MUMBAI: When equity markets are downbeat, you would expect the outlook at research houses that analyse listed stocks to be similarly muted. Why then are analysts putting out reports with buy stamps on them for stocks that are underperforming the broader market, which is anyway bearish? Don’t believe us?

Consider India’s largest real estate company,DLF Ltd. The stock has lost a little over a fifth since January, much more than the 30-share BSE Sensex, which is down 11% in the calendar year. Yet, DLF invited 18buy calls last week, with only eight analysts recommending a sell.

Then there is infrastructure company JP Associates, yet another underperformer vis-A -vis the broader market. The number of buy calls last week: 24. Number of sells: Just 1, according to data available with the ET Intelligence Group.

A fortnight ago when an analyst based out of Canada took a hard look at the Ambani brothers, in a report titled ‘Brothers in Arms: Misappropriated a Fortune’, the research community in India sat up and took notice. True, it wasn’t the first time the financials of Anil Ambani Group CompanyReliance Communications (RCOM) had come under the scanner.

It is a Global Phenomenon

That it took a Canadian research firm to tell investors – Indian and global – what it felt was wrong with the corporate governance and accounting standards of Reliance companies could make you wonder: Couldn’t its Indian counterparts have done the same – and with similar impact?

It’s not just the big boys who are handled with kid gloves. Equity analysts also tend to be charitable to companies that have initial share sales lined up. Over the past two to three years,Reliance Power,Cox amp; Kings,JSW Energy,SKS Microfinance and Future Ventures all received favourable reports before their public offers. Today, all these stocks are trading at a discount to the issue price. Investors who trusted the reports would be poorer for it.

If you’re looking for more evidence of analysts’ inability to call it right, rewind to January 2008 when theSensex peaked at 20,873 points. At the height of the boom, there were some 953 buy recommendations on the top 100 companies listed with BSE, four times the number of sell reports. Clearly, few saw the rally petering out. It did, quite spectacularly, with the Sensex shedding 55% in a year to sink to 9,406.

SP Tulsian, a Mumbai-based independent analyst, has little sympathy for his peers. “Our analysts are meek; they are scared about calling a spade a spade when it comes to evaluating a stock.”

Says Raamdeo Agarwal, joint managing director, Motilal Oswal Financial Services: “Sell recommendations are not common as the underlying broking business is attuned to buy calls.”

It makes sense for a brokerage to send buy reports to clients in the hope that they will act on the advice, thereby boosting its business. Ironically, such pressures would be higher in bearish times when brokers’ earnings from commissions slip.

Agarwal adds that there are many instances of analysts toning down their reports to neutral ratings in lieu of sell, although they are certain about a bearish trend in a particular stock. There are also instances of analysts preferring to drop a company from their coverage list if they’re certain about gloomy prospects rather than making a sell call, adds an analyst on the condition of anonymity.

Arun Kejriwal, director, Kejriwal Research Investment Services, says most analysts follow the herd mentality as it does not pay to come out with an unconventional report.

To be fair to Indian research houses, the rarity of sell reports is a global phenomenon. Bloomberg data reveals there is just one sell reco for about nine buy and hold ratings in the UK. In India, the ratio of buy and hold to sell is under five now.

SaysShankar Sharma, founder of brokerage house First Global: “Wall Street has been tainted for decades for being a management mouthpiece. There are foreign houses and some Indian ones that curry favours with managements for investment banking business, but the majority are fairly independent here.”

What Sharma means is brokerages are not averse to butting out favourable reports in order to bag investment banking mandates, which are typically lucrative. Some brokers’ research arms also put out buy reports when something totally to the contrary may be going on in their dealing rooms.

Yet, when analysts go against the herd with forthright reports, they tend to become stars in their own right even as they earn the wrath of managements. Matthew Earl, head of business services research at Matrix Group in the UK, is one such analyst. A year ago, he raised the red flag on two outsourcing companies, Xchanging and Connaught.