Who needs an Equity Analyst?

In recent time we have seen growing criticism of equity analysts among all classes of investors, particularly among retail investors. Mr. Bhavtosh Vajpayee, became best equity analyst by downgrading IT sector last year (what is happening to IT sector now compared to other sectors). Our friend Mr. Arjun Narayana Murti, analyst at Goldman Sachs became a doomsday prophet for forecasting oil prices (where the oil price is heading now?). Were these analysts just lucky or their analysis was worth the attention?
What caught my attention was an equity report by Mr. Akshay Soni of Morgan Stanley India on Suzlon Energy (Reuters: SUZL.BO, Bloomberg: SUEL IN) released on November 3, 2008, in which he changed the Price Target from Rs450.00 to Rs52.45!!! The major reason stated for this drastic change was increasing risk to wind energy business from changing macro particularly massive downtick in oil prices.

When I looked into the historical prices of crude oil and stock price of Suzlon Energy, I found a very weak relation between the two, refer the graph below:

Apparently, this report was updated just to justify the current stock price of Suzlon Energy. But this analyst was not as lucky as Bhavtosh Vajpayee or Arjun Narayana Murti. This report came out on November 3, 2008 and as on today the closing price is Rs70.6, see below the weekly performance of Suzlon Energy after the report:

On November 4, 2008, the news came that Suzlon and Martifer has entered into an agreement in August this year to complete an early purchase of Martifer stake of 22.4 percent in REpower Systems AG in mid December 2008 which was initially due in May 2009. On last Thursday, the company informed BSE that the New Zealand based TrustPower Ltd has started the stage 1 of its first Australian wind farm located at Snowtown 170 km north of Adelaide. The said wind farm comprises of 47 numbers of Suzlon S88 turbines.

Have these news driven the stock up? Were these news not known to the analysts? Two other reasons stated for this cut in the target price were given as:

· Leveraged Balance Sheet and the cancellation of the rights issue.
· Suzlon decision not to try to exercise the domination and profit transfer agreement with REpower, due to opposition from lenders who will be financing the next rounds of growth for REpower.

Mr. Krishnakant Thakur of Edelweiss released a similar report on October 11, 2008 and gave a much reasonable target price of Rs94.0, lets see the major forecast of these two reports:

I have always believed that these reports are written for other purposes, purpose other than that of providing guideline to fund managers and investors. First and foremost purpose is to provide employment to equity analysts.

My understanding is that macroeconomic and political factors play more important role in the stock price movement of a company, for short or even medium term the company fundamentals becomes mostly irrelevant.

Some of fellow bloggers have been forecasting Sensex at below 4,000 level in near future, I don’t know if their prediction will become true or not. But when some of them predicted that Sensex will reach 12,000 level when it was around 20,000 level I criticised them (Link1, Link2).

Keeping I mind the current financial crisis and impeding global recession, I don’t see a quick recovery of the market. May be the US economy will recover within two years and subsequently the stock market. But for Indian stock market, I’m not very hopeful. Ideally Indian stock market should also be recovering along with that of the US; when I compared the Nasdaq composite index and Sensex and found a good correlation between them.

But when I say I’m pessimistic about Indian stock market, I have certain macroeconomic and political reason to believe that Indian stock market will not improve along with that of the US market. But I also think that Indian stock market may not go down much from here. Some of the reasons I see are:

· Earning growth will be really affected in coming years: I feel from next quarter onward, most of the Indian companies will see negative earning growth. Particularly companies operating in real estate, IT, BPO, Banking, Export and probably metal and cement will be most affected.
· Political instability: Coming general election will see rise of small regional / religious political parties taking centre stage. Congress or BJP may emerge as biggest political party but they will not be able to form the government. BSP, SP, Left Parties will gain substantially in the coming general election.
· Political Change in US: The new government in the US may adopt a protectionist approach, which will hurt the Indian IT and BPO industry. Export oriented companies will also affected.

Disclosure: Suzlon Energy, Long Position