03.5 · Rating rationales, offer documents, broker reports & US filings¶

Why this matters: the annual report is written by the company for its shareholders. Four other documents are written for different readers — lenders, IPO investors, fund managers and US regulators — and each tells you something the annual report does not: how close the company is to a liquidity problem, what insiders paid for their shares before they sold them to you, what the market already expects, and (for global stocks) what the company is legally required to say about its risks. Knowing where each one lives and what to take from it saves hours and occasionally saves a portfolio.

Learning objectives — after this lesson you can:

Read a credit-rating rationale and extract, in five lines, the liquidity position, the covenants and funding profile, the support assumptions and the rating sensitivities.
Walk through a DRHP/RHP and compute, from its pages, the fresh issue vs offer for sale, the post-issue share count, the market value at the price band, the weighted average cost of acquisition of the sellers, and the lock-in schedule.
Deconstruct a sell-side research report's target price into its assumptions and decide what, if anything, it adds to your own work.
Find any item in a US company's filings (10-K, 10-Q, 8-K, proxy, S-1, 13F, Forms 3/4/5; 20-F and 6-K for foreign issuers) and know which item answers which question.

Prerequisites: 03.1 Where information lives, 03.2 Anatomy of an annual report, 03.3 Notes to accounts · Time: ~75 min

1. Credit-rating rationales: the equity analyst's free liquidity report¶

1.1 What a rating is — and why equity investors should read one¶

A credit rating is an opinion on the probability that a borrower pays interest and principal on time. In India, SEBI-registered credit rating agencies (CRAs) — CRISIL, ICRA, CARE Ratings, India Ratings & Research, Acuité, Brickwork, Infomerics — rate bank loans, bonds (non-convertible debentures, NCDs), commercial paper (CP) and fixed deposits. Every rating action comes with a public press release or rationale of three to eight pages.

The long-term scale runs AAA, AA, A, BBB (investment grade), then BB, B, C and D (default); "+" and "−" modifiers refine it (AA+, AA, AA−). Short-term instruments (CP, working-capital lines) use A1+, A1, A2, A3, A4, D. Each rating carries an outlook (Stable, Positive, Negative) or, when an event is pending, a rating watch ("with negative implications", "with developing implications").

Rating rationales are among the most underused documents in Indian equity research, for three reasons:

They contain numbers the annual report does not. Month-by-month debt repayment schedules, unutilised credit lines, cash-flow cover for the next year's maturities, related-party support and covenant terms often appear only here.
They are updated between annual reports. A rating action can come at any time; a rating agency that places a company on watch is telling you it has seen something.
SEBI requires specific sections. After IL&FS defaulted in 2018, SEBI told rating agencies to add a section on Liquidity to every press release — using standard descriptors (Strong/Superior, Adequate, Stretched, Poor) and covering cash and liquid investments, unutilised lines, and the adequacy of cash flows to service maturing debt — and later a section on Rating sensitivities: the specific factors that would lead to an upgrade or a downgrade 1 2. The current rules sit in SEBI's Master Circular for credit rating agencies (as of September 2026, the version of July 2025) 2.

India notes

Rationales are free: search the agency's website by company name, or use the links in the company's exchange filings (LODR requires listed companies to disclose rating changes).
A company can have ratings from several agencies. Differences between them — or an agency that "withdraws" a rating at the company's request — are information in themselves.
"Issuer not cooperating" (INC) means the company stopped providing information to the agency; the rating is then based on public data and usually cut. It is a governance signal, not just a credit one.
Ratings of group companies often assume parent or group support. Read how much of the rating rests on that assumption, and whether the parent is itself stretched.

1.2 The five things to extract¶

Section	What to take	Why an equity analyst cares
Rating action and outlook	Upgrade, downgrade, reaffirm, watch; the instruments and amounts rated	The direction of travel; how much debt exists by instrument
Key rating drivers — strengths and weaknesses	The agency's view of market position, profitability, leverage, working capital, management	A second opinion on the business from someone paid to worry about the downside
Liquidity	Cash and liquid investments; unutilised limits; debt due in the next 12 months; cash flow cover	The single best short-form test of whether the company can survive a bad year
Rating sensitivities	The explicit triggers: e.g. "net debt/EBITDA above 3.0×", "receivables above 120 days", "reduction in parent support"	Ready-made thesis-breakers for your monitoring list
Key financial indicators and annexures	A small table of revenue, profit, debt, gearing, interest cover; group structure; instruments and ratings history	Quick consistency check against the accounts

Worked example 1 — reading a real rationale: DHFL, 3 February 2019¶

On 3 February 2019 ICRA placed the A1+ rating on Dewan Housing Finance's ₹8,000 crore commercial-paper programme on watch with negative implications 3. The case study I4 covers the company; here we read the document as an equity analyst would.

What the rationale said (paraphrased, figures as reported):

Material event. Disbursements in the December 2018 quarter collapsed to ₹510 crore from ₹9,950 crore in the September quarter, "amid tightening liquidity". Between 24 September and 31 December 2018 DHFL repaid ₹17,876 crore of debt.
How it paid. In the same period it raised ₹16,290 crore: ₹11,873 crore by selling or securitising loans, ₹2,750 crore of NCDs, and only ₹500 crore of bank loans and ₹575 crore of CP. Fixed deposits saw a net outflow of ₹1,356 crore.
Liquidity. A reserve of about ₹6,500 crore (including statutory liquid assets) was "sufficient to meet the scheduled repayments till March 2019" — but could be stretched by premature deposit withdrawals.
Weaknesses. Rising non-housing loans; builder loans at 17% of AUM, largely under construction or moratorium; gearing of 9.3×; "reduced ability to refinance".

The five-line equity summary:

The company can no longer roll short-term market debt (CP was 3.5% of new money raised).
It is funding repayments by shrinking: 73% of new funding came from selling assets.
Loan growth has effectively stopped (disbursements −95% quarter on quarter), so earnings will fall even if credit costs do not rise.
The runway is roughly two months of scheduled repayments, conditional on depositors not running.
The riskiest assets (builder loans) are the least saleable, so the book being sold is the good one.

None of this was in DHFL's last annual report. The shares closed at ₹116.10 on 4 February 2019, the first trading day after this rationale (and ₹610 in mid-September 2018); DHFL defaulted four months later.

Trader's lens

Read the liquidity section like a funding-desk report: sources and uses over the next twelve months, then stress it. If the company needs the market to be open to survive, the equity is short a put on market access. Rating agencies lag prices, but their rationales often contain the data that the price is reacting to.

1.3 Limits of ratings¶

Ratings are paid for by the issuer, rely on information the issuer provides, and change slowly. IL&FS was rated AAA until August 2018 and D within six weeks; SEBI later penalised ICRA and CARE over their IL&FS ratings (I4). Use rationales for their data and triggers, not their conclusions. When the price of a company's bonds or equity diverges sharply from its rating, trust the price's direction and the rationale's numbers.

2. Offer documents: DRHP and RHP¶

2.1 The documents and the timeline¶

An Indian IPO produces three offer documents under SEBI's ICDR Regulations, 2018 (Issue of Capital and Disclosure Requirements):

DRHP (draft red herring prospectus): filed with SEBI and published for public comment, usually months before the issue. It has everything except the price.
RHP (red herring prospectus): the final document, filed with the Registrar of Companies days before the issue opens; it adds the price band and issue dates.
Prospectus: filed after pricing, with the final price.

Since 1 December 2023 listing must happen within three working days of the issue closing (T+3) 4. Anchor investors — large institutions allotted shares the day before the issue opens — are locked in for 30 days on 50% of their allotment and 90 days on the rest 5. Promoters' minimum contribution is locked in for 18 months (3 years in some cases) and other pre-IPO shareholders for 6 months. The dates on which lock-ins expire are known in advance and often coincide with selling pressure.

2.2 What to read, in order¶

DRHP/RHP section	What it contains	What to take
Cover page and "The Offer"	Fresh issue (new shares, money to the company) vs offer for sale (OFS: existing holders selling, money to them), sizes, price band	Who gets the money. A large OFS means insiders are cashing out
Objects of the Issue	Uses of fresh-issue money: capex, debt repayment, acquisitions, "general corporate purposes" (capped at 25%)	Whether the company needs the money, and for what
Capital structure	Share history, pre-IPO placements, ESOPs, weighted average cost of acquisition (WACA) of each selling shareholder	What insiders paid, and the multiple they are selling at
Basis for Issue Price	KPIs, peer comparison, and (since November 2022) the price per share of recent primary and secondary transactions and the IPO price band as a multiple of WACA, with a justification by a committee of independent directors 6	The bankers' valuation case — and its weakest assumptions
Risk factors	Company-specific risks first, then generic ones	The few specific risks are the useful ones; count litigation and regulatory matters
Restated financial information	Three years of audited accounts restated to current policies, with auditor's examination report	Build your model from here, not from marketing pages
Management's discussion and analysis	Drivers, segment performance, liquidity	Compare with KPIs; look for changes in accounting policy
Outstanding litigation and material developments	Cases against the company, promoters and directors, tax disputes	Size relative to net worth; criminal matters against promoters
Group companies and related-party transactions	Promoter-controlled entities and dealings	Leakage paths

Worked example 2 — the arithmetic of an IPO: Zomato, July 2021¶

Zomato's IPO (July 2021) offered ₹9,375 crore of shares at a price band of ₹72–76: a fresh issue of ₹9,000 crore and an OFS of ₹375 crore by Info Edge. At ₹76 the company had about 784.5 crore shares after the issue, a market value of about ₹59,623 crore (I8).

Who gets the money? 96% of the issue was fresh capital — cash for the company, not for sellers. That is the opposite of an insider exit.
Dilution: fresh shares = 9,000 ÷ 76 ≈ 118.4 crore, about 15% of the post-issue count.
Post-money cash: the fresh issue added ₹9,000 crore to the balance sheet, about 15% of the market value — so the market value net of the new cash was ≈ ₹50,600 crore.
What the price implies: Zomato was loss-making, so the question is not P/E but how many years of growth at what eventual margin justify ₹50,600 crore for the operating business. That is the analysis the case study asks you to do.

The lesson generalises: first identify who is selling and at what cost, then what the price implies. An IPO where private-equity holders sell most of the shares at ten times their WACA is a different proposition from one where the company raises growth capital at a price close to its last private round.

Reading the Basis for Issue Price

The KPIs are chosen by the company and its bankers. Check that each KPI is defined, audited or certified, and shown for every period; that the "listed peers" are genuinely comparable; and that the multiple quoted uses the same basis for the company and its peers (pre- vs post-issue shares, trailing vs forward earnings).

3. Sell-side research reports¶

3.1 Structure¶

A broker's company report usually has: a rating (Buy/Add/Hold/Reduce/Sell) and a target price (TP) with a 12-month horizon; a one-page investment thesis; earnings estimates for two or three years with changes from the last report; the valuation method; key risks; and pages of financial tables. Initiation reports (the first on a company) are long and useful for industry background; results updates are short and mostly re-state the quarter.

3.2 How target prices are built¶

Most target prices are a multiple times a forward estimate: TP = target P/E × EPS two years out (or EV/EBITDA, P/B for lenders, sum-of-the-parts for conglomerates), sometimes cross-checked with a DCF. The two inputs are both judgements, and small changes move the answer a lot:

\[ TP = m \times EPS_{t+2} \quad\Rightarrow\quad \frac{\Delta TP}{TP} \approx \frac{\Delta m}{m} + \frac{\Delta EPS}{EPS} \]

Worked example 3 — deconstructing a (fictional) broker note on Kaveri¶

This note is fictional, written for this lesson; the Kaveri numbers are from the running example.

Broker X, 25-Aug-2026 — Kaveri Pumps & Motors: BUY, TP ₹528. "We value Kaveri at 24× FY28E EPS of ₹22.0. We expect revenue to grow 15% a year to FY28 on the solar-pump order book and industrial demand, with EBITDA margin recovering to 15.5% as Hosur ramps up. Q1 was a blip; receivables will normalise as state payments resume. Risks: delays in government payments, copper prices."

How to use it against your own work (Kaveri valuation):

Rebuild the estimate. FY26 revenue was ₹1,318 crore. Fifteen per cent a year gives FY28 revenue of about ₹1,743 crore; at a 15.5% EBITDA margin, EBITDA ≈ ₹270 crore. EPS of ₹22 on 6.07 crore shares is PAT of ≈ ₹134 crore — a 48% rise from FY26's ₹90.5 crore. The course's base case has FY28 revenue of ₹1,653 crore at a 14.2% margin.
Find the swing assumptions. The note differs from the base case mainly on growth (15% vs 10–14%) and margin (15.5% vs 14.2%). It does not model receivables or cash flow at all — the course's central concern.
Price the multiple. 24× is roughly the stock's current trailing multiple (25.9× FY26 EPS of ₹15.08). A buyer at ₹390 who accepts the note is betting on EPS growth, not re-rating.
Take what is useful. The note's value is as a record of the bullish expectation you must beat or reject — the "market view" in your variant-perception statement (11.3). The course's reverse DCF says ₹390 already implies ≈14% growth; the note needs more than that.

3.3 Incentives and how not to be used by them¶

Sell-side analysts are paid, directly or indirectly, by trading commissions, investment-banking relationships and access to management. The consequences are well documented: ratings skew heavily towards Buy, targets cluster just above the current price, estimates follow guidance, downgrades come late, and companies with investment-banking business get kinder coverage. SEBI's Research Analysts Regulations (2014, amended since) require disclosure of conflicts — whether the firm or analyst holds the stock, received compensation from the company, or managed an issue — at the end of every report; read that section first 7.

Use sell-side research for: industry data and channel checks; the consensus estimate you must beat; management access notes; and good initiation reports' history of a sector. Do not use it for: the rating, the target price, or any statement about what "the market is missing".

4. US filings: a map for global stocks¶

Global companies you may analyse — and Indian companies with US listings, such as the former Tata Motors and Satyam ADSs, or Infosys and Wipro today — file with the US Securities and Exchange Commission (SEC) on EDGAR (free, searchable by company name or CIK number) 8.

Form	What it is	When	What to read first
10-K	Annual report (US companies)	60–90 days after year end, by filer size	Item 1 Business; Item 1A Risk Factors; Item 7 MD&A; Item 8 Financial statements and notes; Item 9A controls
10-Q	Quarterly report (first three quarters)	40–45 days after quarter end	MD&A changes; new risk factors; subsequent events
8-K	Current report on a material event (results, acquisitions, CEO changes, auditor changes, defaults)	Within four business days	Item 4.01 (auditor change), Item 2.02 (results), Item 5.02 (officers)
DEF 14A	Proxy statement before the annual meeting	Before the AGM	Executive pay and its metrics; related-party transactions; board independence
S-1 / F-1	IPO registration (US / foreign issuer)	Before an IPO	The US equivalent of a DRHP: risk factors, use of proceeds, dilution
13F	Holdings of institutional managers with over $100m	45 days after quarter end	What large investors own (with a lag) — e.g. Berkshire's Apple purchases in G10
Forms 3, 4, 5	Insider holdings and trades	Form 4 within two business days of a trade	Insider buying and selling
Schedule 13D / 13G	Holdings above 5% (13D if activist)	Within days of crossing 5%	Activists' stated intentions
20-F / 6-K	Annual report and interim reports of foreign private issuers	20-F within four months of year end	The 20-F is the foreign issuer's 10-K; 6-Ks carry press releases (as used in I15)

India notes

Indian companies with US ADSs file 20-Fs under IFRS (or with a US GAAP reconciliation in older years), which can give a second, differently-audited view of the same company. Satyam's and Tata Motors' 20-Fs are used in the case studies (I1, I15). The Indian equivalents of the US forms are covered in 03.1: LODR Regulation 30 disclosures ≈ 8-K; SAST disclosures ≈ 13D/13G; insider trading disclosures under the PIT Regulations ≈ Form 4.

Common mistakes

Reading only a rating's letter and not its liquidity section and sensitivities.
Treating an AAA or a Big Four auditor as proof of safety (see I4, G4, G9).
Reading the DRHP's marketing chapters and skipping the capital-structure pages that show what insiders paid.
Confusing a large fresh issue (money to the company) with a large OFS (money to sellers).
Using a broker's target price as your valuation, or its "Buy" as a signal.
Forgetting lock-in expiry dates when buying a recent IPO.
For US companies, reading the press release instead of the 10-K/10-Q, where the risk factors and notes are.

Key terms¶

Term	Meaning
Credit rating	An agency's opinion on the probability of timely debt service, on a scale from AAA to D
Rating outlook / watch	Stable, Positive or Negative direction over 1–2 years / a flag that a pending event may change the rating soon
Liquidity descriptor	Strong/Superior, Adequate, Stretched or Poor — the rating agency's standardised view of near-term liquidity
Rating sensitivities	The specific factors that would trigger an upgrade or downgrade
Issuer not cooperating (INC)	A rating maintained on public information because the issuer stopped providing data
DRHP / RHP	Draft red herring prospectus (filed with SEBI, no price) / red herring prospectus (final, with price band)
Fresh issue	New shares issued; the money goes to the company
Offer for sale (OFS)	Existing shareholders sell; the money goes to them
Anchor investor	An institution allotted shares before the issue opens; locked in 30 days (50%) and 90 days (50%)
WACA	Weighted average cost of acquisition of shares by a selling shareholder, disclosed in the offer document
Basis for Issue Price	The offer-document section justifying the price with KPIs, peers and past transaction prices
Target price	A broker's 12-month price estimate, usually a multiple times forward earnings
10-K / 10-Q / 8-K	US annual report / quarterly report / current report on a material event
DEF 14A	US proxy statement: pay, board, related parties
13F	Quarterly holdings report of US institutional managers above $100m
Form 4	US report of an insider's trade, due within two business days
20-F / 6-K	Annual report / interim report of a foreign private issuer listed in the US

Check your understanding¶

A rating agency's liquidity section says a company has ₹800 crore of cash and ₹400 crore of unutilised lines against ₹1,500 crore of debt due in the next twelve months and ₹500 crore of expected operating cash flow. What descriptor would you expect, and what is your equity-analyst takeaway?

Answer

Sources ₹800 + ₹400 + ₹500 = ₹1,700 crore against uses of ₹1,500 crore: cover of about 1.13× — probably Adequate, at the weaker end. The takeaway: the company depends on rolling some debt or on its operating cash flow arriving on time; a bad quarter or a closed market makes it Stretched. Add "liquidity cover below 1.1×" to your thesis-breakers.

An IPO raises ₹2,000 crore: ₹300 crore fresh issue and ₹1,700 crore OFS by a private-equity fund whose WACA is ₹120 against an issue price of ₹600. What should you conclude, and what would you check?

Answer

85% of the money goes to a seller exiting at 5× its cost; the company barely needs capital. That is not a red flag by itself — funds must exit — but it removes the "growth capital" argument and means the price was set to suit a motivated seller. Check the Basis for Issue Price (peer multiples, KPI definitions), the fund's remaining stake and lock-in, and whether recent secondary transactions were at prices far below ₹600.

A broker values a company at 30× FY28E EPS of ₹40 (TP ₹1,200). If EPS comes in 10% lower and the market pays 25×, where is the stock?

Answer

25 × ₹36 = ₹900 — 25% below the target. Both judgements (multiple and estimate) moved against the note, and the effects compound: (1 − 0.1) × (25/30) = 0.75.

Where in a US company's filings would you find (a) a change of auditor, (b) the CEO's bonus metrics, (c) a director's share sale last week, (d) the risks the company itself lists?

Answer

(a) Form 8-K, Item 4.01; (b) DEF 14A (proxy statement), compensation discussion and analysis; (c) Form 4; (d) 10-K, Item 1A (updated in 10-Qs).

Why might a rating rationale be more useful to an equity analyst after a rating downgrade than before?

Answer

A downgrade rationale usually spells out, with numbers, what went wrong — the liquidity shortfall, the covenant or the support assumption that failed — and the sensitivities for the next move. Before the downgrade the document tends to emphasise strengths. The numbers in a downgrade rationale often reveal how far the problem has gone.

Go deeper¶

SEBI, Master Circular for Credit Rating Agencies (current version) — the required contents of rating press releases 2.
SEBI, ICDR Regulations, 2018 and the November 2022 amendments on KPIs and the Basis for Issue Price 6.
Any recent CRISIL or ICRA rationale for a company you follow — read the liquidity section and sensitivities, and add the triggers to your monitoring list.
US SEC, How to Read a 10-K (investor.gov) 8.
Case studies that use these documents: I4 IL&FS and DHFL (rating rationales), I8 Zomato & Paytm (offer documents), G3 Cisco and G10 Apple (US filings).

Sources¶

All accessed 24-Sep-2026. Regulatory details are as of September 2026; verify the current versions before relying on them.

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