CRISIL’s target price forecast of Spanco, graded 5/5, was Rs289. Today’s price? Rs16!

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Rajesh Desai

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Mar 8, 2013, 3:29:28 AM3/8/13

CRISIL is not a stock broker which is not serious about its buy calls andtarget prices. Indeed, CRISIL’s ‘analysts’ are supposed to be more hardnosed than equity analysts, given that CRISIL is an ‘expert’ in rating debt. If so, what can explain this kind of analysis and recommendation? Vested interest?

One of the biggest names in the business of analysis, Credit Rating and Information Services India (CRISIL), seems to be habitually making blunders in its equity analysis. This time we bring you the story of Spanco. Ever since CRISIL started covering Spanco, back in 2011, the stock has only nosedived from Rs133 to less Rs16 (at the time of writing this piece)! What is interesting (or should we say shocking?) is that CRISIL had stubbornly stuck to the target price of Rs289, according to an interesting blogalphaideas.in, which keeps track of forecasting errors.

In CRISIL’s initial coverage report which was published on 28 July 2011, the ratings agency said: “We maintain our fair value of Rs289 per share and valuation grade of 5/5.” Furthermore, it stated, “We maintain the fundamental grade of 3/5, indicating that Spanco’s fundamentals are good relative to other listed securities in India.” The prevailing price was Rs133 then.

Fast forward little over a year, Spanco tanked to Rs69. In the face of this share price decline, CRISIL’s analysts stood firm. They came up with yet another report on Spanco, on 11 May 2012. In this report, they restated almost the exact same thing: “Post further interaction with the management, we will introduce FY13 forecast and revisit our estimates and fair value. At the current market price of Rs 69, our valuation grade is 5/5.” It even said, “We maintain our fundamental grade of 3/5.”

Today, the share price is below Rs16, or 94.46% down from CRISIL’s original target priceof Rs289. This is not a big error—it is a massive dislocation from the forecast. This isn’t the first time that CRISIL has made this sort of error. It has done a similar sort of thing for Everest Kanto Cylinders (EKC). Sometime in October 2010, it had given EKC a rating of 4/5 and a target price of Rs146 (the prevailing price was Rs124). Two years later, on 29 November 2012, the price tanked nearly 78% to Rs28 while the company gave it a target price of Rs33!

However, we noticed something very odd in CRISIL’s second report. Somehow, the Spanco which was then experiencing difficulties in servicing debt obligations suddenly improved its collection period almost overnight. CRISIL’s report stated, “Spanco’s credit rating was downgraded from CARE B to CARE D on 6 April 2012 due to delays in servicing of debt obligations. The grade was then revised on 30 April 2012 to CARE C. According to the ratings agency, this was due to an improvement in the collection period and consequent improvement in the debt servicing by the company.” When the rating is revised from CARE B grading to CARE C grading that should set off alarm bells for a “fundamental analyst”. Just because it went up from CARE D to CARE C grading doesn’t mean the target price of Rs289 should be maintained. We see the anchoring bias at play here, when the reference level is CARE D and not CARE B grading. This bias is quite common.

This isn’t the first time that we have written about CRISIL’s fishy reports with a special penchant for giving 5/5 to junk or near-junk stocks.

Earlier we wrote how it rated 5/5 for Helios & Matheson a small-time software company based in Chennai despite a pending criminal case against its chairman and MD. The Enforcement Directorate (ED) is currently pursuing investigations against Mr Ramachandran and Mr Muralikrishna, the chairman and director of Helios & Matheson respectively. When this sort of thing is going on, it is an obvious red flag. Unfortunately, this was ignored or overlooked by CRISIL’s analysts.

Click here to read the Helios & Matheson story.

It is common to find stockbrokers coming out with buy recommendations on stocks that lose 80%-90% of their value. They usually have some vested interest. Earlier this year, we had written about Opto Circuits, when broker ICICIdirect kept a BUY on the company even as the share price of Opto Circuits was careening downwards.

Click here to check the ICICIdirect and Opto Circuit story.

Then there’s the case of Arshiya International when Kotak Securities had predicted that it would be the best performer of this year. Instead, the share price has tanked 75% since their call.

Click here for the Arshiya International and Kotak story.

But it is quite remarkable for an ‘independent’ research agency, that has a through grounding in dealing with more conservative world of debt securities to come out with 5/5 recommendations not on blue chips, not on solid mid-caps, but on stocks turn out to be hollow.

One of the crucial components of making a good forecast is not so much to be just close to the mark, though it is important to be as accurate as possible, but revaluating forecasts based on new information. This is what sets apart great forecasters from ordinary hacks. Even great forecasters and analysts make mistakes but they do re-evaluate based on fresh information and give their logical reasons why. When new material information is revealed, it is imperative that it will have a huge bearing on the forecast and target price. What is shocking about CRISIL’s forecast of Spanco is that its share price kept going down while it stubbornly stuck to its original forecast. The analysts in CRISIL should have at least investigated the decline in its share price and the reason behind it.

Rating agencies like Standard & Poor (S&P) which the parent company of CRISIL and Moody’s came under heavy fire in the United States for their flawed forecast of high risk mortgage securities which they stamped as high-grade. The United States government recently filed a class-action lawsuit against S&P for its role in the sub-prime crisis. CRISIL’s rating quality in equity stocks indicates that no lesson has been learnt. Analysts remain as unaccountable as before.