It’s now a ‘fancy’ for foreign research houses to take strong stances against Indian companies, say analysts. Raising questions on their accounting practices, these research firms have been at the receiving end of much flak by the targeted company.
The last two downgrades, in quick succession, saw the companies (Reliance Communications and HDFC) questioning the credibility of the research reports by Veritas and Macquarie Equities Research respectively.
“Growth is like a red carpet. Once the carpet is removed, the hidden problems will appear. It is the analysts’ opinion and market has the free will to accept it or reject it. If we have problems, it will show,” said Mr Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities. The market reacted badly to the Veritas report, sending the RCom stock to new lows on exchanges.
Question & reply
On Tuesday, Veritas, a Canadian research firm raised questions about RCom’s accounting and governance practices. Veritas said that RCom’s accounting policies were “whimsical” and found the Anil Ambani-led company’s risk management and governance practices to be “sub-optimal.”
RCom issued a statement saying that Veritas’ report was lacking in credibility and that it was “mala fide in intent and approach.” RCom clarified that it was fully compliant with all the applicable accounting standards and risk management strategies.
“One should not give too much importance to these downgrades. There should be some investigation carried out on the credibility of these reports,” said Mr Kishor P Ostwal, CMD, CNI Research Ltd.
Last week, global brokerage firm Macquarie came out with a report bashing accounting practices of HDFC. Macquarie said that “a structural de-rating (of HDFC stock) is likely because the quality of earnings and RoE (Return on Equity) reported is being driven more by its corporate book and aggressive accounting practices.” They had alleged that the accounting practices were being used to inflate earnings and RoE.
HDFC reacted strongly to this and said that Macquarie had not verified the facts and statements before raising concerns over its stock performance and accounting practices.
Widely discussed topic
Lately, corporate governance of Indian companies has been a widely discussed topic. In a report, Espirito Santo Securities said there is a focus on corporate governance in India because it impacts performance. Their “intent is to improve the analysis of firm specific risk and help avoid blow ups. Bad governance is even more important than good — the structures of good corporate governance aren’t as obvious in improving business performance, but bad governance risks economic value being misappropriated, and, at its worst destroying a stock.”
This is not the first time that research houses have slammed governance and accounting practices of Indian companies. Last year, Veritas had criticised Kingfisher Airlines. In a report Veritas had written about Kingfisher’s “poor disclosures, capricious accounting policies and understated liabilities.”
The parent company, UB Group replied to this report by calling it “mischievous and sensational.” Veritas has also slammed DLF and RIL in the past.