Fundamental Analysis

Industry Analysis

Industry Analysis
Which industries will benefit most from the upcoming economic environment?

Industry Analysis
This

will lead to several industries, and our analysis will lead us to choose the one that we find to be best positioned.

What is an Industry?
An industry is a group of companies which produce similar goods and/or services.

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 of the Collection of Statistics Act 1953.

Annual Survey of Industries

It

covers all factories registered under Sections 2m(i) and 2m(ii) of the Factories Act, 1948 i.e. those factories employing 10 or more workers using power; and those employing 20 or more workers without using power.

Annual Survey of Industry

The

latest classification, i.e. National Industrial Classification (NIC) 1998, developed on the basis of UN International Standard Industrial Classification (UNISIC), 1990.

Components of Industry Analysis

The purpose of industry analysis is to identify which industries will be good for investors in the upcoming environment. 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

Competitive Structure

Some of the questions to be answered 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?

Permanence

Some of the questions to be answered are:

Is the industry likely to survive in the longrun? Are there any major technological threats (such as laser printer was to the dot matrix printer)? Are there regulatory threats?

Phase of Life Cycle

Some of the questions to be answered are:

Where is the industry in its life cycle? The best returns and most risk tend to occur early in the cycle. The possible phases are:

Birth Phase Growth Phase Mature Growth Phase Stabilization or Decline Phase

Vulnerability to External Shocks

Some of the questions to be answered are:

Could major portions of the industry be nationalized by foreign governments? Are they dependent on supplies of key commodities (such as oil)?

Are they subject to external political whims?

Are they subject to fashion trends that may soon change?

Regulatory and Tax Conditions

Some of the questions to be answered are:

What are the current regulations that the industry faces? Are there likely to be new regulations?

Are the industrys products subject to special taxes

Are there special tax breaks offered to the industry?

Labor Conditions

Some of the questions to be answered are:

What percentage of the industrys workers are unionized? Are the unions generally hostile or complacent?

Is unionization increasing or decreasing? Are qualified workers easily obtainable, or are they difficult to find? This has been a particular problem for the high-tech industries.

Historical Financial Performance

Some of the questions to be answered are:

What is the historical record of industry revenue, earnings and dividends? Are these financial variables cyclical, counter-cyclical?

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

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

Financial and Financing Issues

Some of the questions to be answered are:

How much debt does the average firm have? What is the mix between fixed assets and current assets? Is it labor intensive or capital intensive? What is the average age of the fixed assets? Will they have to be replaced soon?

Industry Stock Price Valuation

Some of the questions to be answered are:

What is the historical average P/E for the industry? How high has it been? What were the economic conditions when the highs were hit? How low has it been? What were the economic conditions when the lows were hit?

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?

A Stylized Depiction of the Business Cycle

Sector Rotation
Selecting

Industries in line with the stage of the business cycle Peak natural resource firms Contraction defensive firms Trough equipment, transportation and construction firms Expanding cyclical industries

The Industry Life Cycle

Pioneering Stage

Rapid growth in demand occurs

Offers highest potential returns, but also offers the greatest risk. It is difficult to select companies for investment because the survival rate is unknown.

Expansion Stage

The survivors of pioneering stage are identifiable.

The rate of growth is more moderate than before. Industries are improving their product and improving their prices.

The capital base is widened and strengthen dividend.

Stabilization Stage

The growth begins to moderate.

Sales may still be increasing, but at a much slower rate than before. Products become standardized and less innovative.

Maturity stage is to be avoided by investors interested in capital gains.

Declining Stage

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

Decline at higher rate during the recession.

Business Cycle Analysis

Growth Industry
High rate of growth compared to the average of all industries. Independent of business cycle. Growth in IT Industries during 199798.

Defensive Industries
Defies the movement of business cycle. Least affected recession and economic adversity. Example: Food, Pharmaceutical etc.

Cyclical Industry
Move along with business cycle Most volatile Example: Consumer durable, Auto, Sugar etc.

Industry Life Cycles

Stage Start-up Consolidation Maturity Relative Decline

Sales Growth Rapid & Increasing Stable Slowing Minimal or Negative

Structural Analysis

Inputs
What

are inputs? Who is the supplier is? Demand-supply position Dependency on foreign countries Alternative inputs Organised or unorganised market

Outputs
What

is it? Who uses it? Organised or unorganised markets Demand Supply position Customer analysis?
Age Sex Religion Demographic condition

Exit Barrier
Switching

Cost

Specialized assets Fixed cost of exit Strategic interrelationships Emotional barriers Government and social restrictions

Players
Who

are the players? Their niches Their SWOT Their competitive position There competitive position

Their future plan & strategies

New products (Product portfolio change)

New Markets (Market Portfolio change)

Diversification or disinvestment plant etc

Economy Industry Linkage

Governments attitude towards industry

Promotional
Regulatory

Restrictive

Other Factors
Export oriented industry Import substitution potential of industry Industry life cycle stage

Practice
Choose an industry and identify the factors that will determine its performance in the next three years and what is your forecast for performance in that time period.