about 3 years ago
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By Ruma Dubey

Last week, one of the days, all of a sudden, Bharti Infratel became the top gainer on the bourses; no new news, all things remained same. So what made it zoom up? An upgrade from a foreign fund! Suddenly a stock gets catapulted into the limelight for no new reason, only because an FII thinks it’s the right time to “report” about it.

CLSA put out a report saying that it had upgraded the stock from ‘outperform’ to ‘buy.’ It had also set the target price at Rs.356.

Prior to that JSPL hit a new high and this was based on a domestic brokerage house report -  Kotak put out a report, giving a “buy” call, revising it from the earlier “sell.”

Reliance Industries has been hitting consistent new highs. Post the new tariffs, many brokerage houses have grown extremely optimistic. FIIs are pretty bullish about the stock and each one is either upping their targets or putting out new optimistic reports. Today, Morgan Stanley and Credit Suisse’s reports are in play. Morgan Stanley expects the company’s energy earnings to exceed all estimations and Credit Suisse too is betting on its petrochem business saying that its refining as well as petchem projects would get commissioned before the end of 2017 and this is expected to add US$3.2 billion to its EBITDA.

So it looks like it is brokerage houses which call the shots, putting put ‘notes’ which decides the fate of the stock that day. They are essentially the movers and shakers on the market, which is why the question comes to mind - how much relevance should an investor like me and you give to such rating downgrades/upgrades by brokerage houses? Yes, we do need to pay heed to the concerns being evinced by these brokerage houses as they do an extensive research on the companies and have a very close ear to the ground. Many a times, they get a whiff of things much ahead of others.

There are many who argue that these brokerage houses have vested interests in putting out these reports. Many allege that when they want to sell, the brokerage houses put out “buy” calls and the exact opposite when they want to buy. They trap investors when they want to get out.

But these are not small time brokerage houses that we are talking about. They are of international repute and could not have reached this far without being fair. So to pooh-pooh their reports completely would be naïve and not very smart just as believing that they do not have any vested interest would be.

Yet, one needs to also question – are they always right? A few months ago, Citigroup and Barclays downgraded L&T on concerns over order cancellations and weak investment cycle. Following this, L&T was beaten down to pulp. But look hard – the company has been consistently reporting new orders, almost one to two on an average per week. And if one may recollect, BHEL scrapped the bottom when foreign brokering houses downgraded and cut their target price of these stocks. Ditto for Axis Bank.

As traders, maybe one might need to act as quickly as possible but as investors, one should look at the reasons for the upgrade and downgrade and if there is no monumental, long term impact, they stay invested. Remember, what they “sell” today becomes a “buy” later. Thus best to stay invested if you are a long term investor. One needs to understand the relevance of the reasons and then take an intelligent decision.

This is a worldwide phenomenon where brokerage houses constantly publish upgrades and downgrades. And all over, they are eyed with a lot of suspicion. They are always blamed, like we do here, of having vested interests while putting out these reports. They surely might have vested interests in most of the reports but it is up to us as to how we treat this information.

Maybe if you have conviction in a stock, say like L&T, when the rating downgrade pushes the stock price down, it could be the best time to actually go contrarian and buy.

Thus it is our decision entirely about how much importance we give to these reports. Brokerages houses, be it domestic or international, are ultimately about making money and all their actions will be about maximizing their returns. We too need to do the same and stop being a cow in a herd.

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