Improved Eqax Ratings for Finance related companies
With immense pleasure and satisfaction, I would like to announce that we have improved Eqax Ratings for Finance related companies.
When we incorporated the Cash Flow as an input to the system, as a side-effect, the ratings for financial sector had suffered. Below is the excerpt from that blog post
“The other side-effect is pertaining to financial institutions (NBFCs, Banks, Investment companies etc). Their raw material is Cash itself. So the usage of Cash Flow for them is debatable. Such companies often have negative Cash Flows which is very normal during growth phase. On the hand, it may also be signaling a problem just like other companies. In such cases, we have decided to go ahead with using Cash Flow. In a way, we have opted to err on the safer side. We would prefer giving a bad rating to a good company than giving a good rating to a bad company. Having said that, we are trying to fix this issue and hope to find a resolution soon.”
This was a tricky issue. Through incorporation of Cash Flow for Finance Companies, we wanted to ensure that we don’t give good ratings to bad companies, even if it meant giving bad ratings to good ones. This worked in part but not as well as we had hoped. Most good companies from finance sector started getting bad ratings.
For example, Bajaj Finance & HDFC Bank had a rating of 38 while Muthoot Finance & Cholamandalam had it as 29 & 19 respectively. This was clearly unfair but expected trade-off. However, a few bad companies still were getting good ratings. Indian Overseas Bank was 64, UCO Bank was 94, whereas MCX was 74. This was extremely discomforting.
We have fixed this now. Muthoot Finance is 80, HDFC Bank is 67, Chola is 73, Bajaj Fin is 71 whereas IOB has become 15, MCX 58 and UCO Bank 64. We believe the new ratings and methodology reflects the worth of companies a lot better than earlier system. Needless to say, correlation with stock price changes has increased drastically in Finance sector, which was lacking.
Other than that, we have also added a new rating called SA CO Difference Rating which feeds into Confidence Metrics. This measures the difference between Standalone and Consolidated Results. Higher the difference, lower the confidence in the company and hence lower the rating. This is especially useful for small companies.
Thank you so much for your support and wishes. Please feel free to share your thoughts and any feedback you may have. It really helps us a lot in improving the system.
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