How to Ace Your Equity Research Interview: Answers to the 30 Most Common Questions

Tell me the difference between cyclical and growth industries and how they are affected by external factors?

Cyclical industries are industries that experience regular ups and downs in business activity, often in line with the overall business cycle. Examples of cyclical industries include automotive, construction, and retail. These industries tend to do well when the economy is growing, but suffer during recessions.

Growth industries, on the other hand, are industries that are experiencing consistent and sustained growth. Examples of growth industries include technology, healthcare, and renewable energy. These industries tend to be less affected by the overall business cycle and continue to grow even during recessions.

External factors that can affect cyclical and growth industries include changes in government policies, technological advancements, shifts in consumer preferences, and economic conditions such as interest rates and inflation. For example, changes in tax policies or regulations can affect the construction and automotive industries, while advancements in technology can disrupt or benefit the growth of technology companies.

Where do you see the market in 5-10 years and why do you believe so?

It is difficult to predict with certainty what the stock market will look like in 5-10 years, however, based on current demographic trends, government finances, and GDP growth projections, it is likely that the S&P 500 will remain relatively stable and may even experience modest growth over this time period. Factors such as inflation, consumer spending, and the Federal Reserve's quantitative easing policies will also play a role in determining the market's performance. Additionally, the development of new technologies and the emergence of innovative new companies could also have a positive impact on the market in the long-term.

Tell me about what is the P/E ratio and how would you use it to compare companies?

The P/E ratio, or price-to-earnings ratio, is a financial ratio that compares a company's stock price to its earnings per share. It is calculated by dividing a company's current stock price by its earnings per share (EPS). The P/E ratio is often used to measure a company's valuation and to compare the valuations of different companies.

A high P/E ratio may indicate that a company's stock is overvalued, while a low P/E ratio may indicate that a company's stock is undervalued. However, it is important to note that a high P/E ratio for one company does not necessarily mean that the company is overvalued, as different industries and sectors have different average P/E ratios.

When comparing companies, it is important to compare P/E ratios within the same industry or sector, as different industries and sectors have different average P/E ratios. For example, technology companies tend to have higher P/E ratios than utilities companies.

It's also important to consider the company's growth prospects, as companies with higher growth prospects tend to have higher P/E ratios. A company with a high P/E ratio but high growth prospects may be more attractive than a company with a lower P/E ratio but lower growth prospects.

Additionally, other factors such as debt levels, profitability, and cash flow should also be considered when evaluating a company. The P/E ratio alone should not be the only metric used to compare companies, it is one of the many metrics used to evaluate a company's performance and its future growth.

Tell me about some top Indexes in NSE and BSE?

The NIFTY 50 Index is one of the most popular and widely-followed indices in the Indian stock market. It consists of the 50 largest and most liquid stocks listed on the National Stock Exchange (NSE). Other popular indices in the NSE include the Nifty Auto, Bank, Financial Services, FMCG, IT, Media, Pharma, Private Bank, and PSU indices. On the Bombay Stock Exchange (BSE), popular indices include the SENSEX, BSE MIDCAP, BSE SMALLCAP, BSE 100, BSE 200, BSE 500, BSE Auto, BSE BankEx, BSE Consumer Durables, BSE Capital Goods, BSE FMCG, BSE HealthCare, BSE IT, BSE Metal, BSE Oil & Gas, BSE PSU, BSE TECk, BSE Realty, BSE SME IPO, S&P BSE CARBONEX, S&P BSE GREENEX, S&P BSE Shariah 50, BSE IPO, BSE POWER, and S&P BSE SmallCap indices.

Tell me about the market capitalization?

Market capitalization, often referred to as "market cap," is a measure of the value of a company. It is calculated by multiplying the current stock price of a company by the number of shares outstanding.

For example, if a company has 10 million shares outstanding and its stock price is $50 per share, its market capitalization would be $500 million.

Market capitalization is used to classify a company as small-cap, mid-cap, or large-cap. Small-cap companies have a market capitalization of less than $2 billion, mid-cap companies have a market capitalization of between $2 billion and $10 billion, and large-cap companies have a market capitalization of more than $10 billion.

The market capitalization of a company can be used as a measure of its size and can be used to compare it to other companies in the same industry or sector. For instance, a company with a large market capitalization may have more resources and be more financially stable than a company with a smaller market capitalization. However, It is important to note that market capitalization alone doesn't indicate the company's overall financial health, it should be considered along with other financial metrics such as revenue, earnings, and debt levels.

Additionally, the market capitalization can change with the stock price, it means that if a company's stock price increases, the market capitalization will increase as well, and if the stock price decreases, the market capitalization will decrease as well.

Where is the dollar vs the INR?

The current exchange rate for US Dollar (USD) to Indian Rupee (INR) is 81.41. This rate is up from 81.32 the previous market day and up from 74.41 one year ago.

What is the 10-year T-Note rate?

The 10-year T-Note rate is currently 3.482%, with an open yield of 3.398%, a day high of 3.501%, a day low of 3.389%, and a previous close of 3.399%. The current price of the 10-year T-Note is 105.2969, with a price change of -0.7188 and a price change percentage of -0.6797%. The coupon rate is 4.125% and the maturity date is November 15, 2032.

What is the price of gold 1 ounce?

The spot price for 1 ounce of gold is currently $1,934.69.

How to evaluate P/E ratio to determine if a stock is cheap If you don't have comparable companies data ?

If you don't have comparable companies data, there are a few ways to evaluate a P/E ratio to determine if a stock is cheap:

Compare the P/E ratio to historical levels: Look at the company's P/E ratio over the past few years to see if it is currently high or low compared to its historical levels. If the current P/E ratio is lower than its historical levels, it may be considered cheap.
Compare the P/E ratio to the industry average: Look at the average P/E ratio for the industry the company operates in. If the company's P/E ratio is lower than the industry average, it may be considered cheap.
Compare the P/E ratio to the broader market: Look at the P/E ratio of a broad-market index, such as the S&P 500, to see how the company's P/E ratio compares to the broader market. If the company's P/E ratio is lower than the broader market, it may be considered cheap.
Compare the P/E ratio with other valuation metrics: P/E ratio should be used in conjunction with other valuation metrics such as Price to Sales ratio(P/S), Price to Book value (P/B), Price to cash flow (P/CF) etc.

How to analyze different sectors of companies?

There are several ways to analyze different sectors of companies:

Research the industry: Understand the key trends, drivers and challenges that are shaping the industry. Look at the size and growth prospects of the industry, and identify any major players or new entrants.
Analyze the financials: Look at the financial statements of companies within the sector to identify key metrics such as revenue, profit margins, and return on equity. Compare these metrics across companies to identify any outliers or trends.
Evaluate the management team: Look at the leadership and management team of the companies within the sector. Assess their experience, track record, and strategic vision.
Look at the products and services: Analyze the products and services offered by the companies within the sector. Look at the quality of the products, their pricing, and the company's distribution channels.
Analyze the competition: Look at the competitive landscape of the sector, identify the key players and understand their strengths and weaknesses.
Evaluate external factors: Consider external factors such as government policies, technological advancements, shifts in consumer preferences and economic conditions that may affect the sector.
Consider valuation: Analyze the valuation of companies within the sector, including metrics such as the P/E ratio, Price to Sales ratio(P/S), Price to Book value (P/B), Price to cash flow (P/CF) etc.
Look at the risks: Identify and evaluate any significant risks associated with investing in the sector, such as regulatory changes, industry consolidation, or changes in consumer preferences.

It's important to note that the analysis process may vary depending on the sector, and the above-mentioned points are general guidelines. It's important to have a good understanding of the sector and the companies within it, and to use a variety of metrics and analysis techniques to build a comprehensive picture of the sector's performance and potential.

What does the cost structure like for the Manufacturing industry, How will you evaluate and what are their biggest cost components?

The cost structure for the manufacturing industry can vary depending on the type of products being produced and the manufacturing process used. However, there are some common cost components that are typically found in the manufacturing industry:

Raw materials: This includes the cost of the materials used to produce the final product, such as metals, plastics, and chemicals.
Labor: This includes the cost of wages and benefits for the employees involved in the manufacturing process, as well as any contract labor costs.
Manufacturing overhead: This includes costs such as utilities, rent, insurance, and property taxes for the manufacturing facility. It also includes costs for equipment maintenance, tooling, and supplies.
Distribution and logistics: This includes the cost of transporting the finished products from the factory to the customer, including shipping, warehousing, and inventory carrying costs.
Research and Development: This includes the costs of researching, developing, and testing new products or processes.
Selling, general and administrative expenses: This includes costs such as marketing, advertising, and administrative expenses.

To evaluate the cost structure of a manufacturing company, you can use a number of financial metrics such as cost of goods sold (COGS) as a percentage of revenue, and gross margin, which is calculated as gross profit divided by revenue. These metrics can be used to compare the company to its competitors and to industry averages.

It's important to note that the cost structure of a manufacturing company can change over time, for example, with changes in raw material prices, labor costs, or technological advancements. It's important to keep track of these changes and how they affect the company's financial performance.

Another important factor to consider is the company's production processes and whether it's able to achieve economies of scale, which could help to lower costs and improve margins. Also, the company's pricing strategies and how it responds to the market conditions and competition should also be taken into account.

Let’s say that you run a French fries franchisee You have two options The first is to increase the price of each of your existing products by 10% (imagining that there is price inelasticity) And the second option would be to increase the total volume by 10% as a result of a new product Which one should you do and why?

It depends on the specifics of your French fries franchise and the market conditions. Both options have the potential to increase revenue, but they have different implications for your business.

Increasing the price of each existing product by 10% may result in a short-term increase in revenue, but it could also lead to a decline in demand if customers are price sensitive. If the demand for your products is inelastic, meaning that changes in price do not significantly affect the quantity demanded, then this option may be a viable one. However, if the demand is elastic, meaning that changes in price do significantly affect the quantity demanded, then this option may lead to a decrease in overall revenue.

Adding a new product to your menu, on the other hand, has the potential to increase the total volume of sales without affecting the price of your existing products. This option may appeal to customers looking for something new and different, and it could lead to a 10% increase in total volume without having to risk losing customers due to a price increase. However, launching a new product also comes with its own set of costs such as R&D, marketing, and testing.

In summary, if you can increase the price of existing products without losing too much customers then the first option will be preferable. But if you think that a price increase could lead to a significant decline in demand, it would be safer to launch a new product to increase the volume. Additionally, you can also consider other options such as creating bundle deals, or offering discounts for large orders. It's important to have a good understanding of your customer base and the market conditions, and to use a variety of strategies and analysis techniques to build a comprehensive picture of the best way to increase your revenue.

What do you think the income statement would look like for a Pharma company like Sun pharma, abbott and cipla? What would their COGS be? How about their operating margin?

The income statement for a pharmaceutical company like Sun Pharma, Abbott, and Cipla would likely include the following key elements:

Revenues: This would include revenues from the sale of pharmaceutical products, such as prescription drugs and over-the-counter medications.
Cost of goods sold (COGS): This would include the cost of raw materials, labor, and manufacturing overhead associated with producing the pharmaceutical products. For a pharmaceutical company, the cost of goods sold would include the cost of the active pharmaceutical ingredients (API) and other raw materials, as well as the cost of manufacturing and packaging.
Gross profit: This is calculated by subtracting COGS from revenues. Gross profit represents the amount of revenue that a company has left over after accounting for the direct costs of producing its products.
Operating expenses: This includes expenses such as research and development, sales and marketing, general and administrative expenses.
Operating income: This is calculated by subtracting operating expenses from gross profit. Operating income represents the amount of money a company has left over after accounting for its direct costs of production and its operating expenses.
Other income/expenses: This includes items such as interest income, foreign exchange gains/losses, and other income or expenses that are not directly related to the company's main operations.
Net income: This is calculated by subtracting other income/expenses from the operating income. Net income represents the company's overall profit or loss.

The COGS and operating margin of a pharmaceutical company can vary depending on a number of factors, such as the type of products they produce, the complexity of their manufacturing process, and the level of competition in the market. However, on average, the operating margin of a pharmaceutical company is around 20-30%.

It's important to note that the above-mentioned details are not specific to Sun Pharma, Abbott, and Cipla, and it's important to check their financial statements for more accurate information. Additionally, the income statement of a pharma company is affected by many factors such as patent expiration, regulatory environment, competition, and the global economy. Therefore, it's important to keep track of these factors and how they affect the company's financial performance.

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I see that you have no market experience and what should make me believe that this is something you are seriously interested in?

I understand that a lack of market experience can be a concern when considering me for a role in Equity Research. However, I have done extensive research into the industry and have a strong understanding of the key concepts and processes. My dedication to improving my knowledge and skills in this field is evidenced by my willingness to learn and grow within this profession. I have developed a strong analytical mindset and excellent problem-solving skills that I believe will make me a valuable asset to any Equity Research team. Furthermore, I am passionate about the industry and have a keen interest in the financial markets, which I believe will make me a great fit for this role.

Why are you looking for an equity research job?

I am looking for an equity research job because I believe that I have the skills necessary to perform the job duties. I have a strong understanding of accounts and financial fundamentals and have the ability to analyze the specifics of individual companies to determine if the security is appropriately priced. Additionally, I have the ability to create financial models to calculate the future value of equity shares, and I am familiar with the financial statements of the companies I research.

Which stock do you pitch for me and why?

The stock I would pitch depends on which company you are interviewing for. Generally, when pitching a stock for an equity research interview, you should focus on a company that is relevant to the firm and sector you are interviewing for. You should also make sure to research the company thoroughly, identify the key drivers that are affecting the stock, and consider the valuation metrics and catalysts for the company. Additionally, you should also consider any potential risks and how you can mitigate them.

Can you tell me what valuation techniques you use if I ask you to value a company?

There are several valuation techniques that can be used to value a company, some of the most common ones include:

Discounted Cash Flow (DCF) analysis: This is a method of valuing a company based on the present value of its future cash flows. It involves forecasting the company's future cash flows, and then discounting them back to their present value using a discount rate. This method is considered to be one of the most accurate ways of valuing a company as it takes into account both the company's current and future performance.
Price to Earnings (P/E) ratio: This is a method of valuing a company based on the ratio of its stock price to its earnings per share (EPS). It is used to compare a company's valuation to that of its peers and to the overall market.
Price to Sales (P/S) ratio: This is a method of valuing a company based on the ratio of its stock price to its revenue. It is used to evaluate a company's valuation by comparing its stock price to its revenue.
Price to Book (P/B) ratio: This is a method of valuing a company based on the ratio of its stock price to its book value (the value of its assets minus its liabilities). It is used to evaluate a company's valuation by comparing its stock price to its book value.
Dividend Discount Model (DDM) : This is a method of valuing a company based on the present value of its future dividends. It involves forecasting the company's future dividends, and then discounting them back to their present using a discount rate.
Comparable Company Analysis: This method involves analyzing the financials of similar companies within the same industry and using those companies' valuations as a benchmark for the company being valued.

It's important to note that no single method is perfect, and a combination of these methods should be used to get the best estimate of a company's value. Additionally, it's important to keep track of the company's financial performance, its growth prospects, the industry trends, and the overall economic conditions.

To your best ability What do you think is the main reason stocks fell by 20%?

It is difficult to determine the main reason for a stock market decline without more specific information about the timing and circumstances of the decline. However, some possible reasons for a 20% decline in stock prices include:

Economic downturn: A recession or other economic downturn can lead to a decline in corporate profits and consumer spending, which in turn can lead to a decline in stock prices.
Interest rate changes: A sudden increase in interest rates can affect the ability of companies to borrow money and invest in growth, and this can lead to a decline in stock prices.
Political instability: Political instability, such as a war or a change in government policies, can create uncertainty and lead to a decline in stock prices.
Natural disasters: Natural disasters can disrupt production and supply chains, and this can lead to a decline in stock prices.
Geopolitical risks: Geopolitical risks such as trade tensions, sanctions, or other global events can affect the global economy and lead to a decline in stock prices.
Company-specific events: A company-specific event such as a financial scandal, a product recall, or a change in management can lead to a decline in stock prices.

It's important to note that a decline of 20% in stock prices could be a result of a combination of these reasons. Additionally, it's important to keep in mind that stock market fluctuations are normal and are to be expected. It is also important to note that past performance does not indicate future performance, and it is important to conduct thorough research and analysis before making any investment decisions.

Tell me about what PE ratio is a popular valuation metric and what the PE ratio number tries to tell us?

The Price-to-Earnings (P/E) ratio is a popular valuation metric that compares a company's current stock price to its earnings per share (EPS). It is calculated by dividing the current stock price by the EPS. The P/E ratio is used to measure the relative value of a company's stock and to compare it to the value of other companies in the same industry or to the overall market.

A high P/E ratio indicates that investors are willing to pay a premium for the company's earnings, while a low P/E ratio indicates that the stock is relatively cheap compared to the company's earnings. However, it's important to note that a high P/E ratio does not necessarily mean that a stock is overpriced, and a low P/E ratio does not necessarily mean that a stock is underpriced.

The P/E ratio tries to tell us how much investors are willing to pay for a company's earnings. A high P/E ratio may indicate that investors have high expectations for the company's future earnings growth, while a low P/E ratio may indicate that investors have lower expectations for the company's future earnings growth. However, it's important to keep in mind that the P/E ratio is only one metric and should be used in conjunction with other financial metrics such as revenue, earnings, and debt levels, to get a more comprehensive picture of the company's performance.

Additionally, it's important to note that different sectors have different P/E ratio averages, a company in a sector with higher growth prospects may have a higher P/E ratio, while a company in a sector with lower growth prospects may have a lower P/E ratio. Therefore, it's important to compare the P/E ratio of a company to the average P/E ratio of the industry or sector it operates in.

Tell me something about yourself that is not on your resume?

When it comes to equity research, I'm highly knowledgeable and passionate. I'm constantly reading and researching the stock market, and I'm always looking for new and creative ways to analyze information. Additionally, I'm a great communicator and have a great ability to explain complex financial concepts in a simple and concise way. I'm also able to build strong relationships with clients and colleagues, which is essential in the equity research field.

Explain to me the type of financial modelling?

Financial modeling is the process of creating a numerical representation of a financial situation, typically using spreadsheet software, in order to make informed decisions. There are several types of financial models, each with their own specific purpose and structure.

Financial forecasting models: These models are used to predict future financial performance based on historical data and other relevant information. They can be used to forecast revenue, expenses, cash flow, and other financial metrics.
Valuation models: These models are used to estimate the intrinsic value of a company or asset. The most common valuation models include discounted cash flow (DCF) analysis, price-to-earnings (P/E) ratio, and comparable company analysis.
Budget and planning models: These models are used to create a financial plan for a company, such as a budget or a strategic plan. They can be used to forecast revenue, expenses, and cash flow, and to identify potential risks and opportunities.
Risk and sensitivity models: These models are used to analyze the potential risks and uncertainties that a company may face. They can be used to simulate various scenarios and to estimate the potential impact of different risks on the company's financial performance.
Monte Carlo simulation models: These models are used to analyze the potential outcomes of a decision under uncertainty. They use probability distributions and random sampling to simulate different scenarios and to estimate the potential range of outcomes.
Real-options models: These models are used to evaluate investment opportunities by considering the flexibility of a company. They include the ability to make investment decisions based on future developments in the market or industry.

It's important to note that financial modeling is an iterative process, and the model should be updated and refined as new information becomes available. Additionally, the choice of the financial model should be based on the specific purpose and the type of decision that needs to be made, and it's important to have a good understanding of the assumptions and limitations of the model.

Do you understand the DCF model and Walk me through the process?

Yes, I understand the Discounted Cash Flow (DCF) model. It is a method of valuing a company based on the present value of its future cash flows. The process of creating a DCF model typically includes the following steps:

Forecasting future cash flows: The first step in creating a DCF model is to forecast the company's future cash flows. This typically involves forecasting revenue, costs, and expenses for a period of time, usually 5 to 10 years.
Determine the discount rate: The next step is to determine the discount rate, which is used to discount the future cash flows back to their present value. The discount rate is typically b