In a Down Market, Stock Of Indian Analysts Soars

India West, June 28, 2001, By Bala Murlai Krishna

SAN LEANDRO, Calif.-Last June when Ravi Suria put out his first dire report on Internet darling Amazon.com, he was greeted with a mix of shock, disregard and even derision. By questioning Amazon’s business model, and predicting a disastrous outcome barring significant changes, the 29-year-old convertible debt analyst clearly stepped on the shoes of star analysts such as Henry Blodget and Mary Meeker, still cheerleaders for the pioneering e-commerce company and for the Internet in general.

Why, Suria even ruffled the feathers of his Lehman Bros. colleague, Holly Becker, who railed at the cheek of “a relatively unknown credit analyst” with “no insight into the company’s strategy,” and Amazon chief executive Jeff Bezos, who dubbed his report “hogwash” and shut him out of an analysts’ schmooze.

Even the more experienced Ashok Kumar, like Suria an alumnus of the Indian Institute of Technology in Chennai, faced similar ridicule last fall. The first to spot a weakness in the market for personal computers, the U.S. Bancorp Piper Jaffray analyst broke ranks with analysts in downgrading Intel, a bellwether stock not only for the PC industry but also for the entire technology sector. Other analysts reacted with a collective howl of protest, calling it an “overreaction.” What is more, they reaffirmed their high ratings on the chipmaker, saying they didn’t see any clouds on the horizon.

Two years ago, Dan Niles faced worse: death threats. When the Sri Lankan took a dim view of Dell, a hugely popular stock of the go-go nineties, investors were furious with the Robertson Stephens analyst. Dell investors, rewarded handsomely over the years as the company exploited the soaring PC industry, expected the party to continue forever, and some of them were loath to put up with one who was trying to upset their applecart.

Over time, each of those three calls has turned out to be prophetic, emphasizing the fundamental strength of the analysts’ research. Amazon stock is still stinging from that report, not to mention another that followed earlier this year; Intel not only went down but also took many others with it; and Dell has been a dog, stock market parlance for an underperformer. Suria, Kumar and Niles are not the only South Asian analysts making a dent in the highly traditional world of finance and investing.

Goldman Sachs’ Michael Parekh (see separate story) has educated the investing world on opportunities arising from the explosive growth of the Internet; his colleague Vik Mehta is a wireless guru; another, Niraj Gupta, is a top gun in broadcasting; and then there is the relatively unknown Ullas Naik (see separate story), who emerged the most successful Internet analyst in 1999, trouncing the likes of Meeker and Blodget. In fact, there are scores of them making a quiet and some not-so-quiet impact on Wall Street, reminiscent of the manner in which South Asian entrepreneurs invaded Silicon Valley in the 1980s and top-notch business executives raided the board rooms of corporate America in the’90s.

If the Institutional Investor’s All-Star Analysts listing and similar rankings by The Wall Street Journal and Fortune are anything to go by, not to mention 24-hour financial news channels such as CNBC and Bloomberg, these analysts are acquiring the kind of repute South Asian engineers, entrepreneurs and managers already have in the United States. Mostly in their 30s, or even younger as Suria was when he shot into fame, and possessed with the swagger of those emerging from top-notch engineering and business schools, these analysts are finally signaling the arrival of South Asians on Wall Street.

Financial professionals from the subcontinent have worked on Wall Street for decades, but most often in anonymity, but “the fame and notoriety the Ravi Surias of the world have attained of late is sure making people take notice that Indians on Wall Street are more than some back-room number crunching jockeys,” said Jai Singh, the editor-in-chief of CNET’s News.com who is counted among the most influential people in technology. “What they have to say can make or break companies,” he added.

Goldman’s Parekh calls it a “broadening trend” that started in the 1960s and has witnessed the rise of Indians in a variety of fields. Confident, forthright, fearless and often contrarian and correct, the South Asian analysts are also a breath of fresh air in a time and age when “Wall Street surrendered its investment banking integrity,” said Ram Kolluri, a Wall Street veteran who is himself a frequent guest on 24-hour financial news channels.

For a variety of reasons, “analysts are sheep,” as News.com’s Larry Dignan harshly characterized them once. Few are independent, forceful and insightful in their analysis. According to a study by Dartmouth College’s Amos Tuck School of Business Administration, in the early 1990s analysts put out six buy ratings on a stock for every sell recommendation. This ratio deteriorated further to 50 to one at the height of the Internet mania. Another survey by Zacks Investment Research pointed to even more lopsided ratings: 265 buy or hold ratings for every sell rating. The conflict of interest with investment banking divisions is seen as a big reason, but Niles, who is now with Lehman Bros., says analysts are confronted with other, often harsher, challenges.

“It takes a lot of guts to make a negative call,” he told India-West. For obvious reasons, a firm’s investment banking would hate such a call; so would the company and sometimes mutual funds that hold the stock. Many analysts would probably shrug off some or all of these potential setbacks. But what if you are wrong, asks Niles, 34. If one recommends a stock and it goes down, it is all right; but when one makes a negative call, the “downside is huge,” he said. “That one outcome is so ugly to your career most analysts prefer to take a safer path.”

So what does it take to make fearless negative calls?

Niles says it is first and foremost a mind thing: Our job is not to be a cheerleader. Once analysts get that right and base their analyses on solid fundamental research, they are on the right track. “The bottom line is…if people can make money, they will listen,” said Niles, whose current firm Lehman Bros., known to be among the more liberal investment banks allowing its analysis significant autonomy. In fact, when earlier this year Suria was poised to release a second damning report on Amazon, the company was so agitated it reportedly had the venture capitalist John Doerr call the Lehman Bros. chief executive. But the Lehman Bros. head strongly backed Suria. “He (Suria) took a lot of grief, but stuck to his guns,” remarked Niles.

Suria has gained so much fame or notoriety for his reports on Amazon that his brilliant research on telecommunications companies has gone largely unnoticed. Niles, who has worked together with Suria at Lehman Bros., says no analyst in recent memory has saved more money for investors than Suria through his reports on the Ciscos and Nortels of the world long before they collapsed.

“Quite honestly, the (Suria’s) big calls were on telcos,” said Niles, “He took a very unpopular position, nobody wanted to believe the party was over for the likes of Cisco. But he was dead right.”

Suria, described by his Lehman Bros. colleague as a “workaholic,” has in the past been shy of talking about himself. Business Week once described his fondness for expensive cigars and beer, but very little is really known of the young man. Wai Tung, who has taken Suria’s position at Lehman Bros., says the Indian inspired the four-man team he led, but for the most part remained a private person. He could recall only an odd occasion when they went out for a drink. For the most part, it was “nose to the grindstone,” he told India-West.

Suria studied at IIT in Chennai and became interested in finance when studying for his M.B.A. program at Tulane University in New Orleans. Suria, who began his Wall Street career at Paine Webber in 1994, declined to be interviewed for this article but pointed to an interview he gave to TheStreet.com in which he spoke at length on his telecommunications sector research.

Suria’s basic premise: the telecommunications industry was overcapitalized, which is not necessarily bad. But since the overcapitalization occurred through debts, the burdens would cripple the companies’ fortunes and their stocks. True to Suria’s analysis, the debt burden, among other things, caught up with Cisco, Nortel and other telecommunications companies, most of which consequently lost 70 to 90 percent of their stock market value. As TheStreet.com observed, “Suria’s analysis of the telecom services sector may stand as his most important contribution: after all, Amazon’s peak market capitalization was $39 billion, which is dwarfed by the peak $640 billion market cap of the telecom services industry.”

U.S. Bancorp’s Kumar is not known to mince words. If anything he calls a spade a shovel. He has been described variously as “notoriously cranky” and “extremely bold.” Many Indian analysts “are making a pretty big impact, Ashok most of all,” said News.com’s Michael Kanellos, who often seeks Kumar’s searching analysis to report on technology.

At the end of 1998, Kumar was the first to report major problems at Compaq. Four months later, the PC-maker’s board asked its celebrated chief executive Pfeiffer Eckhard to resign, pointed out Kanellos.

“Kumar has creative ways to get to the bottom of a problem,” said Kanellos, “and has several sources” to fall back on. The report on the PC industry by Kumar, a former Intel executive, was one of the biggest last year. “Everyone was saying no even after he proved correct,” said Kanellos.

Also last year, Kumar took a lone, defiant and bearish stand on Brocade Communications, a fiber channel storage company started by Kumar Malavalli. As Brocade’s stock rose, he held out long enough saying, “you need to step back and look at the forest, not the trees.” True enough, Brocade came crashing down and is now off 50 percent.

“He (Kumar) generally doesn’t make the call unless it is based on fact and analyses,” said Kanellos. “He knows what he is talking about” and what is more, he doesn’t “speak in Wall Street gobbledygook.”

For now, Wall Street is hanging on to every word from the South Asian analysts and profiting immensely, too.