Research report
Also written Research report (what it does)
A document presenting an investment idea — analysis plus a recommendation. SEBI excludes market commentary, index discussion, internal notes and statistical summaries from the definition.
In plain language
A research report does three jobs at once: it presents an investment idea, gives a market perspective and carries detailed company analysis.
Every analyst reads the same annual reports. What separates a good report is the clarity of the idea, simple delivery, a clear argument, a narrative structure and a format fitted to the reader. What sinks a bad one, per Chapter 13, is unnecessary detail, long sentences, no structure, inconsistent views and complex language.
How it works
Structure. The major sections are company business, peer group analysis, shareholding pattern, key strengths, key concerns, industry overview, company fundamentals, key financial indicators and financials. The workbook splits them into fact-based sections (peer group, shareholding, fundamentals, key indicators, financials — sourced from annual and quarterly reports) and view-based sections (business, strengths, concerns, industry — sourced from management conversations and the analyst's own understanding).
What is not a research report. Comments on general market trends; discussion of broad-based indices; commentary on economic, political or market conditions; periodic reports for mutual fund or AIF unit holders or PMS and IA clients; internal communications not given to clients; offer documents; statistical summaries of company financials; technical analyses of demand and supply in a sector or index.
Rules on content (regulation 20). Facts from reliable information; terms defined and used consistently; any rating system defined with its time horizon and benchmark; and where a rating or price target has been assigned for at least one year, a graph of daily closing prices for the period assigned or three years, whichever is shorter.
Rules on distribution (regulation 22). No selective early release to internal traders or favoured clients.
A worked example
Illustrative. An analyst publishes an update on 10 March reiterating Buy on a stock at Rs 500 with a target of Rs 560 — an expected return of 60 ÷ 500 = 12%. The firm defines Buy as more than 10% over twelve months, so the call is consistent.
The price graph. The Buy rating was first assigned in January two years earlier. It has been in force for at least a year, so a daily closing price graph is required — for two years, because that is shorter than three.
The trading window. Under regulation 16(2) the analyst and associates may not trade the stock from 30 days before publication (8 February, in a non-leap year) to 5 days after it (15 March).
What would not have needed any of this: the same analyst's morning note saying "Nifty looks overbought after a 6% rally" — that is a comment on a broad-based index, excluded from the definition.
Why NISM asks about it
Chapter 13 (Qualities of a Good Research Report) covers structure, fact and view sections, rating conventions and the checklist approach; Chapter 14 (Legal and Regulatory Environment) covers regulations 16, 19, 20 and 22. The exclusion list and the price-graph rule are favourite questions.
Common exam traps
- The workbook gives two different trading restrictions — keep both. Chapter 14.2.3, quoting the insider trading framework, says analysts who prepare a report on a listed company "shall not trade in securities of that company for thirty days from preparation of such report". Regulation 16(2) of the Research Analyst Regulations says thirty days before and five days after publication. A question naming the RA Regulations wants the second.
- The graph covers the rating period or three years, whichever is shorter — not whichever is longer, and only once a rating or target has stood for at least one year.
- Technical analysis of a sector or index is excluded; a technical call on a single stock is not on the list.
- Rating words have no universal meaning. "Buy", "Accumulate", "Overweight" mean what the issuing firm's definitions say — which is why the definitions must be in the report.
- Overweight / underweight describe performance relative to the market; outperformer / underperformer are relative to the sector or market.
Check yourself
1.Which of the following is a VIEW-based section of a research report?
- a)Peer group analysis
- b)Key Concerns
- c)Shareholding pattern
- d)Key financial indicators
Show the answer
Answer: (b) Key Concerns
View-based section in research report: Company Business, Key Strengths, Key concerns, Industry Overview. Source of information: communication with management, personal understanding of the business and industry.
The fact-based sections are the other three options: peer group analysis, shareholding pattern, company fundamentals, key financial indicators and financials. Source of information: annual reports, quarterly reports, calculations.
Why the split exists: almost all the sections of a research report are fact based and therefore filling them is more of a copy-paste function but certain important sections require understanding of the business and thorough communication with management.
And this is where an analyst's value actually lies. All the research analysts have access to, more or less, the same information i.e., annual reports, quarterly reports etc. In fact, all good analysts and experts of a sector have similar things to say. So how does one stand out and be the best? Research analysts make a difference by the way in which they present their views, conclusions and recommendations.
No document contains a company's "key concerns" — the company will not publish its own worries.
The full list of major sections: company business, peer group analysis, shareholding pattern, key strengths, key concerns, industry overview, company fundamentals, key financial indicators and financials.
2.The three steps in compiling a research report are:
- a)Research, Recommendation and Review
- b)Planning, Drafting and Editing
- c)Screening, Valuation and Rating
- d)Collection, Compilation and Circulation
Show the answer
Answer: (b) Planning, Drafting and Editing
Like any other writing project, compiling research reports also has three important steps — Planning, Drafting and Editing.
Planning: the writing process has to be planned as to how each section will be approached and assign a deadline to each. As there are many reports to be written and the work load shall be high near quarterly results season, it is important to maintain high levels of discipline otherwise the delay can have a cascading effect on the work.
Drafting: once done with the planning, work should begin on each section. Generally, each organization has a template of its own and therefore working on a pre-defined structure makes the work a little bit easier.
Editing: once a draft is ready it should be rechecked for financial figures, spell-checks and grammatical errors and edited accordingly.
The sections to be planned: company business, peer group analysis, shareholding pattern, key strengths, key concerns, industry overview, company fundamentals, key financial indicators and financials.
And a presentation step to build into the drafting: it is also suggested to make use of data visualization software and prepare visual charts to present the data. Visual data is easier to understand than written numbers.
Why the discipline matters: the results season creates a queue of reports, and the delay can have a cascading effect on the work.
3.A research firm uses the rating convention given as an example in the workbook. An analyst expects a stock to return 8% over the next 12 months. Which recommendation fits?
- a)Hold
- b)Buy
- c)Sell
- d)Overweight
Show the answer
Answer: (a) Hold
The workbook's example convention: "a 'buy' may indicate an expectation that the stock will deliver more than 10% returns over the next 12-month period, 'hold' may indicate that the stock's return is expected to range between -10% and 10% over the next 12-month period and a 'sell' recommendation may indicate an expected return of less than -10% over the period."
An expected 8% is inside the −10% to +10% band, so the rating is Hold.
Why the others are wrong:
- Buy needs more than 10%. A positive return alone is not enough.
- Sell needs less than −10%.
- Overweight is a different kind of rating. It is relative: "'Overweight', 'equal weight' and 'underweight' are ratings used to describe a stock or sectors performance relative to the market." The stem gives an absolute return with no market comparison.
The workbook also says "different research agencies may have different definitions for each term". That is why "the interpretation of the recommendation is also typically mentioned in the research report for the immediate reference of the user", and why the stem specifies which convention the firm uses.
Where this is taught
Free preparation for NISM Series III-ARelated terms
- Buy-side analystAn analyst employed by an asset manager — a mutual fund, pension fund, hedge fund, AIF, FPI or portfolio manager — whose recommendations are written for the employer's own fund managers, not the public.
- Conflict of interestAny interest of the analyst's own — a shareholding, a fee, a relationship — that could bias the research, and which the regulations require to be disclosed rather than merely avoided.
- Margin of safetyThe gap between a security's estimated intrinsic value and the lower price paid for it — the cushion that protects the buyer when the estimate turns out to be wrong.
- Research AnalystUnder the SEBI (Research Analysts) Regulations, 2014, a person who, for consideration, is engaged in the business of providing research services — including a part-time research analyst.
- Sell-side analystAn analyst at a firm offering investment banking, broking or advisory services who publishes research in the public domain with a buy, hold or sell call and a price target.
- Checklist approachUsing a fixed, written list of qualitative, quantitative and valuation questions before every investment decision, so judgement stays disciplined rather than based on memory or mood.
- Price targetA sell-side analyst's forecast of where a security's price will be over a stated time horizon — the number that turns a Buy, Hold or Sell rating into a specific, checkable prediction.
- Secondary researchInformation an analyst gathers from already-published sources — annual reports, industry journals and market research — rather than collecting it first-hand.
- Independent research analystThe third of the workbook's analyst categories: one who works for a research originator or boutique firm separate from full-service investment firms, and sells research on subscription.
- Mosaic analysisAssembling many individually insignificant pieces of information, public and non-public, into a critical insight — a practice the workbook states is acceptable.