.


Reply

By Dheeraj on April 2, 2015 at 12:58 pm

Author

Many Thanks Vanshja!


Reply

By Hari on April 2, 2015 at 12:49 pm

Great Article!!! Enjoyed project finance classes in educba.


Reply
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By Dheeraj on April 2, 2015 at 12:58 pm

Author

Thanks Hari!
Reply

By Rafael on April 2, 2015 at 10:35 am

Great post! Excelent read for students who are willing to


pursue a career in equity research.
Reply

By Dheeraj on April 2, 2015 at 11:15 am

Author

Thanks Rafael
Reply

By Nitesh on April 2, 2015 at 10:10 am

Thanks for the information.


Reply

By Dheeraj on April 2, 2015 at 11:15 am

Author

Thanks Nitesh!
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Reply

By deepak on April 2, 2015 at 10:03 am

Content was very much useful. Thanks for the information.


Reply

By Dheeraj on April 2, 2015 at 11:15 am

Author

Thanks Deepak!
Reply

By sneha on April 2, 2015 at 9:43 am

Very good article. Please suggest some courses..


Reply

By Danish Cooper on April 2, 2015 at 9:28 am

This is some real good advice thanks alot. But is it possible


to value a company without accounting skills and rather
using mathematical techniques.
Reply
By Angela on April 1, 2015 at 6:27 pm

Thanks Dheeraj. This was an eye opener. I always


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overlooked Excel, maybe it is high time for me to focus on


MS Excel. Any startup training that you recommend for
excel?
Reply

By Dheeraj on April 1, 2015 at 6:34 pm

Author

Many thanks Angela.


Reply

By Uuganaa on April 13, 2015 at 7:18 pm

Hello Dear,
I read your article and Im really interested in FCA.
Could you tell me how i study, what do i do need at
first of all. I hope that you will help me.
See you soon.
Reply

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About Dheeraj?

>> worked as JPMorgan Equity Analyst, ex-CLSA India Analyst >>edu


qualification - CFA Charterholder, FRM Charterholder, IIT Delhi, IIML >>This is
my personal blog that aims to help students and professionals become
awesome in Financial Analysis. Here, I share secrets about the best ways to
analyze Stocks, buzzing IPOs, M&As, Private Equity, Startups, Valuations and
Entrepreneurship.

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