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Fundamental Analysis

Industry Analysis

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Industry Analysis

Which industries will benefit mostfrom the upcoming economic

environment?

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Industry Analysis

This will lead to several

industries, and our analysis willlead us to choose the one thatwe find to be best positioned.

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What is an Industry?

An industry is a group ofcompanies which produce similargoods and/or services.

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Industry Data in India

The Annual Survey of Industries(ASI) is the principal source of

industrial statistics in India.

The survey is conducted annually

under the statutory provisions ofthe Collection of Statistics Act1953.

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Annual Survey of Industries

It covers all factories registeredunder Sections 2m(i) and 2m(ii) of

the Factories Act, 1948 i.e. thosefactories employing 10 or more

workers using power; and those

employing 20 or more workerswithout using power.

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Annual Survey of Industry

The latest classification, i.e.National Industrial Classification(NIC) 1998, developed on the basisof UN International Standard

Industrial Classification(UNISIC),

1990.

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Components of Industry Analysis

The purpose of industry analysis is to identify whichindustries will be good for investors in the upcomingenvironment.

Some important issues should be addressed: Competitive Structure

Permanence

Phase of Life Cycle

Vulnerability to External Shocks

Regulatory and Tax Conditions

Labor Conditions

Historical Financial Performance

Financial and Financing Issues

Industry Stock Price Valuation

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Competitive Structure

Some of the questions to beanswered are:

What companies are in the industry?

What are their market shares?

Which are publicly traded?

Has the number of competitors been rising,fallen, or remained stable?

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Permanence

Some of the questions to beanswered are:

Is the industry likely to survive in the long-run?

Are there any major technological threats

(such as laser printer was to the dot matrixprinter)?

Are there regulatory threats?

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Phase of Life Cycle

Some of the questions to beanswered are:

Where is the industry in its life cycle? Thebest returns and most risk tend to occurearly in the cycle.

The possible phases are: Birth Phase

Growth Phase

Mature Growth Phase

Stabilization or Decline Phase

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Vulnerability to External Shocks

Some of the questions to beanswered are:

Could major portions of the industry benationalized by foreign governments?

Are they dependent on supplies of key

commodities (such as oil)?

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Are they subject to external politicalwhims?

Are they subject to fashion trends that maysoon change?

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Regulatory and Tax Conditions

Some of the questions to beanswered are:

What are the current regulations that theindustry faces?

Are there likely to be new regulations?

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Are the industrys products subject to

special taxes

Are there special tax breaks offered to theindustry?

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Labor Conditions

Some of the questions to beanswered are:

What percentage of the industrys

workers are unionized?

Are the unions generally hostile orcomplacent?

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Is unionization increasing ordecreasing?

Are qualified workers easilyobtainable, or are they difficult tofind? This has been a particular

problem for the high-tech industries.

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Historical Financial Performance

Some of the questions to beanswered are:

What is the historical record of industryrevenue, earnings and dividends?

Are these financial variables cyclical,

counter-cyclical?

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Have they been growing slowly,rapidly, or about average?

What is the average cost structure inthe industry? Heavy on fixed costs?Or, are variable costs the lions

share?

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Financial and Financing Issues

Some of the questions to beanswered are:

How much debt does the average firm have?

What is the mix between fixed assets and currentassets? Is it labor intensive or capital intensive?

What is the average age of the fixed assets? Willthey have to be replaced soon?

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Industry Stock Price Valuation

Some of the questions to beanswered are:

What is the historical average P/E for theindustry?

How high has it been? What were theeconomic conditions when the highs were

hit? How low has it been? What were the

economic conditions when the lows werehit?

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Where is it now? Where should it be,based on historical economic

comparisons? What kinds of capital gains and

dividend yields have historically been

generated?

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A Stylized Depiction of the Business Cycle

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Sector Rotation

Selecting Industries in line with thestage of the business cycle

Peak natural resource firmsContraction defensive firms

Trough equipment, transportationand construction firms

Expanding cyclical industries

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The Industry Life Cycle

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Pioneering Stage

Rapid growth in demand occurs

Offers highest potential returns, but alsooffers the greatest risk.

It is difficult to select companies for

investment because the survival rate isunknown.

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Expansion Stage

The survivors of pioneering stage areidentifiable.

The rate of growth is more moderate thanbefore.

Industries are improving their product andimproving their prices.

The capital base is widened and strengthendividend.

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Stabilization Stage

The growth begins to moderate.

Sales may still be increasing, but at a

much slower rate than before.

Products become standardized and lessinnovative.

Maturity stage is to be avoided byinvestors interested in capital gains.

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Declining Stage

In the boom period, the growth of theindustry would be low.

Decline at higher rate during therecession.

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Business Cycle Analysis

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Growth Industry

High rate of growth compared to theaverage of all industries.

Independent of business cycle.

Growth in IT Industries during 1997-98.

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Defensive Industries

Defies the movement of businesscycle.

Least affected recession andeconomic adversity.

Example: Food, Pharmaceutical etc.

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Cyclical Industry

Move along with business cycle

Most volatile

Example: Consumer durable, Auto,Sugar etc.

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Industry Life Cycles

Stage Sales Growth

Start-up Rapid & Increasing

Consolidation Stable Maturity Slowing

Relative Decline Minimal or Negative

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Structural Analysis

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Inputs

What are inputs?

Who is the supplier is?

Demand-supply positionDependency on foreign countries

Alternative inputs

Organised or unorganised market

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Outputs

What is it?

Who uses it?

Organised or unorganised markets

Demand Supply position

Customer analysis? Age

Sex Religion

Demographic condition

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Exit Barrier

Switching Cost

Specialized assets

Fixed cost of exitStrategic interrelationships

Emotional barriersGovernment and social restrictions

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Players

Who are the players?

Their niches

Their SWOTTheir competitive position

There competitive position

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Their future plan & strategies

New products (Product portfolio change)

New Markets (Market Portfolio change)

Diversification or disinvestment plant etc

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Economy Industry Linkage

Governments attitude towards industry

Promotional

Regulatory

Restrictive

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Other Factors

Export oriented industry

Import substitution potential of industry

Industry life cycle stage

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Practice

Choose an industry and identify the

factors that will determine its

performance in the next three years andwhat is your forecast for performance in

that time period.