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A Basic Disconnect

Stocks of many small companies go unanalysed is because they don’t provide what investors look for…

A few days back there was a news item lamenting the lack of analyst coverage of a vast majority of the stocks listed on the Indian stock markets. Apparently, over 5300 of the 6000-odd stocks listed in India are not tracked by any equity analysts. Obviously, many of these stocks are very thinly traded, if at all. Whenever anyone discusses the thinness—or shallowness, whatever you prefer—of the Indian stock markets, then these two facts are likely to be quoted. However, depending on who you’re talking to, the cause and effect may be assumed to run in either direction.

You may hear that no one is interested in investing or trading in these stocks because there’s no reliable analysis available; or you may hear that no one is interested in analysing them because no investor is interested. Either way, the net affect is the same. For a moment, let's step back from the fiction that these stocks are part of the secondary market. They are not. A good number of scrips access the IPO market and then wander around as zombies. From time to time, someone injects some life into them when its convenient to pretend that they are alive. When the season passes, they go back to being zombies. Mind you, many of these are good businesses but practically non-existent as stocks.

The fact that they don't have any analyst coverage or any volume are just symptoms of the underlying problem, the size and depth of the investor base in the country. Today, no investor has any reasonable way of getting any returns from these stocks. Moreover, any artificial attempts to create analyst coverage or incentives to trade in these stocks are not going to change this in a hurry. There's a basic disconnect between what the investor is looking for and what these type of scrips provide—having analysts push out reports is not going to change that.