Tea

FMCG Others - cleaning, home care etc

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales

Details

Top 5 companies account for 80 % of industry ( 2500 Cr) 1. Tata Tea - 41 % 2. HLL - not broken out separately 3. Goodricke group - 9 % 4. Jayshree tea - 9 % 5. Tata coffee - 8 % 6. Williamson tea - 8 %

Profitability pool analysis ranking by ROE

Poor profitability in industry due to movement of consumption to loose tea (and commodity nature of product) 1. Tata Tea - 3 % 2. Goodricke group - -7 % 3. Jayshree tea - -4% 4. Tata coffee - 0 % 5. Williamson tea - 36 %

Market share stability analysis

Complete data not available However Tata tea seems to gaining share

Tea Pricing stability Pricing seems to be poor and has dropped from 1999 by 4-5 %

FMCG Others - cleaning, home care etc

Industry structure type

Dominated by a few key players like Tata tea, HLL, nestle and some smaller player. However key segment is the loose , unorganised tea market which has done well in the past few years

Key Industry products or segments

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Economic model
Return on capital :

Details 1.Trend for the last 10 years. 2. What is the normative return. Is it cyclical ?

ROE has dropped from 20 % + to below 10 %

High , above 20 % for most

Tea Dupont analysis 1. Asset turnover ratio = Sales / total assets ( Asset efficiency) 2. NPM. 3. Return on asset = NPM* Asset TO ratio 4. Total asset / Equity ( indication of debt levels) 5. ROE = Total asset/ equity * Return on asset

FMCG Others - cleaning, home care etc

1. Asset turns have come down from 1.3 to 0.8 2. Margins have dropped from 10 % + to 5-6 % in 2005 due to poor pricing 3. ROA is poor due to 1 and 2 4. Debt equity has held steady at around 0.5:1 5. ROE is dropping due to the above reasons

FA Intensity

1. Asset light model ? 2. High on intangible asset ( R&D / Customer relations / Brand / patent )

High FA TO in the industry. Mainly due to outsourcing of manufacturing to third party suppliers

WCAP Intensity

1. Which component of WCAP is high inventory / recievables and why

High Ratio as payables is on credit. Recievable are mostly around 1 week. Main WCAP component is the inventory.

Capital intensive ?

1. Capital intensity high due obsolence

No. high Asset TO

Margin intensive ?

Does the business have high margins. Are the margins defensible ?

Low margins for most. NP < 10 %. Not cyclical. Structural reduction happening

RM as % of sales and implication

Tea

FMCG Others - cleaning, home care etc

Key Industry ratios and statistics

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Consumed regularly as bevarage 2. In decline, being overshadowed by coffee (check this assumption) 1. Rural demand 2. Demand in specific segments 3. Down trading happening

Key supply drivers

supply side factors which impact the economics of the business 1. Does the supplier power effect the pricing 2. Is the business RM sensitive ?

1. Tea crop (volumes) - global production 1. Price of LAB / Oils 2. Global pricing determined by international demand

Shareholder Value creation drivers

Important Drivers which which would enhance the long term value

1. Strong brands 2. Distribution infrastructure 3. NPD pipeline and ability to launch successful new products 4. Innovation capability Was low. Currently business model is changing due to local players. Price senstivity increasing

Degree / nature of change

1. Does the underlying need for the product remain the same 2. Can the need be met with substitute products ?

Tea Predictability of business 1. Does the product/ service have long life cycle 2. Does it satisfy some recurring need 3. Has the business model changed drastically several times ?

FMCG Others - cleaning, home care etc High. However growth is low in the main categories due to high penetration

Cyclical nature ?

Is the business subject economic cycle or exempt from it . Is it in a state of perptual decline ?

Low

Ability to increase price ahead of 1. Is the business able to increase 1. Poor for unbranded. Depends on inflation (Pricing power) price easily ? This is a strong indicator demand / supply situation of CA 2. Moderate for the branded. However demand growth is low and moving towards unbranded and hence poor pricing power

Was high. Has got impacted due to local players and intense competition between major players. Food / Some segments still have moderate pricing power

Some sort of monoploy or Oligopoly

1. Is consolidation happening ? 2. 80 % market share controlled by how may firms ?

None

Multiple co.s . Multiple local companies

Does the company have a recurring revenue stream

Yes . Due to FMCG nature of product

Yes.

Does the business have franchise / brands or is it commodity

1. What has been the trend in the last 1. Brands are present. Poor pricing / few years Franchise levels

The business has franchise/ brands. Commoditisation has now started

Does the industry enjoy high growth rates ? For how long

No. Growth is negative due to migration Low growth in general category. Growth to coffee only in niche categories now

Tea Key industry variable which drive the performance

FMCG Others - cleaning, home care etc 1. Distribution depth / No. 2. Ad spend / Brands 3. Net margins

Strong competitive advantages create entry barriers for incumbents, preventing entry of competition and enables incumbents to earn high returns Customer advantage Factors 1. Habit forming and High resulting in moat (customer Differentiation - No. 1 captivity) 2. Experience goods (brand effect, Higher durability than production trademarks) - No. 2 advantage factors 3. High switching cost (Lock-in) - No. 3 (for ex : change of business software by a co. such as SAP ERP etc) 4. High search cost ( where it is diffcult, expensive and risk for custom to look for alternative ) like case of doctor or lawyer 4. Network effect (related to switching cost - network effect increases switching cost)

Source of competitive advantage

1. Habit forming, but low differentiation. Although companies are moderately successfully in branding part of the market

1.Habit forming and differentiation created through branding and product differentiation 2.Brand effect strong in several categories such as cold drinks, soaps, detergents, oils etc

Presence of Network economics - customer advantage factor network Radial or combitorial economics

Presence of network effect increases switching cost for the customer a) Scale economics due to network effects b) Barriers to entry due to network effect 1. Transaction based (like ebay) 2. Community based (like Fools) 3. Complementary products (VHS+ players) 1. Commerce transaction 2. advertising 3. Subscription 4. Data 5. Incubation (Like windows network effects taken to MS office or Explorer

NA

NA

Network taxonomy

NA

NA

Network profits based on

NA

NA

Tea Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent A. Process economies (resulting in A. Not much process economies lower cost of production for incumbent) 1.indivisbility of value chain 2. Complexity and fit of processes 3. Rate of change in process costs 4. Protection through copyright / Patent / License / Lease 5. Resource uniqueness such as acess to raw material or manpower etc

FMCG Others - cleaning, home care etc A. 2. Complexity and process fit present in certain categores such as food B. Scale economies in distribution, Purchasing, Advertising. Helps in building brand and reducing COGS

B. Scale Economies ( In conjuction B. Scale economies exist for b. Scale economies very crucial and with with demand captivity result in very Distribution / Advertising and moderately customer based advantages add to sustainable competitive advantages ) for production in farms competitive advantage through 1.Distribution 1. Distribution - strong distribution 2. Purchasing network 3. Advertising 2. Purchasing efficiency 4. R&D 3. Information based economies through advertising

Distinctive capability analysis

Distinctive capability analysis applied to specific market (product or geographic create the customer based or production based advantages Relationships with all stakeholder / systems / process / Knowledge base / - analyse the architecture v/s the target market Strong know how from parent / IP transfers

Architecture

Strategic assets

Distribution network / plant / license monopoly / natural reserve /Patents / Media Properties/ Network effects / Switching costs - analyse with target market

1. Distribution network for retail 2. Tea gardens 3. Brands

Strategic assets in the form of distribution network

Tea Innovation R&D / Innovation history /NPD - Disruptive innovations ? - Sustaining innovations ? Low Cost position None

FMCG Others - cleaning, home care etc Moderate innovations. Higher in past. Low currently Costs structure are on higher side.

Cost

Important in the industry

Financial strength

Strong Balance sheet

NA

Companies are financially strong. Strong cash flows and low debt Strong brands for every user segment

Reputation

Brands / trademarks

Important in the industry

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Low industry returns due to low entry barriers, commodity nature of product and lower pricing strenght of brands and unorganized sector. Also falling demand and shift of tea drinking to coffee (substitute) has resulted in falling returns. High rivarly and presence of substitute and falling demand has reduced returns in the industry

ENTRY BARRIER - No. 1 Factor deciding industry profitability

1. The Brand pull should create Entry barriers exist in the form of scale, prevent the customer from switching branding and distribution strenght. to competitor due to price. Else a However unorganised market has made know brand will not translate to a impact on growth and pricing profitable franchise 2. Strategic assets above can also create entry barrier thus maintaining a profitable franchise High, especially for backward integrated companies having their tea gardens Important - in production, distribution and marketing

Entry barriers are high due to distribution and Brands

Asset specificity

Economies of Scale

Distribution economies of scale. Purchasing economies of scale

Tea Proprietary Product difference Low

FMCG Others - cleaning, home care etc Minimal

Brand Identity Switching cost

Moderate Low

Strong brand differences Low

Capital Requirement

High only if integrated backwards to tea High, due brand building and gardens Distribution infrasturcture

Distribution strength

High

High. Getting eroded in local areas

Cost Advantage

Important

Low

Government Policy

Low

None

Expected Retaliation

moderate

High

Production scale

important

Anticipated payoff for new entrant

Low. Check for unbranded

Precommitment contracts

Low

Learning curve barriers Network effect advantages of incumbents

Moderate None

Tea No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT High competition

FMCG Others - cleaning, home care etc

Rivarly is high now due to poor growth and unorganised sector

Rivalry is high now. Local competition is intense. Due to high intangible investment in brands and distribution, the profitability of the industry is weak now Low now

Industry growth

Low for organised sector

Fixed cost / value added Intermittent overcapacity Product difference

?? High Low

Low High now as these product involve low tech Medium. Quality -> but reducing now. Differentiation is mainly through Distribution and brands Low Medium . Business is not capital

Informational complexity Exit Barrier Demand variability

Low moderate. Low for unorganised Low

SUPPLIER POWER

Low as tea is a commodity

Supplier power is low

Differentiation of input Switching cost of supplier

Low Low

Low Low

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

Yes, from other tea gardens Low High High Low Low as the final consumer is the final buyer

Yes No High Low Low Buyer power on individual basis is low

Tea Buyer conc. v/s firm concentration Buyer volume Low

FMCG Others - cleaning, home care etc Buyer conc. Is low and dispersed

Low

Buyer volume is low

Buyer switching cost Buyer information

Low High, mostly priced based other than brand and taste None Coffee

Buyer switching cost is low Good, although not critical

Ability to integrate backward Substitute product

No Brand substitution high especially in soaps/ detergents / oral care. Less in foods

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

Yes Low High Low Low, new generation moving toward coffee

High and hence subsititution of brands happen Low Medium to low now Low High

Intangible assets

1. Brands - requiring high ad spends for maintenance 2. Patents / Knowledge assetrequiring high R&D expenses 3. Distribution infrastructure - S&D expenses ? 4.Customer relationships/ contracts / agreements 5. Media property / License / Some sort of monopoly 6. Network effects / Switching costs / Customer lockins

1. Brands important in industry . Do brands give excess returns in india (to check ??) 2. No patents 3. Distribution infrastructure is similar to FMCG companies. No longer a key differentiator for the top companies

Valuation model

Tea Valuation approach

FMCG Others - cleaning, home care etc 1. P/E 2. Cash flow

High PE Low PE for the industry Avg PE for the industry Valuation drivers

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

Automobiles - cars / HCV

Auto components

AUTO AND ANCILLARIES Batteries

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales 1. Tata motors - 50 % 2.Maruti udyog - 30 % 3.Ashok leyland - 12.5 % 4.Eicher motor - 3 % 5. Force motors - 2 % Total industry sales - 41195 1.MICO - 12.7 % 2.Bharat Forge - 6.7 % 3.Exide Industries - 5.9 % 4.SRF - 5.5 % 5.Sundram Fasteners - 4.4 % 6.SKF India Ltd. - 3.9 % 7.Wheels India - 3.6 % 8.Amtek Auto - 3.5 % 9.Rico Auto - 2.8 % 1. Exide - 80 % OEM and 65 % after sales

Profitability pool analysis ranking by ROE

1. 2. 3. 4. 5.

Eicher - 50.5 % Tata - 19.8 % Maruti - 13.2 % Ashok - 12.9 % Force - -10%

1. 2. 3. 4. 5. 6. 7. 8.

Bharat forge - 28 % Rico auto - 15 % MICO - 12 % SRF india - 10 % Exide - 8 % SRF/ Amtek - 7 % Sundaram fastner - 4 % Wheels india - 2 %

Market share stability analysis

Automobiles - cars / HCV Pricing stability

Auto components

AUTO AND ANCILLARIES Batteries

Industry structure type

Not too fragmented. Top 3 companies account for 90 % of industry

Very fragmented. But each company works in its own niche product. Easily 40+ no. of companies. Top 10 companies account for only 50 % industry

Key Industry products or segments

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Economic model
Return on capital : Cyclical in nature Has improved from < 10 % to 20 % + in the last few years . Mainly due to improved asset utilisation and margins improvement High.Being driven by export demand and increase in the knowldege component of business. Improvement in asset turns have improved ROC. Interest expenses have improved margins. OPM are stable

Automobiles - cars / HCV Dupont analysis 1. Asset TO has doubled to 2.9 from 1999 to 2006. TO has doubled, but the asset being used are the same 2. Margins have also doubled from 3 % to 6 %. 6 % NPM appear sustainable 3. To doubling of NPM and asset TO, the ROA has gone up 4 times from 4.5 % to 18 % + 4. Debt levels have gone down due to total asset to equity dropping from 1.8 to 1.3 5. ROE has gone from 10 % range to 20 % due to above factors (point 1-4)

Auto components

AUTO AND ANCILLARIES Batteries

1. Asset turns have improved from 1.3 to 1.8. And hence has driven the efficiency 2. NPM has gone up by 3-4 % (doubling). The Profit margins look sustainable in 47 % range 3.Return on asset has improved from 56 % range to 10% +. More 10 % sustainable ? 4. Debt level (total asset / equity) has seen some drop but not too much (2 to 1.7) 5. ROE is above 10 % and on avg above 13-14 % . The industry can be assumed to be creating value as a whole

FA Intensity

Moderate TO ratio. Generally > 2.

WCAP Intensity

Capital intensive ?

Yes. The Ratios have improved from < 1 to almost 2 times TO ratios. Asset efficiency has improved the ROC

Margin intensive ?

Very low margins currently. Low 14-17 % Avg OPM. NPM has increased margins causing poor return on capital. from 3-4 % to 8-9 %. Major Margins are cyclical in nature improvement achieved through debt reduction

RM as % of sales and implication

Automobiles - cars / HCV

Auto components

AUTO AND ANCILLARIES Batteries

Key Industry ratios and statistics

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Consumer demand for cars. Depends on general affluence level. 2. Commercial vehicle demand depends on industrial activity 3. Availability of finance 1. Driven by demand for commerical and cars 2. Some parts also driven by industrial demand 1. Driven by OEM sales of cars, two wheelers, and Tractors 2. Replacement demand 3. Industrial demand

Key supply drivers

1. Steel prices

1. Steel prices

1. Price of key raw material - Lead and Plastics ( both together account for around 75 % of RM cost )

Shareholder Value creation drivers

1. Strong brands 2. Enduring low cost position 3. NPD pipeline and ability to launch successful new products 4. Innovation capability

1. Patents / Technology skills 2. Strong R&D capability 3. Ability to develop new products to meet the demands of the auto industry

1. 2. 3. 4.

Patent / Technology Strong R&D and new products Distribution for aftersales Relationship with OEM customers

Degree / nature of change

Moderate.Smaller life cycle of a product. High. Smaller product life due to Changes in technology continous improvement in technology and change in car models

1. Low driven mainly by changes in the technology

Automobiles - cars / HCV Predictability of business high. Due car buying by consumer and Commercial vehicle for Goods movement

Auto components

AUTO AND ANCILLARIES Batteries

High. Low level of change High especially if long term contracts are being signed. Auto component companies are moving to higher end items improving the predictability of the business

Cyclical nature ?

Moderate for cars. High for commercial vehicle

Ability to increase price ahead of Poor inflation (Pricing power)

Business is cyclical in nature as the end demand comes from automobiles. However india is move into the global supply chain and hence will have lower volatility the OEM except for long term 1. Poor for

1. OEM business is cyclical 2. After sales follows OEM with lag, but is less cyclical

1. Poor for the OEM except for long term contract. Depends more if technology is contract and inbuilt escalation clauses. able to drive costs low Depends more if technology is able to 2. Much higher for the spare parts drive costs low business 2. Much higher for the spare parts business. Though lower than other auto components

Some sort of monoploy or Oligopoly

Low in india. High competitive intensity Multiple companies. especially in mid segment

Very high market share enjoyed by Exide

Does the company have a recurring revenue stream

Yes. High value purchase with long cycle Yes. However from limited customer

Yes - From OEM contracts and retail sales

Does the business have franchise / brands or is it commodity

Franchise / branding is strong in india

1. No brands. Franchise is more 1. No brands. Franchise is more production (cost driven) in OEM production (cost driven) in OEM 2. For service market brands and pricing 2. For service market brands and pricing power is present (moderate) power is present (moderate). Exide is a strong brand. Overall batteries have stronger brand value than other auto component Yes. Trend towards good growth due change in global dynamics 1. High currently. Driven by OEM 2. Later to be driven by Replacement market

Does the industry enjoy high growth rates ? For how long

Commerical vehicles is cyclical. Cars / personal vehicle have a much steadier trend

Automobiles - cars / HCV Key industry variable which drive the performance 1. Brands 2. Cost of manufacturing

Auto components

AUTO AND ANCILLARIES Batteries 1. R&D 2. Long term contracts 3. Cost of mfg ( Cost competitiveness) 4. Ability to deliver on quality and service levels 5. Distribution and dealer relationship. Relationship with OEM customer (Market share in each )

1. R&D 2. Long term contracts 3. Cost of mfg ( Cost competitiveness) 4. Ability to deliver on quality and service levels

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

1.High differentiation among products 2. Brand effect is strong 3. Moderate lockins due long purchase cycle

1. Switching cost / Locking exist 1. Moderate differentiation due to moderately due to technology transfers brands and long term contracts

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

None

Network taxonomy

None

None

Network profits based on

None

Economies of scale in advertising, manufacturing and OEM relationship

Automobiles - cars / HCV Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) A. 1. Value chain indivisbility is very high 2. Complexity and process fit is high 3. Process cost reduction happens due to learning curve 4. Patents may exist in some unique cases. Less so in india

Auto components

AUTO AND ANCILLARIES Batteries A. 1. Value chain indivisibility has impact on cost. Lead procurement process and manufacturing costs have impact 2. Complexity and process fit has moderate impact 3. Moderate benefits through patent or R&D knowhow

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies in production/ competitive edge if the ratio of Purchasing/ Ad/ R&D fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

A. 1. Value chain indivisibility is high 2. Complexity and process fit high due to technology component 3. Process cost drops may happen on learning curve 4.Patent may exist and provide competitive edge 5. Low cost manpower a plus for indian industry

B. Scale economies exist for purchasing, B. Scale economies important for distribution (for retail) and R&D distribution, purchasing , Ads and R&D

Distinctive capability analysis

Architecture

1. Relationship with suppliers is 1. Relation with OEM important 2. System / process to apply technology 2. Process/ knowledge base important to for lower cost production of the Auto keep cost of production low components 3. Internal process important for car companies 1. Distribution network is important dealers are important 1.Patents 2. Switching cost of OEM , though not too high

Strategic assets

Automobiles - cars / HCV Innovation Important - but technology is mainly imported Important

Auto components 1. Sustaining innovation

AUTO AND ANCILLARIES Batteries

Cost

Very important. Main trend driving outsourcing from india

Financial strength

Very important as Auto companies have Important as auto companies globalise large scale Very importan as Auto purchase depends on brands and reputation Important only in retail

Reputation

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Industry has good returns as demand has been high, early entrats who developed scale have been able able to create barriers and keep returns high. Key variables are entry barriers and rivarly. In event of drop in demand, rivalry could increase resulting drop in returns High entry barriers, muted rivalry due to lesser no. of competitior in each product segment and improvement in scale due to export and local market has resulted in an attractive industry returns, especially for the larger companies. Rivalry is not intense. Supplier power is very low. Buyer power has resulted in lowering of returns a bit. Returns are high for exide which has control on the market. However buyer power from OEM reduces returns somewhat. Rivarly is less due to high market share of exide. Supplier power and substitutes do not have high impact

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Entry barriers are high and hence maruti high entry barriers due to and other first movers have a higher 1. Economies of scale advantage. 2. Customer relationship and contracts 3. Tech knowhow and R&D assets

High entry barrier due to dominance of exide in the OEM and after sales market

Asset specificity

High. An automobile plan is capital intensive High for manufacturing/ Purchasing/ Marketing etc

high

Moderate

Economies of Scale

1. Purchasing / Manufacturing and marketing economies of scale

1.Purchasing / Manufacturing / Distribution and Advertising economies of scale

Automobiles - cars / HCV Proprietary Product difference Moderate. New technology is being added. But it gets copied quickly

Auto components

AUTO AND ANCILLARIES Batteries 1. Moderate. Branding and quality create a meaningfull difference.

1. High due to employement of technology / R&D spend

Brand Identity Switching cost

High

1. Medium to low (if supplying OE vendors) moderate. New buyers have tendency to 1. High for the OE stick to their brand.

1. Strong. Gives pricing power in replacement market Low

Capital Requirement

High for the industry

High to achieve global scale economies ??

Distribution strength

Critical

1.Not critical as many supplier are located close to OE 2. Important only if the company is a domestic retail player 1. Critical component between players due technology difference, Advantages of scale 1. Low impact

Critical, especially for the replacement market

Cost Advantage

High

??

Government Policy

Moderate

NA

Expected Retaliation

High

high, especially in the lower end of spares market High for achieving cost effciences

??

Production scale

High

Important, especially for the OEM market where price is very critical ??

Anticipated payoff for new entrant

??

Low as capacity / Technology / Customer relationship needs to be establised Yes. Extremely critical

Precommitment contracts

No

Important for the OEM market. Gives volumes, but lower margins ?? None

Learning curve barriers Network effect advantages of incumbents

High None

High None

Automobiles - cars / HCV

Auto components

AUTO AND ANCILLARIES Batteries High market share with exide

No. of competitors - Monopoly / Low concentration ratio for all segments 1. Intense competition due to a no. of ologopoly or intense competition except entry level small companies (concentration ratio ) 2. Some companies building scale to global levels - would result in lower competitionamong major competitor as RIVALRY DETERMINANT Rivarly is high due to high fixed Low rivalry investments. Muted currently due to good demand growth most of the autocomponent companies operate in different product lines

Low, due to dominance of exide

Industry growth

High

High in india due to high exports

Moderate

Fixed cost / value added Intermittent overcapacity Product difference

High Moderate Moderate

High

??

currently low for specific product due to Not very critical shift in global model High due to technology input and Moderate. Driven more by the brand Manufacturing processes and OEM relationship High due to R&D High Low Moderate. ?? Low. Reduced by replacement market

Informational complexity Exit Barrier Demand variability

Moderate High High

SUPPLIER POWER

Low

Low. Main supplier are steel/ metals Low, due to commodity nature of the company where the cost depends on the inputs commodity cycle Low Medium - Only if some special RM type is required None Low Low High Low High Low Low

Differentiation of input Switching cost of supplier

Low Moderate

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

High Low High High Low Low

Yes No ?? ?? Low high for OEM resulting in lower margins, Low for Replacement market resulting in higher margins

Automobiles - cars / HCV Buyer conc. v/s firm concentration Buyer volume Low

Auto components High

AUTO AND ANCILLARIES Batteries High for OEM, low for the replacement market

Low

1. OE buyer is high from a company and High for OEM, low for the replacement hence high impact market 2. Retail is low individual volume and retail does not add to a large component of business Low High for OEM, low for the replacement market Low None, except for brand substitution

Buyer switching cost Buyer information

Low

Ability to integrate backward Substitute product

1. High as lot of companies invest in developing their vendors High 1. High as key vendors are important for the auto makers in their total cost structure None 1. Low. Most top auto companies are trying to out source as much as possible Public transport - not really a key factor Low

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

High Low High. Taken care through vendor selection process High Low if quality and cost is maintained

High Low Moderate Low Low

Intangible assets

1. Brands are critical. Pricing strength is moderate due to brands. Depends more on the product quality / review 2. R&D spends high for cost cutting / new technology. More from the production advantage standpoint than from a consumer standpoint

1.Brands not too critical and do not add to pricing power 2. R&D / Patents required from process point of view for indian vendors to achieve low cost of production 3. Distribution critical for Spares supply in the after's market only 4. Customer relationships very important for the OEM market and can result in moderate lockins 5. Technology tie-ups are also important

1. Brands - important in after sales market 2. R&D and knowhow important for new products and to improve quality and to reduce cost 3. Distribution infra important for after sales markets 4. Customer relationship important for OEM relationships

Valuation model

Automobiles - cars / HCV Valuation approach 1. P/E 2. Cash flow

Auto components 1. P/E 2.DCF

AUTO AND ANCILLARIES Batteries 1. PE 2. DCF - normalised a small extent

High PE Low PE for the industry Avg PE for the industry Valuation drivers

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

ANCILLARIES Tyres Hardware BPO

Technology

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales

Profitability pool analysis ranking by ROE

Market share stability analysis

ANCILLARIES Tyres Pricing stability Hardware BPO

Technology

Industry structure type

Key Industry products or segments

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Economic model
Return on capital : Poor. In the region of 7 - 12 % . OPM drop has resulted in drop to 7 %. Asset efficiency is steady

ANCILLARIES Tyres Dupont analysis 1. In the region of 1.7 - 2. Good ratio 2.In the range of 1-3 % with reduction in the recent years. Extremely poor margins 3. Low - 4-5 % due to very low NPM 4.In the range of 1.8 - 2. moderate debt which has reduced recently 5. In the region of 7-10 %. Reduced in the recent years due to drop in margins Hardware BPO

Technology

FA Intensity

WCAP Intensity

Capital intensive ?

Margin intensive ?

Very low margins for the last 6 years inspite of boom in the auto industry

RM as % of sales and implication In the range of 7 - 12 %. Reduction to 7 % in the recent years . This has resulted in further drop in NPM and depressed ROE

ANCILLARIES Tyres Hardware BPO

Technology

Key Industry ratios and statistics

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Driven by OEM sales of cars, two wheelers, and Tractors 2. Replacement demand 1. Offshoring of services

Key supply drivers

1. Price of key raw material - rubber

1. Educated mapower at reasonable cost 2. Continous skill enhancement of employees 3. Exchange rate - rupee / dollar

Shareholder Value creation drivers

Degree / nature of change

ANCILLARIES Tyres Predictability of business Hardware BPO

Technology

Cyclical nature ?

Ability to increase price ahead of 1. Poor for the OEM except for long term inflation (Pricing power) contract. Depends more if technology is able to drive costs low 2. Much higher for the spare parts business but much lower than other auto components. Also re-treading plays an important role too

1. Extremely lower for computers 2. Higher for other computer equipment with lower standardisation such as PDA/ routers / etc. more based on feature 3. Pricing power is present only in the first few months during new model introduction. None later- has to be reduced ?? None

Some sort of monoploy or Oligopoly

None

Does the company have a recurring revenue stream

Yes - From OEM contracts and retail sales

??

Yes, but only after long term contract is signed

Does the business have franchise / brands or is it commodity

1. No brands. Franchise is more Brand power results in moderate production (cost driven) in OEM pricing. Not very attractive customer 2. For service market brands and pricing franchises power is present (moderate)

Weak to moderate brand.No franchise.Lock in due to Switching costs

Does the industry enjoy high growth rates ? For how long

Yes - From OEM contracts and retail sales

Yes, due increasing penetration by computers

Yes, very high due to increased outsourcing

ANCILLARIES Tyres Key industry variable which drive the performance Hardware BPO

Technology

Source of competitive advantage

Customer advantage Factors 1. Moderate differentiation due to resulting in moat (customer brands captivity) Higher durability than production advantage factors

1. Moderate brand effect. 1. Lock or high switching cost mainly Commoditisation happening now with a vendor company due to built in 2. From some electronic products such knowledge sharing with the vendor as consumer electronics brand effect is increasing for the high end

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

None

None

Network taxonomy

None

Network effect for some consumer electronics (but not in india)

None

Network profits based on

None

None

None

ANCILLARIES Tyres Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) A. 1.Indivisibility of value has impact on manufacturing costs 2. Process fit not too complex Hardware A. Process economies due to 1. Value chain fit and process cost reduction over time BPO

Technology

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scales economies in manufacturing, competitive edge if the ratio of distribution, purchasing , R&D and fixed cost / Variable cost for the moderately in R&D market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

A. Process economies 1. Complexity and fit of process is critical for BPO kind of operations. More for the high end than the vanilla call centre business 2. Process cost reduction over time is critical 3. Acess to quality manpower in india is imp

B. Scale economies in B. Scale economies in 1. Production 1. manpower availability 2. Distribution which is critical for 2. Sales and marketing electronics 3. Purchasing of components 4. Advtg 4. R&D for new products (non existent in india)

Distinctive capability analysis

Architecture

Strategic assets

ANCILLARIES Tyres Innovation Hardware BPO

Technology

Cost

Financial strength

Reputation

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Extremely attractive returns due to high demand and high value add for the customer. Entry barrier have now become high as the larger firms have become big. Rivalry is not destructive due to high growth. Buyer power is not very high and supplier power / Substitute does not impact. Very returns in the industry currently as it is a sunrise industry

ENTRY BARRIER - No. 1 Factor deciding industry profitability

1. Entry barriers exist for - economies of scale - Strong customer relationships - learning curve barriers can be created

Asset specificity

Low

Economies of Scale

High. High volume helps in recruitment and meeting new demand and deployment. Also training costs / Fixed costs can averaged out

ANCILLARIES Tyres Proprietary Product difference Hardware BPO None

Technology

Brand Identity Switching cost

Low High

Capital Requirement

Moderate to low. Customer contacts are critical

Distribution strength

None

Cost Advantage

High

Government Policy

Low

Expected Retaliation

Moderate to low

Production scale

NA

Anticipated payoff for new entrant

Good

Precommitment contracts

Highly critical in this industry

Learning curve barriers Network effect advantages of incumbents

High None

ANCILLARIES Tyres No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT Hardware BPO

Technology

Multiple players

Industry growth is high. The industry is in growth mode and hence has lower level of internal competition

Industry growth

High

Fixed cost / value added Intermittent overcapacity Product difference

Low None Low

Informational complexity Exit Barrier Demand variability

Moderate Low Low

SUPPLIER POWER

None

Differentiation of input Switching cost of supplier

None None

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

None None None None None High, especially for smaller companies

ANCILLARIES Tyres Buyer conc. v/s firm concentration Buyer volume Hardware BPO

Technology

High for each firm. For some very high

High for new firms

Buyer switching cost Buyer information

Moderate High

Ability to integrate backward Substitute product

Moderate No product substitute in medium term. Vendors can be substituted. Long term new technologies can make some services obsolete NA NA NA NA NA

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

Intangible assets

1. Brand have moderate impact 3. Distribution infrastructure important for after sales market 4. Customer relationship important for OEM market

1. Brand not resulting in too much pricing power. Indian brands not so powerful. 2. Low for indian vendors 3. Distribution critical . Service infrastrucuture is important 4. Customer relationship important for Corporate customers / Dealer relationship important for retail

1. Customer relationship important. Similar to IT services 2. Knowledgement management critical

Valuation model

ANCILLARIES Tyres Valuation approach Hardware BPO

Technology

High PE Low PE for the industry Avg PE for the industry Valuation drivers

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

Technology IT services

Financial instituiton BANKS

Rating agency

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales Large no. of companies. However top 8 companies account for 80 % and top 4 for 70 % (cognizant is not listed 1. TCS - 22 % 2. Infosys - 19 % 3. Wipro - 17 % 4. Satyam - 10 % 5. HCL - 5 % 6. Iflex - 2 % Industry is fragemented. Top 16 players 1. Crisil account for 80 %. Total no. of banks is 2. ICRA 50 + 1. SBI - 25% 2. ICICI bank - 10 % 3. Punjab national bank - 7 % 4. Canara bank - 6 % 5. BOB - 5 % 6. BOI - 5 % 7. Union bank of india - 4 % 8. HDFC bank - 3 % 9. Indian overseas bank - 3 % 10. Oriental bank of commerce - 3 %

Profitability pool analysis ranking by ROE

Very profitable industry. However only the top vendors or specialist are highly profitable. A number to tier II and III vendors are losing money 1. TCS - 65 % 2. Infosys - 22 % 3. Wipro - 29 % 4. Satyam - 26 % 5. HCL / Iflex - 8 % 6. Patni - 10 %

Most banks have ROE in the range of 17-22 % . Almost 90 % + banks have double digit ROE in last few years

Market share stability analysis

NA

Cannot analyse. However accquisition mergers should reduce the no. of players.

Technology IT services Pricing stability Pricing is better for Top tier and specialist companies. For Tier II and III companies pricing is squeezed due to reliance on key customers

Financial instituiton BANKS Competition has made pricing of credit competitive. However it decided more by interest rates

Rating agency High, due to oligpoly between the 3 companies

Industry structure type

Fragmented. But consolidating at the Top and to specialist vendors

Very fragmented. Should consolidate through M&A

oligopoly between three companies 1. CRISIL 2. CARE 3. ICRA

Key Industry products or segments

1. 2. 3. 4.

Retail lending Corporate lending Treasury operations Fee based incomes

1. Ratings 2. Market research

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest) 1. SBI 2. ICICI 1. CRISIL 2. CARE/ICRA

Economic model
Return on capital : 1.Very high return on capital 2. Trend for last 10 years towards high ROCE and low debts 3. No cyclicality as the industry is in a growth phase Retun on capital depends on economic 1. Very high to strong competitive cycle. High in last few years due to advantage ( > 50 %) reducing int rates. Better for private and some psu due better lending and risk management processes

Technology IT services Dupont analysis 1. Asset turnover not too high. Between 1-1.5. Main asset is building 2. High NPM. Between 17-20 %. Fairly steady due to GDM 3. High ROA. 20% + 4. Very low debt. Most companies are cash rich 5. Persitently high ROE, in excess of 20 %

Financial instituiton BANKS Not entirely relevant. ROA is a more important no. any bank with ROA > 1.5 % will have good ROE as banks have leverage of 9-10 times

Rating agency 1. 2. 3. 4. 5. High Asset TO ration - 2-3 times of FA NPM 15-20 % ROA is high. 30-40 % range Low to no debt High ROE in the range of 40% +

FA Intensity

High FA TO as business requires only Building and IT infrastructure

Not relevant : FA is mainly branches and 1. Asset light model. 2-3 time FA IT / ATM infra turnover

WCAP Intensity

Very Low WCAP - Main WCAP is Debtors, Not relevant : no inventory, Low creditors. Tier 1 companies have debtors days of 30 days. Tier 2 has 60-90 days of Debtors Low capital intensity Very capital intensive. Operates with high level of leverage ( 10:1)

1. WCAP needs are close to 0

Capital intensive ?

1. Low intensity of capital. 3-4 times TO ratios

Margin intensive ?

High margins due to GDM model. To go Low margins (NII and other income). down over long term due to competition ROE is good due to high leverage.

1. High margins - 15-20 % NPM

RM as % of sales and implication Salary cost. Currently under pressure due to labor shortage

Cost of funds. Depends on interest rate. 1. High margins - 30-40 % OPM Does not impact as long as the bank can manage the asset liability durations

Technology IT services

Financial instituiton BANKS 1. Interest rates and yield curve 2. GDP performance 3. NPA

Rating agency

Key Industry ratios and statistics

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Low cost proposition for same services 2. Labour / skill shortage in long run 1. Credit offtake - Industrial / rural / Consumer through consumer loan 2. Continual demand of the product although alternate channels such as capital markets are now relevant 1. Debt raising by companies 2. No. of companies looking at raising debt and getting rated

Key supply drivers

1. Educated mapower at reasonable cost 2. Continous skill enhancement of employees

Demand deposit / Time deposit and cost None of deposit

Shareholder Value creation drivers

1. Branding 2. Strong sales capabilities 3. Service solution / innovation capabilities

1. Ability to improve loan portfolio with low risk profile and source fund at low to competitive rates 2. Other income streams as Fee based income , treasury income, Distribution income Low level of change Medium - competition from alternate sources of finances such as capital markets / Consumer finance companies for consumer loans / HFC for housing loans / Project finance & WCAP finance from FI

Degree / nature of change

High degree of change - due to technology changes / high competition

Technology IT services Predictability of business

Financial instituiton BANKS

Rating agency

Predicability is low due fast technology Medium - Change due to disaggregation Highly predictable changes. Clock speed for the Business is of channel / Change due to IT / Price high. Changes in the environment every shopping 2-3 years

Cyclical nature ?

Not yet as the model is moving to offshore

Not cyclical Cyclical based on economy . Low now due to Retail loans / Retail business which depends on the growing affluence 1. Not very high due low differentiation 1. Very high for the main rating agency levels for retail services like crisil / ICRA etc 2. Other income dependent more on other non core services such as cash management/ asset management depend on brand / infra and other factors 3. Pricing depends more on the cost of RM ( interest rate of money ) 4. margins mainly a play of the yield None at all Restricted competition due to three main firms - CRISIL , ICRA and …

Ability to increase price ahead of Very moderate. More demand supply inflation (Pricing power) gap driven. Commoditisation at lower end and moving up the value chain

Some sort of monoploy or Oligopoly

None at all - close to perfect competition.

Does the company have a recurring revenue stream

Yes

Yes, high recurrence of reveneues

Yes , if new debt is issued. Companies like crisil have developed new revenue streams like Risk assesment, Advisory services, Equity research etc Branding / Franchise very powerful and gives good pricing power

Does the business have franchise / brands or is it commodity

Weak to moderate brand.No Moderate branding - Not resulting in a franchise.Lock in due to Switching costs franchise

Does the industry enjoy high growth rates ? For how long

High growth currently due model shifts. High growth currently as banking not Looks likely for the next few years too developed in india

No, moderate in the current line of business.

Technology IT services Key industry variable which drive the performance 1. No. of new accounts 2. % repeat business 3. Utlisation levels 4. Margins 5. Geographic split of business 6. Split of business by vertical ( and performance in the vertical )

Financial instituiton BANKS 1. Net interest income 2. NPA 3. Credit / deposit ratios 4. Non interest cost/ operational income 5. Level of treasury income 6. Return on equity 7.No. of branches / Infra 8. CAR

Rating agency 1. No of new customer added 2. Margins 3. Other income - other value added service other than rating services

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

1.Lock in exist due process knowledge of customer and long term contracts 2. Brand effect exist, but is only moderate

1. Moderate differentiation due to 1. High brand effect branding and distribution network / size 2. High lockin (High switching cost) 2. Brand effect is high 3. Moderate lockin for retail customer

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

Scale economies come due to bigger network

none

Network taxonomy

None

None

none

Network profits based on

None

Network profits are based on economies none of scale as banks with large network can expand their retail business and also access low cost deposits

Technology IT services Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) A. 1. Value complexity is not too high unless IPR is being created 2. Copyright may exist for a few knowledge assets. Not much for IT services industry

Financial instituiton BANKS A. 1. Value chain is reasonable level of complexity and fit of process, which results in lower costs and better service for customer 2. No copyright or patent protection exists B. Scale economies critical for distribution (financial products, services), purchasing (raising deposits/ funds), and advertising

Rating agency High customer advantage due to government regulation . Rating is generally done by a set of fixed co.s CRISIL, CARE and ICRA

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies not too high other competitive edge if the ratio of than staffing fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

B. Scale economies in securing low cost No significant process economies deposit Scale economies in fee based income from retail Scale economies in Advertising

Distinctive capability analysis

Architecture

1.Domain specific IPR and knowledge base 2.Employee relationship and recrutiment / retention capability 3.Experience / knowledge base of IT project execution 1. Domain specific IPO and Knowledge base 2. Key employees groups with knowledge assets 3. Moderate switching costs

Crucial architecture factors : Relationship with depoitors / Risk management processes / Knowldege base / Employees

- Systems / knowledge base of company details / industry expertise

Strategic assets

Distribution network. Though does not offer very high CA

Brand / Toll gate like monopoly of the rating agency as any company wanting to access capital market have to get rated

Technology IT services Innovation Weak to none

Financial instituiton BANKS Low

Rating agency None

Cost

Currently low cost position. Endurability ? High . 1. Relevance in outsourcing 2. Relevance in Acquisitions Moderate to low. India brand stronger than individual company brands

Financial strength

Imp - Depends on access to low cost deposit / Credit management and Risk management processes V Imp . CAR decide the growth capability of the bank

Not critical

Not critical

Reputation

Brand / strenght important for accessing V imp. Any company wanting to access low cost deposit capital market has to get rated by these companies - like a toll gate

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Extremely attractive returns due to high demand and high value add for the customer. Entry barrier have now become high as the larger firms have become big. Rivalry is not destructive due to high growth. Buyer power is not very high and supplier power / Substitute does not impact. Very returns in the industry currently as it is a sunrise industry Returns high currently due to growth in the industry. Entry barrier and exit barrier also high. Rivarly is high, but has not impacted returns. However a very fragmented industry and slowdown can impact returns for smaller players. Buyer, supplier and substitutes not very crucial Very high returns due very high entry barriers, low rivarly due to limited competition. No buyer power, supplier power or substitutes

ENTRY BARRIER - No. 1 Factor deciding industry profitability

- Barriers due to economies at low end work - Barriers due to vertical based competency (BCM / Insurance ) : Depends on individuals - Companies can enter although the industry is now consolidating

- Barrier to entry is due to RBI license 1. Entry barrier very high due to - Economies of scale important for powerful brand (Franchise) Distribution (retail), advertising and for getting low cost deposit - Switching cost moderate especially as consumers generally stay with the bank

Asset specificity

Low

Low

Low. Limited to building etc

Economies of Scale

Economies important at low end epecially for outsourcing

High

Low

Technology IT services Proprietary Product difference

Financial instituiton BANKS

Rating agency high. Credit rating work done by an agency will not have enough credibility if done by a new agency High High

None - IPR / knowledge base for vertical Low is the only differentiator

Brand Identity Switching cost

Specific for verticals High

Medium Medium

Capital Requirement

Low

Capital requirement is high and essential

Low

Distribution strength

NA

Important in the retail

Low

Cost Advantage

High - but applicable to all

Imp for all banks

Low

Government Policy

NA

Critical as banking license is controlled by RBI

Low. Can have an impact if government decides to create a new agency and gives it credibility

Expected Retaliation

High

High. Extremely fragmented and competitive industry Not applicale

Production scale

NA

Not likely to happen in the ratings business. Other streams of work have higher competition Low

Anticipated payoff for new entrant

High

Moderate

Low

Precommitment contracts

High

None

high. Being leveraged for new streams of revenue High

Learning curve barriers Network effect advantages of incumbents

High None

Medium

High. Higher no. of branches is critical in Low the industry

Technology IT services No. of competitors - Monopoly / Intense competition ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT

Financial instituiton BANKS Intense competition now

Rating agency Limited number of companies

Medium rivalry. However firms in the Intense competition now industry due to low exit barriers do not engage in destructive competition. Expected to increase with growth in the US companies in india High High

Low due to limited no. of companies

Industry growth

Medium. New streams of revenue developing Low Low Low

Fixed cost / value added Intermittent overcapacity Product difference

Low Low Low

High NA Low

Informational complexity Exit Barrier Demand variability

Medium to Low Low Low

Low High High to medium

High Low Low

SUPPLIER POWER

None - Input is manpower

Supplier is essential deposit holder who Not relevant, except for people with provides low cost deposit. 1. Branch right financial background infrastructure 2.Brand image imp for low cost deposits None None NA NA

Differentiation of input Switching cost of supplier

None None

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

None None None None None % Sales contributed by Top 5 account. High for smaller companies

None None None None None Imp in wholesale a/c. Retail not critical

NA NA NA NA NA Not too high

Technology IT services Buyer conc. v/s firm concentration Buyer volume

Financial instituiton BANKS

Rating agency Low

Varies for companies. Tier II companies Low have higher Buyer conc High for Tier II companies Low

Low

Buyer switching cost Buyer information

High for buyers High

Low to medium High

High NA

Ability to integrate backward Substitute product

Low. The reverse is happening Substitution is feasible with another vendor. However switching costs are high. Hence repeat business is key variable High for low end work High Low Medium High

None 1.Capital markets for Industry 2. ECB markets

Not possible !! None

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

High High Low Low High

Intangible assets

1.Customer relationships important 1.Brand critical on the deposit side 2. Knowledgement management 2. Distribution infra important for important. deposit side / for retail sector for other 3.Branding important more from products such as insurance , mutuals recruitement point of view. Branding etc. Distribution also important for retail becoming critical for the top vendors business 4.Research for creating IP for high end is 3. Customer relationship important for gaining importance corporate business. 4.Risk management systems important for keeping NPA low and for treasury income

1. Brand very important and locked in by the three main agencies - crisil, CARE, ICRA 2. Customer relationship critical for having clients for the ratings business 3. Distribution now through the NET to provide research services

Valuation model

Technology IT services Valuation approach 1. DCF

Financial instituiton BANKS

Rating agency

1.Price to Book - private market value is 1. DCF 2 to max of 3

High PE Low PE for the industry Avg PE for the industry Valuation drivers

1.ROA 3. ROE 4. Yield on earning assets 5. Cost of funding (from equity, term deposits, Loans etc) 6. Net interest margins (NIM) 7. NPA 8. Provision for loan losses 9. Non-interest income and expenses 10. Reserve for loan losses and net charge offs 11. Capital adequacy ratios 12. Debt leverage / liquidity 13. Loan books to deposit ratio - tell how much more lending the bank can do without more equity

1. Cash flow 2. No. of clients 3. Non ratings revenue stream and growth

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

8-10 years Low ..< 5%

COMMODITY Cement

steel

Metals

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales 1.Grasim Industries - 22% 2. ACC - 15 % 3. Ultratech Cement - 11 % 4. Gujarat Ambuja Cements - 10 % 5. Jaiprakash Associates(Div) - 10 % 6. India Cements - 6 % 7. Birla Corporation - 4 % Total industry - 30000 cr 1. SAIL - 37 % 2. TISCO - 20 % 3. JSW steel - 8 % 4. Ispat industry - 6% 5. Jindal steel - 4% 6. Jindal saw - 4 % 7. Bhushan - 4 % total industry - 75000 cr 1. 2. 3. 4. 5. Hindalco - 36 % Sterlite - 24 % NALCO - 15 % NMDC - 12 % Sesa Goa - 5 %

Profitability pool analysis ranking by ROE

1. 2. 3. 4. 5. 6. 7.

ACC - 22 % Guj ambuja - 11 % Birla cement - 11 % Grasim - 5 % Ultra tech cement (L&T) - 2 % Jaiprakash associate - 31 % (?) India cement - -7%

1. 2. 3. 4. 5. 6. 7.

SAIL - 20 % TISCO - 32 % JSW steel - 90 % Ispat industry - -81% Jindal steel - 2 Jindal saw - 2 % Bhushan - 5 %

1. Hindalco - 4.4 % 2. Sterlite - 0.2% 3. NALCO - 16.3 % 4. NMDC - 80 % 5. Sesa Goa - 50% A lot of variation in profitability. Need to analyse specifics. Is it due to cyclicality of industry ?

Market share stability analysis

Market share changes show consolidation happening in the industry 1.ACC maintained mkt share at 18.5 % 2. Grasim has maintained at 15 % 3. Gujarat ambuja has gained 4 % to 16 % 4. Jaiprakash associate has gained 3 % to 6.6 % 5. All smaller players like shree cement, madras cement, dalmia cement losing market share losing share and would either be bought out or close

Market share lossed by SAIL/ TISCO and Aluminum - NALCO - 53 %, Hindalco - 48 being captured by smaller players % 1. SAIL has lost 2% to 59.5 % Copper - Hindalco - 55% , sterlite - 45% 2. TISCO has lost around 1.2 to 22.4 % 3. ISPAT industry gained highest share to 8.9 % (up 7 %) 4. JSW steel has gained 3.4 % market share to 6 % Smaller players stable. More consolidation not very probable

COMMODITY Cement Pricing stability Pricing has increased by only 3 % in the last 6 years. NPM increases must be due to cost cuts. However price swings are high ( - 7 % to + 20 %)

steel Very high price swing . Almost 80 % price increase from 2002 to 2005. Price increase the main cause of high profitability

Metals

Industry structure type

Currently a lot of companies. Top 4 Kind of a duoploly with 74 % industry companies comprise of 55 % of industry. between SAIL and TISCO and top 3 A lot a poor profitablity regional players. companies 82 % of industry. Not too Consolidation likely in the next much left to consolidate downturn cycle

Industry is mainly duopoly for Aluminium and copper. As a result pricing seems to much more stable

Key Industry products or segments

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Economic model
Return on capital : 1. Poor return on capital. Less than 10 % 1. Poor return on capital. Less than 10 % 1. Good return on capital. > 16 % for over complete business cycle over complete business cycle the last 5-6 years 2. A few companies with cost advantage 2. A few companies with cost advantage 2. Cyclical to an extent. But it is has can have 15 % plus ROC over business can have 15 % plus ROC over business been between 13 % and 25 % during cycle cycle the cycle

COMMODITY Cement Dupont analysis

steel

Metals

1. Not much of an improvement in asset 1. High improvement in Asset TO. As the 1. Asset TO ratio has improved from 0.8 TO ratios for the industry. Small industry is cyclical, any upturn has high to 1.1. On an average between 0.7 and improvement from 0.8 to 0.9. Industry tendency to increase the TO ratios as 1 not becoming any more efficient operating leverage is high 2. NPM between 15 - 18 % during the 2. Margins have expanded from 1-2 % to 2. NPM has gone to 10% + from -ve cycle almost 10 %. Margins do not look margins due to high commodity nature 3. ROA is also cyclical, fluctuating sustainable ( to analye as margins may of the industry between 12 % in 2000 to low of 9 % in have come through cost cutting and not 3. Return on asset depends on 1 and 2 2003 and current high of 20 % price hikes ) has turned +ve due to upturn in the 4. Average DE ratio of 0.3 to 1 3.ROA have gone from 1-2 % to 9 %. cycle 5. ROE is cyclical and fluctuates again ROA is not too good 4.Debt levels down from 2.3:1 to 1.6:1 . between 16 % to 27 % with the ROA 4.Debt levels have dropped marginally. But still high Ratio has come down from 2.7 to 2.2 5. ROE very cyclical. gone up during 5. ROE is poor (< 10 %). has improved upturn. Can come down drastically only in the last 2 years to improvement during downturn. Not a high amount of in margins. not sustainable and purely value creation in the industry dependent on demand supply gap. Also the poor ROE is due to the smaller players Low FA TO ratio. Typical FA TO ratios are : Low FA TO ratio. Typical FA TO ratios are : Asset heavy model with Asset TO generally < 1

FA Intensity

WCAP Intensity

Low WCAP intensity for Co. like GACL , others have poor WCAP ratios

Low WCAP intensity

Capital intensive ?

Highly capital intensive in nature . Major capital investments : Plant, Distribution network (sales / purchasing office ), distributors etc

Highly capital intensive in nature . Major capital investments : Plant, Distribution network (sales / purchasing office ), distributors etc

Highly capital intensive in nature . Major capital investments : Plant, Distribution network (sales / purchasing office ), distributors etc

Margin intensive ?

Poor margins during Demand supply Poor margins during Demand supply High margins, typically 15%. Looks mismatch. In excess supply scenario the mismatch. In excess supply scenario the mainly due to the duopoly nature of the margins come under pressure. margins come under pressure. industry for AL and copper

RM as % of sales and implication 28 % plus for TIER one companies. 28 % plus for TIER one companies. Other companies which are not low cost Other companies which are not low cost producer have lower OPM producer have lower OPM

COMMODITY Cement

steel

Metals

Key Industry ratios and statistics

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Demand supply mismatch due to excess supply can put pressure on margin 2. Infrastructure growth / Housing Construction demand especially in higher urbanisation areas 1. Price of coal/ limestone 2. Energy price such as oil / coal etc 1. Demand supply mismatch due to excess supply can put pressure on margin 2. Infrastructure growth / Housing Construction demand especially in higher urbanisation areas 3. Performance of downstream companies such as Cars, White goods 1. Price of iron ore

Key supply drivers

Shareholder Value creation drivers

1. Enduring low cost position

1. Enduring low cost position

Degree / nature of change

1. Low. Strongly dependent on business 1. Low. Strongly dependent on business cycle and demand supply gaps cycle and demand supply gaps 2. Industry consolidation would help in improving returns and reduce competition

COMMODITY Cement Predictability of business 1. Medium

steel 1. Medium

Metals

Cyclical nature ?

1. high

1. high

Ability to increase price ahead of 1. Only if there is supply shortfall, else inflation (Pricing power) poor

1. Only if there is supply shortfall, else poor

1. Only if there is supply shortfall, else poor

Some sort of monoploy or Oligopoly

1. None 2. Consolidation would result in better pricing power Yes.

1. None

??

Does the company have a recurring revenue stream

Yes.

??

Does the business have franchise / brands or is it commodity

Commodity with poor brand / franchise value

Commodity with poor brand / franchise value

Commodity with poor brand / franchise value

Does the industry enjoy high growth rates ? For how long

Medium growth rates especially in india. Highly cyclical industry However growth would add value only if there is industry consolidation

Cyclical

COMMODITY Cement Key industry variable which drive the performance 1.Most important is production cost for company 2. Cement pricing depending on demand supply scenario 3. Demand supply mismatch in the local / regional market of the company as the product is transportation cost sensitive 4. Medium term demand supply situation (no. depends on the new plants coming up)

steel 1. 2. 3. %

Metals Demand supply mismatch Global demand and pricing Production cost (cost of goods sold as of sales)

Demand supply mismatch 1. Global demand and pricing 2. Production cost (cost of goods sold as 3. of sales) %

Source of competitive advantage

Customer advantage Factors Low customer advantage except for resulting in moat (customer moderate brand effect captivity) Higher durability than production advantage factors

None

None

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None none

None none None

Network taxonomy

none

none

None

Network profits based on

none

none

None

COMMODITY Cement Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) A. 1.Value chain indivisibility / complexity and process is important to derieve a sustainable cost advantage (ex: GACL) 2.Process cost reduction happens through learning curve 3.Access to limestone and other raw material such as low cost captive power can give moderate cost advantage

steel A. 1.Value chain indivisibility / complexity and process is important to derieve a sustainable cost advantage (ex: TISCO) 2.Process cost reduction happens through learning curve 3.Access to coal, iron ore and other raw material such as low cost captive power can give moderate cost advantage

Metals A. Process economies - very critical 1. Value chain indivisibility is important 2. Process complexity and fit has critical important for some metals such as Al 3. Process cost reduction happens over time 5. Resource access such as ore / power has high important

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies in purchasing, competitive edge if the ratio of distribution(logistics) fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

B. Scale economies in purchasing, distribution(logistics)

B. Scale economies important for production and purchase of raw material

Distinctive capability analysis

Architecture

1. Process capabilities can help achieve 1. Process capabilities can help achieve 1. Process capabilities can help achieve low cost position. Difficult to sustain low cost position. Difficult to sustain low cost position. Difficult to sustain

Strategic assets

1. Strong distribution network in specific market . May not be easy to replicate 2. Tie up of RM from specific source . Ownership of mines resulting in low cost RM can add to low cost position 3. Presence of plant close to key market. Can be replicated though

1. Strong distribution network in specific market . May not be easy to replicate 2. Tie up of RM from specific source . Ownership of mines resulting in low cost RM can add to low cost position

1. Strong distribution network in specific market . May not be easy to replicate 2. Tie up of RM from specific source . Ownership of mines resulting in low cost RM can add to low cost position

COMMODITY Cement Innovation None.

steel None. Would be limited to new processes / practises Very critical factor

Metals None. Would be limited to new processes / practises Very critical factor

Cost

Very critical factor

Financial strength

Critical for continous capital investment Critical for continous capital investment Critical for continous capital investment into the Business into the Business into the Business Low Low Low

Reputation

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Cyclical and low returns during downturns. Fragmented industry which is slowly consolidating. As a result of scale, entry barriers are going up. Still local economies of scale exist. Returns also drop due intense rivalry and high competition. Low impact of supplier, buyer power and substitutes Cyclical and low returns during downturns. Fragmented industry which is slowly consolidating. As a result of scale, entry barriers are going up. Returns also drop due intense rivalry and high competition. Low impact of buyer power and substitutes. Suppliers have moderate influence due to coal and ore pricing

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Entry barriers are not too high till consolidation happens. Also some companies can supply to local markets

Entry barriers are not too high till consolidation happens. Companies can supply to Global markets

Asset specificity

High

High

Economies of Scale

High

High

COMMODITY Cement Proprietary Product difference None

steel None

Metals

Brand Identity Switching cost

None None

None None

Capital Requirement

High

High

Distribution strength

Medium

Medium

Cost Advantage

Low - only for some

Low - only for some

Government Policy

Low

Low

Expected Retaliation

High

High

Production scale

High

High

Anticipated payoff for new entrant

Moderate

Low

Precommitment contracts

Low

Low

Learning curve barriers Network effect advantages of incumbents

Moderate None

Moderate None

COMMODITY Cement No. of competitors - Monopoly / High. 60 % capacity with top 6. Too ologopoly or intense competition many players (concentration ratio ) RIVALRY DETERMINANT high competitive intensity causes poor profitability of industry. Fragmented industry - now consolidating

steel High. Too many players such mini mills , Integrated steel plant etc

Metals

high competitive intensity causes poor profitability of industry. Fragmented industry - now consolidating

Industry growth

Medium. Dependent on demand supply Medium. Dependent on demand supply gap gap High (upto 5 usd per tonne ) High Low High High Low

Fixed cost / value added Intermittent overcapacity Product difference

Informational complexity Exit Barrier Demand variability

Low High High

Low High High

SUPPLIER POWER

Medium

Medium - Ore suppliers / Coal / Lime is controlled by government or few suppliers and can have impact on the prices Low Low

Differentiation of input Switching cost of supplier

Low Low

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

None. Cost escalation of RM has impact None. Cost escalation of RM has impact on Margins on Margins Medium - For coal and fuel Medium - For coal and fuel and iron ore Low High None Low Moderate High None Low

COMMODITY Cement Buyer conc. v/s firm concentration Buyer volume Low

steel Low

Metals

Low

Low

Buyer switching cost Buyer information

Low Medium

Low Medium

Ability to integrate backward Substitute product

None None

None high. Product may not be substituted but brands can be easily. Also substitution by alternate material such plastics is driving the long term trend line downwards High High Low None High

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

High High None None None

Intangible assets

1. Brands important , but do not give pricing strenght 2. R&D / Process based research for reducting the costs 3.Distribution important for retail sales.But no longer a key differentiator

1.Brands also do not give pricing power 1.Brands also do not give pricing power 2. Process innovations / improvements 2. Process innovations / improvements for cost reductions for cost reductions

Valuation model

COMMODITY Cement Valuation approach

steel

Metals

1. Price to book 1. Price to book 1. Price to book 2. DCF ( based on normalised earnings ) 2. DCF ( based on normalised earnings ) 2. DCF ( based on normalised earnings ) 3. Reproduction costs 3. Reproduction costs 3. Reproduction costs

High PE Low PE for the industry Avg PE for the industry Valuation drivers

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

Media Media - Broadcasting

Media - Production

Publishing ( including papers )

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales Fragmented industry with multiple players in various niches. 1. Zee - 28 % 2. HTMT - 18 % 3. Adlabs - 3 % Fragmented industry with multiple players in various niches. 1. Zee - 28 % 2. HTMT - 18 % 3. Balaji tele - 8 % 4. UDTV - 5 % 5. NDTV - 5 % 6. TV today - 5 % 7. Sandesh - 4 % 8. TV 18 - 4 % 9. Saregama - 3 % 10. Adlabs - 3 % Only 3 listed companies ( bennet & coleman is not listed ) 1. Jagaran prakash 2. Deccan chronicle 3. Mid-day

Profitability pool analysis ranking by ROE

1. Zee - -7 % 2. HTMT - -6 % 3. Adlabs - 9 %

1. Zee - -7 % 2. HTMT - -6 % 3. Balaji tele - 14 % 4. UTV - -8 % 5. NDTV - -20 % 6. TV today - 0 % 7. Sandesh - -11 % 8. TV 18 - 15% 9. Saregama - 11 % 10. Adlabs - 9 %

Good ROE 1. Jagaran prakash - 13 % 2. Deccan chronicle - 11 % 3. Mid-day - -5%

Market share stability analysis

Data not available

Data not available

Data not available

Media Media - Broadcasting Pricing stability Not relevant

Media - Production Not relevant

Publishing ( including papers )

Industry structure type

Fragmented industry 1. Broadcasting - Zee is the only listed co 2. Several content generation companies - Balaji telefilm, UTV,saregama 3. Channel - TV18, NDTV, TV today etc

Fragmented industry 1. Broadcasting - Zee is the only listed co 2. Several content generation companies - Balaji telefilm, UTV,saregama 3. Channel - TV18, NDTV, TV today etc

Key Industry products or segments

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Economic model
Return on capital : Poor ROE trends. Constant drop in ROE due to competitive nature of the industry. ROE has been below 10 % on avg. however several specific content companies may have double digit ROE 1. Good ROC for publishing business 15 % 2. Very high for digital (BPO) publishing business

Media Media - Broadcasting Dupont analysis 1. Low Asset turns . Less than 0.5 2. Double digit margins which have however come down to single digits 3. Low ROA due to poor margins and asset turns 4. Low debts. Ratio is 0.3:1 or lesser 5. Dropping ROE due to competitive pressures over the last few years ( fragmentation of media)

Media - Production

Publishing ( including papers )

FA Intensity

Low FA intensity. Main requirement for Publishing business would be Land/ building and printing machines

WCAP Intensity

Low WCAP Ratio : High inventory due to skewed sales around june and carry forward of inevntory. High recievable due to skewed sales Moderate. Mainly WCAP and inventory holding / obsolence cost

Capital intensive ?

Margin intensive ?

Net margins in 10-15 % range

RM as % of sales and implication

Media Media - Broadcasting

Media - Production

Publishing ( including papers )

Key Industry ratios and statistics

1. GDP growth, industry performance 2. Ad spending 3. Cost per thousand - cost / thousand for reaching the consumer for distribution 4. Ratings for broadcast networks 5. Upfront sales of ads Cable/ satelllite 1. Average revenue per user (ARPU) 2. Churn 3. Penetration levels 4. NEt subscriber additions 5. Subscriber acquisitions

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Demand depends on the specific product. A hit film , or popular soap will have high demand 2. Channel fragmentation / media fragmentation and other new forms of entertainment impacting demand None 1. Demand depends on the specific product. A hit film , or popular soap will have high demand 2. Channel fragmentation / media fragmentation and other new forms of entertainment impacting demand None 1. Cost of paper / ink 2. Obsolence cost / wastage of books

Key supply drivers

Shareholder Value creation drivers

1. Tight management of WCAP (Distribution channel) 2. Demand forecasting

Degree / nature of change

Media Media - Broadcasting Predictability of business

Media - Production

Publishing ( including papers )

Cyclical nature ?

Ability to increase price ahead of 1.Very product dependent - revenue inflation (Pricing power) based on hits 2. Secondary stream like DVD / games in US give better pricing if the film / show has been a hit (low in india due to piracy) 3. Only exception is a company like disney which can price on brand name. None such in india. Some sort of monoploy or Oligopoly None

1.Very product dependent - revenue based on hits 2. Secondary stream like DVD / games in US give better pricing if the film / show has been a hit (low in india due to piracy) 3. Only exception is a company like disney which can price on brand name. None such in india. None

1. High once the monopoly is established, pricing power is good. 2. For standard publishing, margins are cost driven

Yes. Especially for the dominant paper. Being threatened by alternate sources such as TV / Internet Yes.

Does the company have a recurring revenue stream

None , in india

None , in india

Does the business have franchise / brands or is it commodity

1. Brand / franchise has limited power 1. Brand/ franchise very high for for initial appeal. Each product succeeds newspaper. Very good pricing if the based on it own strenght paper is dominant 2. For regular publishing pricing power is weak and Franchise value low

Does the industry enjoy high growth rates ? For how long

Moderate

Moderate. In synch with increase in no. of channel

Moderate . Slightly higher than economy

Media Media - Broadcasting Key industry variable which drive the performance

Media - Production

Publishing ( including papers )

Source of competitive advantage

Customer advantage Factors 1. Differentiation through programming Moderate brand effect (for disney in US, 1. Habit in case of papers. High resulting in moat (customer 2. Brand effect is also moderate. but low in india) differentiation for select publications captivity) Depends on the programming 2. Brand critical in publishing. Regular Higher durability than production book publishing does not have brand advantage factors effect.

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

None

Network taxonomy

None

None

Network profits based on

None

None

Media Media - Broadcasting Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

Media - Production

Publishing ( including papers ) A. Limited to copyright

A. A. Process economies are very 4.Process economies through license in moderate the past ( doordarshan in india , and 4. Moderate resource uniqueness NBC/ABC etc in US) through talent 5. Resource uniqueness through programming talent

B. Scale economies on 1. Distribution 2. Purchase 3. Advertising 4. Production of multiple programs and distribution to a large audience

B. Moderate scale economies for production

B.Scale is important for distribution, purchasing (content and raw material) and Ad

Distinctive capability analysis

Architecture

Some importance of talent

Strategic assets

1. Media license Media properties, talent 2. Media properties in the right to films/ serials

Media Media - Broadcasting Innovation None

Media - Production None

Publishing ( including papers )

Cost

None

Financial strength

Important

NA

Reputation

Important

NA

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Not very high returns to moderate to low entry barriers. High competition exist. Buyers especially Ad providers and cable operators have some amount of power and take away some of the returns High entry barriers in papers and moderate to high rivalry. So established papers returns are high.supplier, buyer power and substitutes do not make too much impact. For other publishing entry barriers are not too high. Rivalry is high. Also returns impacted by buyers such as goverment or bulk buyers

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Moderate entry barriers due to scale, licensing requirement. However a large number of new players are able to get in in niche segments

1. Very high entry barrier in case of newspaper / magazine if it is no. 1 due to buyer / advertiser behaviour 2. Low entry barrier for other publishing companies

Asset specificity

High

High

Economies of Scale

High for production. Fixed investment are high and once done , will come down as volume goes up

1. Matters for distribution / sourcing of Raw material / in generating content

Media Media - Broadcasting Proprietary Product difference None

Media - Production

Publishing ( including papers ) 1. high but Depends on title. The publishing company does not have a brand 2. Very in case of newspapers / magazines papers. 1. high for 1. Buyer would not switch brands

Brand Identity Switching cost

High. But depends on programming Low

Capital Requirement

High

Low

Distribution strength

Critical. But not done by networks themselves

Moderate importance

Cost Advantage

None

Low

Government Policy

High. Licensing is critical

Low

Expected Retaliation

High

Production scale

None

High in case of paper business where the no. 1 paper is very dominant and has network effects High

Anticipated payoff for new entrant

Low

High

Precommitment contracts

None with customer. Done annually with advertisers High None

Low

Learning curve barriers Network effect advantages of incumbents

High High

Media Media - Broadcasting No. of competitors - Monopoly / High competition ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT High level of competition due to fixed nature of investment

Media - Production

Publishing ( including papers ) Oligopoly, but in some cases, single paper dominates a local market

High for regular publishing as it is commodity nature and fragmented

Industry growth

Moderate

Low

Fixed cost / value added Intermittent overcapacity Product difference

High NA Moderate

High NA High

Informational complexity Exit Barrier Demand variability

Low Moderate

High High

SUPPLIER POWER

Moderate

Low except if the publisher is printing exclusive writer content

Differentiation of input Switching cost of supplier

High Moderate

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

High Low High High Low Buyers are cable opertors, Ad providers and consumer. Cable operators have influence Low

Media Media - Broadcasting Buyer conc. v/s firm concentration Buyer volume Low

Media - Production

Publishing ( including papers ) Low

Low

Low

Buyer switching cost Buyer information

Low for smaller channels High

Low High

Ability to integrate backward Substitute product

None Other entertainment options

NA Internet, news channels. However impact still low in india

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

High NA NA Low High

High Low High Low Low in old generation, high in current

Intangible assets

1. Brand strength - mainly through 1.Brands have limited pricing power. programming now Know brands can get good openigs for 2. Distribution infrastructure through their films / serials. Branding of films / cable and transmission towers for characters like disney does not happen terrestial channels 2. Customer relationship with broadcast 3. Customer relationship with channels advertisers and programming co. 4. License /media property for broadcast right

1.Brand - such as vikas / macmillan for textbooks . Not so much for other books 2. Distribution infrastructure - S&D expenses 3. Marketing / Procurement infra sourcing books / striking book deals etc

Valuation model

Media Media - Broadcasting Valuation approach 1. DCF 2. PE

Media - Production

Publishing ( including papers )

High PE Low PE for the industry Avg PE for the industry Valuation drivers

1. Revenue, Operating expenses, operating cash flows, earnings quality 2. Balance sheet strength 3. ARPU 4. EBDTIA - for new companies which do not have +ve cash flows

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

Projects ENGG PROJECTS ( A/C, Electrical , const )

Petrochemicals Gas

Integrated petroleum companies

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales 1. L&T 2. BHEL 3. ABB Four companies in the buisness 1. GAIL - national player - 75 % 2. Petronet LNG - 19 % 3. Guj Gas - 3 % 4. Indraprastha gas - 3 % Fairly consolidated industry. Top 5 account for 85 % of industry (513200 Cr) 1. IOC - 33 % 2. Reliance - 16 % 3. HPCL - 14 % 4. BPCL -13 % 5. ONGC - 9 %

Profitability pool analysis ranking by ROE

Very profitable industry 1. GAIL - 10 % 2. Guj Gas - 11 % 3. Indraprashta gas - 18 % 4. Petronet LNG

Profitability impacted due to govermental controls on pricing 1. IOC - 4 % 2. Reliance - 8.5% (not impacted as it is diversified and not under government control) 3. HPCL - -9 % 4. BPCL - -23% 5. ONGC - 16 %

Market share stability analysis

Exact numbers not available. GAIL is largest. Other companies are city specific and enjoy a level of monopoly

Data not available

Pricing stability

Projects Petrochemicals Gas ENGG PROJECTS ( A/C, Electrical , const ) 1. Pricing is fixed based on project. RM Data not available prices fluctuates during contract and have to be managed to manage margins

Integrated petroleum companies Data not available. Pricing controlled by government and driven by crude costs

Industry structure type

Mainly controlled by GAIL. Reliance now forming a nationwide network using their gas finds in godavari basic. Local monopolies like Guj gas in surat, baroda or in delhi by indraprashta gas

Mainly government sector gaints. Competition from reliance in refinery, and marketing Additional competition from the global majors in E&P. private players now in retail such as Essar etc. 1. Fuels 2. Naptha 3. Distillates

Key Industry products or segments

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

1. Power, Oil and gas, and other 1. Consumer 2. Industrial retail industry 2. Electrical projects, power project, 3. Bulk Refigration project, construction project, refinery etc.

1. Reliance due to scale and management 2. IOC - due to backward intergration and marketing network 3. HPCL/BPCL - due to mktg network and refinery in good locations 1. Cyclical - varies depending on the High. Generally in 15-20 % economic activity 2. Normative return difficult to calculate. Has varied from single digit to 30%+ in recent past Good ROE . General in 15-20 % range only for reliance. Government pricing impacting the other companies

Economic model
Return on capital :

Dupont analysis

Projects ENGG PROJECTS ( A/C, Electrical , const ) 1. Asset TO = 1.2- 2 times 2. Low single digit - 3-7 % 3. 10-14 % 4. 0.8 - 0.3 5. 10- 25 % All the return ratios are cyclical and depend on business cycle

Petrochemicals Gas 1. Asset TO is 1.8-2 with increases in last few years 2. NPM fairly stable (with improvements also) 3. Working Cap/ Sales is low 4. Low Debt to equity 5. ROE is good. From 12-20% +

Integrated petroleum companies 1. Asset TO is 1.8-2 with increases in last few years 2. NPM impacted for government companies due to subsidy for petrol and other products. Industry average steady due to gas and private sector 3. ROA has improved to 15 % due to rise in petroleum prices 4. reduction in Debt . ratio has come down from 0.7 :1 to 0.4 : 1

FA Intensity

High FA

Moderate TO ratios. Fixed costs in terms High. Capital intensive industry with of gas pipelines. Low level of large investments in obsolesence - refinery - crackers - E&P High now mainly due to rise in inventory costs. Debtors and other Wcap components still stable

WCAP Intensity

Capital intensive ?

Low WCAP TO : Projects have lead times High. Business requires low WCAP to where the procurement has to be done negative WCAP and payment is by percentage completion. Also as projects are long term in nature , WCAP depends on project management Working capital Low capital intensity .skills Yes. Fixed asset intensive. Wcap management is crucial intensity is low or -ve

Yes

Margin intensive ?

Not high Margin. Competitive business subject to bidding

Not high. Margins are 10% plus

variable. Depends on govt policy

RM as % of sales and implication Low teens margins. NP margins are 5-7 % range also

1. Depends on GRM - which depends on crude price 2. Mktg margins depends on govt pricing of fuels and SKO

Projects ENGG PROJECTS ( A/C, Electrical , const )

Petrochemicals Gas Gas pricing

Integrated petroleum companies GRM Pricing for govt controlled products Crude cost Refining capacity

Key Industry ratios and statistics

Business units

1. Retail 2. Bulk 3. Transmission

1. 2. 3. 4. 5.

Refinery Retails LPG/Gas Aviation E&P

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Industrial economy performance 1. Industrial performance 1.Basic demand for petro products 2. Commerical business performance for 2. Switching to Gas as source of energy A/c business ( Price of oil / regulation is key factor) 3. Retail demand 4. Conversion of Auto to CNG

Key supply drivers

1. RM costs such as steel, copper, cement etc

1. New Gas finds 2. Import availability ( LNG vs NG vs CNG )

1. Crude price

Shareholder Value creation drivers

1.Ability to manage RM costs 1. Ability to tie long term contracts with 1. Capacity utilisation at refinery 2. Ability to control project costs customers ( with price variability ) 2. Gross refining margins - this in turn 3. High Capital turns as the margins are 2. Access to low cost supply depends on crude prices. low 3. Strong balance sheet to build 3. Marketing infra with refinery helps in 4. Project order book distribution infrastructure maintaining margins Major level of change as gas sector being opened up. Threat of new licenses. Impact of Reliance needs to be analysed. Impact of GAIL and National grid 1. Low 2. Check on how much new capacity is expected . Expansion in refinery capacity could impact the refining margins in the future.

Degree / nature of change

Projects ENGG PROJECTS ( A/C, Electrical , const ) Predictability of business

Petrochemicals Gas Good predicability of revenue stream. Retail customer has highest predictability. Industrial is next in predicability. Transmission is lowest.

Integrated petroleum companies Low. However margins are not predicable due to Crude volatility and government pricing policy

Cyclical nature ?

Business is not very cyclical. Depends on the manufacturing business cycle. Also depends on gas prices

Yes. Depends on economy growth and crude prices

Ability to increase price ahead of 1.Pricing power is low and subject to inflation (Pricing power) bidding. 2.Margins depend on the project duration / rm costs

Till date not high. Prices are subject to Refining margins are dependent on the annual contracts. However changing as price of crude. However for some input price is being decontrolled companies it depend on the retail price of product which is controlled by the government. Hence poor pricing.

Some sort of monoploy or Oligopoly

None. Competitive bidding

Monopolistic in nature till date. Duopoly None due to reliance (GAIL/Reliance). Local areas to may have monopolies Yes. As contracts are signed for mid to long term Only from contract (Ex reliance ) or if the refinery has downstream distribution. Retail business has high repetitive revenue No franchise power. Only production driven advantages. Companies trying to build brand for retail network

Does the company have a recurring revenue stream

None. Competitive bidding

Does the business have franchise / brands or is it commodity

No . The business is mainly a commodity. Value add is through a strategic asset such as pipeline / Tech knowhow/ License for a certain area.

Does the industry enjoy high growth rates ? For how long

High, due to big investments in power, Yes. The industry has high growth for Moderate growth due to good growth of cement and other infrastructure projects next 5-7 years till the gas infrastructure the economy is setup in india

Projects ENGG PROJECTS ( A/C, Electrical , const ) Key industry variable which drive the performance

Petrochemicals Gas 1.Demand growth 2. Supply assurance and cost of supply 3. License and Distribution infrastructure

Integrated petroleum companies 1. 2. 3. 4. 5. Government policy Capacity utilisation Product cost Economies of scale Production technologies

Source of competitive advantage

Customer advantage Factors 1. Brand has moderate impact at the resulting in moat (customer bidding stage captivity) Higher durability than production advantage factors

1.Lockin due to infrastructure in place and long term contracts. This results in switching costs which may be high

1. Brand effect is low. Relevant if fuel outlets are owned by company

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None None None none

Network taxonomy

None

None

none

Network profits based on

None

None

none

Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

Projects ENGG PROJECTS ( A/C, Electrical , const ) A. 1. High indivisibility of value chain due to long term nature of projects 2. Complexity and fit of process is critical for low cost and on time delivery 3. Moderate rate of change in process cost 4. Protection through patents and R&D assets

Petrochemicals Gas A. 1. Value chain indivisibility is important in terms of procurement process, distribution, marketing and sales etc 2. Cost advantage realised due to learning curve 3. License /Lease / rights can create entry barriers 4.Access to gas a low prices such company owned wells is critical

Integrated petroleum companies A. 1.Value chain indivisibility is critical and complexity process fit can add to cost advantage 2. Cost advantage can be achieved through learning curve 3.Access to petroleum at cost effective price. Not so critical in india as most companies import oil

B. Scale economies in 1. Production 2. Purchasing of RM 3. Sales and mkt 4. R&D

B. Scale critical in distribution, purchasing and R&D. Scale economies are useful in tying up purchasing contracts and in distribution

B. Scale economies critical in production, distribution and purchasing

Distinctive capability analysis

Architecture

1. Relationship with key customers such as power companies for power projects, or cements companies ec 2. Engineering, project management knowledge base and experience

1. Procurement contracts / relationship with supplier crucial in profitability 2. Process knowldege to run the gas infra is important. Not a key differentiator

1.Procurement contract / supply contracts with marketing companies (if relevant) 2. Relationship with government 3. Ability to setup and run refineries with high scale - resulting in economies of scale 1. Distribution network very critical 2. Plant - especially for of high scale 3. Access to oil properties on special terms

Strategic assets

1. Patents 2. Knowledge assets 3. Experience of delivering similar projects

Patents on gas technology, Gas pipelines, Switching cost , Gas license

Innovation

Projects ENGG PROJECTS ( A/C, Electrical , const ) Sustaining innovation especially in process Important as project margins are very low

Petrochemicals Gas None

Integrated petroleum companies Low

Cost

Important - if own supplies and own infrastructure.

important

Financial strength

Very important as some project involve high financial risks too Brand is important for recognition in the critical for institutional buyer industry

high

Reputation

Moderate. Companies attempting to build retail brands

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Barriers are high for new players. However due to cyclical nature of demand and industry, rivalry is high. Also buyers have high involvement and due projects nature the margins and returns are low during demand downturns. High entry barrier and monopoly due to licensing has resulted in high returns. However supplier power is high, buyers especially bulk customer can negotiate and there are substitutes available. These have reduced the returns a bit, but still the returns are above average Moderate entry barriers and moderate rivalry should keep the returns above average. However government intervention has destroyed margins. Also buyer power, supplier power and substitutes have low impact

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Barrier to entry is high for new players. High entry barrier exist. Would change However high competition among based on the policy / regulatory exisiting players and international decisions players. Scale and experience, exisiting relationship with customer create entry barriers for existing players

Moderate entry barriers based on economies of scale

Asset specificity

High

High

High

Economies of Scale

High as the scale of projects is large

high economies of scale due to the Gas High. Larger refineries with latest infrastructure which has to be defined technologies can have higher GRM (gross refining margins)

Proprietary Product difference

Projects ENGG PROJECTS ( A/C, Electrical , const ) Low. Project execution skills and knowledge is more critical

Petrochemicals Gas None

Integrated petroleum companies Low to none

Brand Identity Switching cost

Low to moderate V high during project. Low for new project

None High

none- relevant only if the refining business has associated marketing infrastructure Low to none

Capital Requirement

High

High

High

Distribution strength

Low

High

Critical

Cost Advantage

High

Medium to low . Depends on procurement contracts and the cost structures

Medium to low. Depends on economies of scale

Government Policy

High for domestic market

Imp. The policy / license decisions would Imp as petro product pricing at retail have high impact level is still controlled by the government

Expected Retaliation

High due to bidding nature of projects

Current low. In the future new entrants may increase the competitive impact NA

Competition between existing competitors Critical

Production scale

High

Anticipated payoff for new entrant

Moderate

Low

Low

Precommitment contracts

Low

High

Critical from buying and selling side(if marketing infra is absent) Moderate None

Learning curve barriers Network effect advantages of incumbents

High Low

high High

No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT

Projects ENGG PROJECTS ( A/C, Electrical , const ) High competition

Petrochemicals Gas

Integrated petroleum companies

Monopoly changing to duopoly. Increase moderate competition in competition happening.

High rivalry due to cyclical growth, high Currently low due to local licenses exit barriers and intermittent over ( monopoly ). At national level low due capacity to monopoly with GAIL. Will reduce in future with other companies / competition Moderate to high - cyclical High

moderate as the industry has been a controlled one

Industry growth

moderate - cyclical

Fixed cost / value added Intermittent overcapacity Product difference

Low High Low

Moderate value addition Till date none Low. As area monopolies exist

High Currently low Low to none

Informational complexity Exit Barrier Demand variability

High High High

CHK High Low

Low to none High Low

SUPPLIER POWER

Low. RM prices are decided by commodity prices

Supplier power is high. The impact to reduce as new sources would be available Minimal High as sourcing contracts are signed. Integrated gas co. such as GAIL will not have any issues Other sources of energy. Currently move towards gas is high globally Currently high. Limited to GAIL / CAIRNS etc. Situation to ease in the future Moderate to high High High as some supplier are themselves integrated companies. Like Reliance / GAIL power strong for bulk customer Buyer

Low as crude can be sourced from a variety of locations sources

Differentiation of input Switching cost of supplier

Low Low

none low

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

Low Low to moderate Low to moderate High None High especially large projects

none low ?? high Moderate None - except if the refinery is standalone and supplies through a marketing company

Buyer conc. v/s firm concentration Buyer volume

Projects ENGG PROJECTS ( A/C, Electrical , const ) high to moderate

Petrochemicals Gas Buyer conc is low

Integrated petroleum companies low

High

Buyer volume to total sales volume is low

low

Buyer switching cost Buyer information

Low High

Buyer switching cost (retail) is high. At Bulk customer switching is more probable High for bulk customer. Low for retail

low low

Ability to integrate backward Substitute product

Low to moderate

Low

none None for the product and indsutry

Inhouse projects for commodity/ low end effected by other forms of energy work sources. More important between different forms of gas. Gas v/s oil v/s coal are the subsitutions. Price of each plays an important role High High Low for commodity work Low initially Low for complex projects High High Low High Low

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

high high low V high Low to none

Intangible assets

1.Brands are not too important 2. Knowledge assets in the form of technical expertise for specific projects is critical. Project management skills crucial for large projects 3. Patents may exist in the some cases for unique process / design - not seen in india 4. Customer relationship for repeat business

1. Patents for processes and new 1.Patent / Knowledge asset for usages. Not much in india achieving low cost production 2. Local / regional monoply for gas 2. Customer relationships need to be distribution. This is weaking now with developed by stand-alone refinery to CAS for pipeline sharing at national level market their product 3. Customer relationship important for wholesale business (industrial customer) 4. Moderate Switching costs / Lockin exist once the customer has signed up the supplier

Valuation model

Valuation approach

Projects ENGG PROJECTS ( A/C, Electrical , const ) DCF

Petrochemicals Gas 1. Earning based measures - P/E 2. Asset based measures 12-14 8-9 10-12

Integrated petroleum companies DCF, asset replacement value

High PE Low PE for the industry Avg PE for the industry Valuation drivers

50 10 15-20 1. Open orders position 2. Inventory/ Debtors position 3. RM costs 4. Net margins

12-14 5-6 8-10 1. Asset replacement value 2. Government pricing and policy (GRM) 3. Crude pricing 4. Capacity for refining 5. Demand for petro products

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

10-15 % 10-12 % currently 10 years

15%+ 8-10% None by mkt

Variable 6-7% (linked to GDP) None by mkt. Mkt pricing below replacement cost

Petrochemicals (excluding lubes)

Lubricants

Tourism Hotels

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales Multiple products 1.Reliance+ IPCL (through IPCL) - 70 % 2. Ruchi soya - 7 % 3. Supreme petrochem - 6 % 4. Castrol - 5 % 5. Tamilnadu petro - 4 % Total industry - 23700 Cr 1. Indian hotels - 28 % 2. EIH limited - 20 % 3. Hotel leela - 9 % 4. Asian hotel - 9 % 5. ITC hotel - 6 % 6. Taj GVK hotel - 5 % 7. Bharat hotel - 5 % Total industry - 3500 Cr

Profitability pool analysis ranking by ROE

Profitability of industry is poor except for reliance, castrol, and narmada chematur 1. Reliance - 19% 2. Castrol - 29 % 3. Narmada chematur - 27 % 4. Lanxess ABS - 4 %

1. Indian hotels - -1.5% 2. EIH limited - 13 % 3. Hotel leela - 7 % 4. Asian hotel - 1.7 % 5. ITC hotel - 2.7% 6. Taj GVK hotel - 27 % 7. Bharat hotel - -12 % Total industry - 3500 Cr

Market share stability analysis

Reliance+IPCL control 70% of market. Other Petroleum majors are expanding in petrochemicals like IOC

Petrochemicals (excluding lubes) Pricing stability Driven by crude/ input cost and demand / supply condition

Lubricants

Tourism Hotels Highly dependent of the volume of business travel and the room capacity. As the business takes time to add new capacity especially in key metro markets, pricing strong in times of high demand

Industry structure type

emerging and growing industry. Not controlled by government

Multiple companies. High compeition. To check if consolidation happening

Key Industry products or segments

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest) Reliance

Economic model
Return on capital : Poor ROE for most companies except the 3 companies noted above 1. Normative return on capital is high . 20 % range 1. Poor for the last few years ( due to over supply and low demand ) 2. Ten year Returns - Drop from 15 % + to low tens ( 4-5 % ) .Mainly due to poor demand and excess supply

Petrochemicals (excluding lubes) Dupont analysis 1. Asset TO has improved from 1 to 2.5. The improvement is driven by reliance 2. NPM has improved from 4 % to 8 % again mainly due to reliance 3. Asset to equity or debt to equity has improved 1.5:1 to 0.5 :1 4. ROE improvement for industry from 5-9 % from 2003 to 30 % + in 2006

Lubricants

Tourism Hotels 1. Very low Asset TO ratio (<0.5) 2. Highly variable NPM , from 17 % to 5 % depending on the business cycle 3. Highly variable ROA due to cyclical business 4. Asset / Equity is < 2. Moderate to low debt levels 5. Low ROE . Typically < 10 %. Depends on margins (business upcycle)

FA Intensity

High. Capital intensive business with investment in plant and euquipment

1. FA intensity low for castrol. Other Co. Low. High capital investment. Model have FA TO in 0.8 - 1.5 . shifting to managed property to improve 2. FA are typically lube blending plants. ROA

WCAP Intensity

WCAP intensity Low for castrol.

??

Capital intensive ?

High. Capital intensive business with investment in plant and euquipment

Yes

Margin intensive ?

Moderate. < 10 %. Cyclical in nature

Poor margins in this business. Except for Low to moderate margins ( depends on companies with strong brands / occupancy levels ) Distribution infra

RM as % of sales and implication

Operating margins in 25 % range. However low NPM due to high depreciation costs (High asset intensity) and interest component due to debt

Petrochemicals (excluding lubes)

Lubricants

Tourism Hotels

Key Industry ratios and statistics

Demand supply Capacity scenario Pricing

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Petrochemicals are used in wide variety of industry and essential to economy 1. Industrial demand 2. Automotive demand - No. of old vehicles 1. Business travel - Related to economy performance 2. Liesure travel - Related to income levels 3. Inbound tourist levels

Key supply drivers

1. Crude price and RM prices which are derieved from crude

1. Price of petroleum / oil

1. Room capacity (available stock) 2. Depends on location too

Shareholder Value creation drivers

1. 2. 3. 4.

Demand - supply condition (capacity) 1. Brand Costs of product 2. Distribution infrastructure R&D and research on product Economies of scale

1. Shareholder value improvement can be done through managed property model to reduce asset intensity 2. Better brands / Targeted hotels can be used to improve occupancy rates 1. Low

Degree / nature of change

1. Low, mainly dependent on capacity scenario and demand - supply

1. Low to medium

Petrochemicals (excluding lubes) Predictability of business High. However margins are not predicable due to Crude volatility

Lubricants 1.High

Tourism Hotels 1. High although Cyclical in nature

Cyclical nature ?

Yes. Depends on economy growth and crude prices

1.Auto segment has low cyclicality 2. Industrial segment depends on industrial activity

Yes

Ability to increase price ahead of Not very high. Mostly commodity 1. Low inflation (Pricing power) product wherein the margins are highly dependent on the crude pricing

No. Depends on the demand supply gap at any point of time

Some sort of monoploy or Oligopoly

1. Reliance may have some pricing power in its products. 60-70 % mkt share held in reliance some key products Yes

1. Intense competition due to large no. of players

None. Except in some heritage property / Key locations

Does the company have a recurring revenue stream

Yes

Yes.

Does the business have franchise / brands or is it commodity

More of commodity

Weak Franchise. Strong brands , but high price senstivity ( pricing strenght some times ??)

Brands . But not very profitable franchise due to high fixed costs .

Does the industry enjoy high growth rates ? For how long

Yes

Low growth rates in the last few years. Also a lot unorganised companies

Not very high growth due to cyclical nature

Petrochemicals (excluding lubes) Key industry variable which drive the performance 1. Capacity utilisation 2. Product cost 3. Economies of scale

Lubricants

Tourism Hotels 1. ARR ( average room rent) 2. Occupancy rates - depending on business / tourism levels 3. Net margins (costs) 4. Asset turns

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

1. Low customer related moats. Small moat due to following factor - specialised relationship with specific customer due to special product developed for them - in case the supplier has high mkt share, customer may not have much choice - long term contracts

1. Experience good - brand effect results in premium pricing

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None None None

Network taxonomy

None

None

Network profits based on

None

None

Petrochemicals (excluding lubes) Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) A. 1.Value chain indivisibility is critical and complexity process fit can add to cost advantage 2. Cost advantage can be achieved through learning curve 3.Access to petroleum based RM. Vertically integrated companies at an - Scale economies very relevant advantage (like reliance). Companies for local market - both geo and have to import product product based ( ex: operating 4. Access to technology and latest system is a specific local product research (not a big factor though) market). Scale economies more sustainable and provide B. Scale economies critical in competitive edge if the ratio of production, distribution and purchasing fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

Lubricants

Tourism Hotels 1. Value chain indivisbility not too high 4. License / lease of key properties can have impact on pricing and profits (for ex Taj properites)

B. Scale economies have importance in purchasing and advertising

Distinctive capability analysis

Architecture

1. Customer and supply contracts 2. Process knowledge to reduce product cost 3. Vertically intergrated companies with access to RM at favorable prices have a cost advantage 1. Scale economies are important 2. Technincal knowhow also important

Service orientation of personnel. Not a very big differentiator

Strategic assets

Key properties which can duplicated. Such Taj at Gateway etc. May not add too much to overall profitability if demand is weak

Petrochemicals (excluding lubes) Innovation Low to moderate

Lubricants

Tourism Hotels None

Cost

V Important

Not very important as they have high fixed costs Important to expand no. of properties

Financial strength

Moderate

Reputation

Moderate

Brand important. However does not seem to translate to a profitable franchise as the pricing power is dependent on the demand supply gap

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Good returns in the industry as the industry is dominated by reliance. Also entry barriers in specific product groups by specific companies and moderated competition in each segment. Buyer power is high is several cases, supplier power is low as the RM is general a commodity and the substitutes are absent in most cases Entry barriers are low except in metros and business segment. Also as demand fluctuates and fixed costs are very high, the competitive intensity is very high and hence returns are cyclical. Supplier buyer and substitutes are absent. Buyer power has some impact, but not a major impact on returns

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Moderate entry barriers mainly due to - economies of scale and resultant cost advantage

Entry barriers are low. Subject to availability to land in some key areas.

Asset specificity

High

High

Economies of Scale

High

Economies to scale are local in nature.

Petrochemicals (excluding lubes) Proprietary Product difference Low to none

Lubricants

Tourism Hotels Medium. Ex : Taj manages to have percieved differences

Brand Identity Switching cost

Low to moderate Low

Strong Low

Capital Requirement

High

High

Distribution strength

Moderate

Low

Cost Advantage

High

Pricing ability is weak due to commodity nature and high fixed costs Low

Government Policy

Low

Expected Retaliation

High

High

Production scale

Important

NA

Anticipated payoff for new entrant

??

Low

Precommitment contracts

High from both buy and sell side due pricing variability Moderate None

Applicable for corporate customers

Learning curve barriers Network effect advantages of incumbents

Moderate to low NA

Petrochemicals (excluding lubes) No. of competitors - Monopoly / Duopoly in some product groups ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT Moderate to high rivalry. Not high competitive intensity

Lubricants

Tourism Hotels High

High rivalry and price based competiton. Due to high fixed costs this industry resembles the airline industry in some aspects

Industry growth

Moderate

Low

Fixed cost / value added Intermittent overcapacity Product difference

High Moderate Low

High High Low

Informational complexity Exit Barrier Demand variability

Low Moderate Low

Low High High

SUPPLIER POWER

Supplier power is moderate. In some product group there are limited no. of RM suppliers. Also threat of forward integration exists none Low

None

Differentiation of input Switching cost of supplier

None None

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

None Low to moderate Low to moderate High High Low to moderate

None None None None None Corporate market is price sensitive and able to negotiate price

Petrochemicals (excluding lubes) Buyer conc. v/s firm concentration Buyer volume Low

Lubricants

Tourism Hotels Medium to Low. Corporate buyers have leverage Medium to Low. Corporate buyers have leverage

Moderate

Buyer switching cost Buyer information

Low High

Low High

Ability to integrate backward Substitute product

none Low as each petrochemical has specifc usages

None None in india . Possibility of competition from budget hotels

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

Moderate Low to moderate Low Low Low

Intangible assets

1. Customer relationship / contracts and agreement are a few intagible assets 2. Process and learning curve advantages 3. In some products R&D and special technology. Not critical in most products

1. Brands - requiring high spend to maintain visibility for retail . 2. R&D assets in terms of developing new types of lubes 3. Distribution infrastructure for retail 4. Customer relationhip with OEM need to be maintained. Pricing power is poor for big customers such as state agencies / OEM etc

1. Brands are important and provide relative pricing power (better pricing than other hotels - but not necessarily adequate pricing ) 2.Customer relationship important (not critical ) for corporate customer for business travellers

Valuation model

Petrochemicals (excluding lubes) Valuation approach DCF

Lubricants

Tourism Hotels 1. Price to book 2. DCF ( based on normalised earnings ) 3. Reproduction costs

High PE Low PE for the industry Avg PE for the industry Valuation drivers

12-14 8-9 10-12 1. Cost of Product / production (domestic v/s International ) 2. Demand supply scenarios 3. Capacity utilisation 4. ROE / Other fin factors 5.

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

12% + 1.5 times GDP None by mkt

Tourism Travel and tourism services

Shipping

Engg. And Industrial Mach Power , capital goods etc

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales 1. Shipping corp of india - 46 % 2. GESCO - 32 % 3. Varun shipping - 13 % 4. Mercator line - 9 % Total industry size : 7123 Total indian industry is only 4 listed co. However foreign competition is imp The industry is mix of several subsectors such as power, engg goods etc BHEL - 21 % Siemens - 8 % ABB - 8 % Sulzon - 7 % Crompton greaves - 6 % KOEL - 3 % KEC infra - 3 % Areva T&D - 3 % Cummins - 3 % Thermax - 3 % Laxmi machine works - 3% Most companies earning above cost capital. Also cyclical industry and hence current ROE is good BHEL - 4 % Siemens - 17 % ABB - 27 % Sulzon - 85 % Crompton greaves - 24 % KOEL - 0 % KEC infra - 34 % Areva T&D - 49 % Cummins - 13 % Thermax - 29 %

Profitability pool analysis ranking by ROE

1. 2. 3. 4.

Varun shipping - 73 % Maercator lines - 56 % GESCO - 43 % Shipping corporation of india - 26 %

Market share stability analysis

BHEL accounts for 65% of power sector and has highest market share. Other companies especially foreign companies are expanding

Tourism Travel and tourism services Pricing stability

Shipping

Engg. And Industrial Mach Power , capital goods etc

Pricing highly dependent on world trade volumes and shipping capacity (dependent strongly on demand supply)

Industry structure type

Kind of duopoly in india . Need to check Fragmented. But the larger players have impact of foreign competition much more pricing and scale based advantages for large projects

Key Industry products or segments

1. Power sector 2. Industry 3. Transport - trains

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Economic model
Return on capital : 1. Avg 10 % + with increase in the last 2 1. Last 3-4 years have been high due to years due to hardening shipping rates high demand growth 2. Cyclical and depends on trade 2. Generally over 13-15% for the entire volumes and new ships being cycle. Higher for larger companies introduced

Tourism Travel and tourism services Dupont analysis

Shipping

Engg. And Industrial Mach Power , capital goods etc

1. Asset TO < 1. Indicates high asset intensity. Mainly in the form of Fixed asset - ships / Offshore vessels 2. NPM are 10 % + with improvement lately. NPM drives the ROE as the business is asset intensive 3. Return on asset < 10 % due to low Asset TO. NPM would drive this ratio which in turn depends on trade volume and capacity 4. Total asset / Equity is < 0.5 indicating moderate debt level 5. ROE is 12 % + and improved lately due to rising NPM

FA Intensity

1. High on FA

1. No. High WCAP requirement, due to debtors and inventory position 2. Yes - R&D, customer relationship / brands / patents and technology are key elements in this industry High - due to projects (EPC) nature of sales. Inventory can also be high in some sectors

WCAP Intensity

Capital intensive ?

1. High capital requirement. Obsolence not high. However single hull ships would require phasing out

Not high

Margin intensive ?

Yes. Atleast 11% +

Yes. Margins are atleast 6-7% or higher. Margins seem to be sustainable. However during downturns margins and cash flows can be strained

RM as % of sales and implication

Tourism Travel and tourism services

Shipping

Engg. And Industrial Mach Power , capital goods etc 1. Order book ( as % of sales) 2. Net margins

Key Industry ratios and statistics

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. International trade 2. Oil shipments 1. Infrastrcuture development - power, roads and industry

Key supply drivers

1.Cost of vessel (which depends on steel 1. Cost of RM such as steel, metals and other RM prices) 2. Business is RM sensitive as the pricing is long term during RM pricing can change

Shareholder Value creation drivers

1. Tight supply scenario ( new capacity requires 2-3 years to come online 2. Higher proportion of double hull vessel 3. High capacity utilisation 4. High margins Low change. Business is cyclical

1. Growth/ demand for capital goods due infrastructure requirement 2. Cost leadership/ technology leading to growth in international markets and better ROC in domestic market 1.Low level of change in basic demand, however technology for capital goods is evolving

Degree / nature of change

Tourism Travel and tourism services Predictability of business

Shipping

Engg. And Industrial Mach Power , capital goods etc High, especially companies which have accquired scale

Low change. Business is cyclical

Cyclical nature ?

Yes

Yes

Ability to increase price ahead of inflation (Pricing power)

No pricing strenght can be seen. However pricing depends on demand supply ( FA can move to any area of demand !!). Global trade volume and capacity are the drivers

Moderate, depends on technical capabiliies, financial strenght

Some sort of monoploy or Oligopoly

None. A large number of companies

None

BHEL has a very strong position in power sector

Does the company have a recurring revenue stream

A recurring revenue stream from retail channel or from corporate contracts

Yes

Yes partly from services (after sales) ,but not big

Does the business have franchise / brands or is it commodity

None. Although larger fleets add to scale economies and better service

Moderate franchise driven by scale, technology and accumulated knowledge and skills

Does the industry enjoy high growth rates ? For how long

High, due to more business and leisure travel

Moderate growths. Mainly related to growth in foreign trade

High due to growth in infrastructure

Tourism Travel and tourism services Key industry variable which drive the performance

Shipping

Engg. And Industrial Mach Power , capital goods etc

1. Fleet utilisation levels 1. New orders/ investment in 2. Shipping rates infrastructure 3. % of presigned contracts / Total sales volume

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

Low to none

1. Customer advantage factor is related to switiching cost for an existing customer. However a new sale is dependent on bids by all competitors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

None

Network taxonomy

None

None

Network profits based on

None

None

Tourism Travel and tourism services Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

Shipping

Engg. And Industrial Mach Power , capital goods etc 1. Process economies are linked to a. value chain indivisibility can lead to lower cost and better value b. complexity and fit of all processes c. process costs from learning curve

A. 1. Value chain fit and complexity is important to achieve a low cost position through high fleet utilisation and low operating expenses 3.Process costs reduce with learning curve

B. Scale economies critical in operations B. Important scale economies from and fleet utilisation and fleet type a. purchasing b. R&D

Distinctive capability analysis

Architecture

1. Relationship with other providers such as air carriers, hotels and tourism providers is important to provide a single point service to the customer 2. Relationship with corporate customers for the outsourced travel business

1. Customer relationships and contracts 2. Contract and relationship with ship builders 3. Fleet operation skills / costs

1. Relationship with important or key customers such as power utility, power companies, railways, defence etc 2. Systems/ process/ knowledge base all add to the value added for a company

Strategic assets

None. Relationships are the only assets 1. Mainly vessels and fleet operational R&D/ technology and few patents - none skills too strong 2. Customer relationships and contracts

Tourism Travel and tourism services Innovation None

Shipping

Engg. And Industrial Mach Power , capital goods etc Sustaining innovations

None

Cost

Not too important

Important

Imp

Financial strength

Moderate

v. Important

V Important

Reputation

Very important. A brand helps in pulling Low in terms of criticality retail customer

Moderate importance

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Returns are cyclical depending on demand. Entry barriers are low as shipping companies can add capacity in any market as required - licensing ??. Rivalry is high due to high fixed investment, high demand variability and hence margins are cyclical and dependent on demand. supplier power, buyer and substitutes have low impact

ENTRY BARRIER - No. 1 Factor deciding industry profitability

1. High asset specificity and intensity 1. Entry barriers mainly due to scale, 2. Economies of scale ( no. and types of low cost position, strong balance sheet vessels ) is critical for cost advantage and customer relationships and to weather down cycles 3. Balance sheet strength

Asset specificity

1. High asset specificity

High

Economies of Scale

1. Scale economies high for capacity utilisation, vessel type availability and overall costs

Very high and important

Tourism Travel and tourism services Proprietary Product difference

Shipping

Engg. And Industrial Mach Power , capital goods etc Moderate

1. Low. Depends on the services provided

Brand Identity Switching cost

NA Low. Except for the contracts signed

Low High

Capital Requirement

High

High

Distribution strength

NA

Low

Cost Advantage

Important. Exists if scale economies exist Important. Tonnage tax, investment in port, development of trade would impact industry

High

Government Policy

Important for power, transportation, railways etc

Expected Retaliation

High

High

Production scale

NA

High

Anticipated payoff for new entrant

??

Moderate

Precommitment contracts

Moderate to high. Benefits when rates are dropping Moderate NA

High

Learning curve barriers Network effect advantages of incumbents

High NA

Tourism Travel and tourism services No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT

Shipping

Engg. And Industrial Mach Power , capital goods etc A few major competitor - dominated by BHEL

Oligopoly. 4-5 major companies

Moderate to high. Excess rates would lead to low rates , resulting in low profitability. Mainly due to high fixed capacity

Moderate to high

Industry growth

Moderate

High

Fixed cost / value added Intermittent overcapacity Product difference

High High Low

Moderate High Moderate

Informational complexity Exit Barrier Demand variability

Low High High

High High High

SUPPLIER POWER

Low. Capacity is constrained by None availability of supplier. Lead time is long for ships Moderate to low Low Low Low

Differentiation of input Switching cost of supplier

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

None ?? High High None Moderate to low

NA Low High Moderate None Moderate to low

Tourism Travel and tourism services Buyer conc. v/s firm concentration Buyer volume

Shipping

Engg. And Industrial Mach Power , capital goods etc Low

Low

Low

Moderate

Buyer switching cost Buyer information

Low High

Low High

Ability to integrate backward Substitute product

None None

None None

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

Intangible assets

1. Branding very important for the leisure travel 2. Distribution infrastruture important for retail business and addon business such as Forex ( thomas cook ) 3. Customer relationships important for clients which have outsourced their travel. Margins low in such relationships

1.Customer relationships / contracts are relevant for shipping. Has a critical bearing on revenue stability (can reduce the upside for revenue also)

1. Patents / knowledge asset crucial in providing value to customer 2. Customer relationships and contracts are important

Valuation model

Tourism Travel and tourism services Valuation approach

Shipping

Engg. And Industrial Mach Power , capital goods etc 1. DCF based 2. Open order book for revenue visibility 30-40 10-12 20 1. Open order book 2. Debtors days 3. Inventory TO 4. WCAP TO 5. Asset TO 6. Margins

1. DCF 2. Shipping rates 8-10 3-4 5-6 1. Frieght rates 2. % of pre-fixed contracts 3. Asset value 4. P/B

High PE Low PE for the industry Avg PE for the industry Valuation drivers

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

20-30% 10-20% 10 Yrs Equal

Textiles

Retail Lifestyle and Value retailing etc

Chemical Fertilizer

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales Fragmented industry. 20 companies make the 80 % (Total industry is 26200 Cr) 1.Century Textile - 10% 2.Aditya Birla Nuvo - 9% 3.Raymond - 9% 4.Mahavir Spinning Mills - 7% 5.Indo Rama Synthetics - 7% 6.Arvind Mills - 6% 7.Alok Industries - 5% 8.Century Enka Ltd - 4% 9.Rajasthan Spinning - 3% 10.Garden Silk Mills - 3% 11.Abhishek Industries - 3% Most companies earning below cost of capital (< 13 %) 1.Century Textile - -2% 2.Aditya Birla Nuvo - -3% 3.Raymond - 5% 4.Mahavir Spinning Mills - 9% 5.Indo Rama Synthetics - -6% 6.Arvind Mills - -3% 7.Alok Industries - 23% 8.Century Enka Ltd - -10% 9.Rajasthan Spinning - -1% 10.Garden Silk Mills - -9% 11.Abhishek Industries - -1% 1. Pantaloon ( 655 cr) 2.Trent (150 cr) 3. Shopper's stop (500 Cr) 4. Titan 5. Metro AG 6.Provogue india Fragmented industry. Around 20 companies in industry size of 33000 Cr and 12 companies making 80 % 1.National Fertilizers - 11% 2.Tata Chemicals - 11% 3.RCF - 9% 4.GSFC - 9% 5.Chambal Fertilizers - 8% 6.SPIC - 7% 7.Zuari Industries - 7% 8.GNFC - 6% 9.Coromandel Fertilizers - 6%

Profitability pool analysis ranking by ROE

Poor industry economics. Very few companies make more than cost of capital due to pricing controls 1.National Fertilizers - -5% 2.Tata Chemicals - 2% 3.RCF - -2% 4.GSFC - 13% 5.Chambal Fertilizers - 4% 6.SPIC - -13% 7.Zuari Industries - 5% 8.GNFC - 10% 9.Coromandel Fertilizers - 5%

Market share stability analysis

Complete data not available. However companies like mahavir spinning mills, Rajasthan spinning and sangam india are gaining share in the cotton yarn space

Steady market shares Urea - national fertilizer @ 26 % RCF @ 13 % Chambal has gained share from 8 % to 14 % DAP market controlled by a few key players 1. Tata chemical at 14 % 2. GSFC has risen to 30 % from low 10-20 % 3. Zuari has risen from < 10 % to around 30 % 4. Spic and a number of companies have lost share or stopped DAP

Textiles

Retail Lifestyle and Value retailing etc

Chemical Fertilizer 1. DAP has seen good pricing improvement by around 10 % (controlled by government?) 2. Urea has had substaintail improvements in pricing ( by 30 % +). Check why NPM are still poor ?

Pricing stability

Commodity product (part is branded). Industry has seen rising pricing (which in turn depends also on cotton prices)

Industry structure type

Extremely fragmented, due to government policy of looms and not allowing large vertically inetgrated compaines. Export opportunities should see consolidation and larger mills

Mainly segmented to two segments. A few companies dominating the DAP segment. The rest in the urea market

Key Industry products or segments

1. DAP 2. Urea

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

1. DAP 2. Urea

Economic model
Return on capital : 1. Poor ROE for the last 6 years . Less than 10 % and negative sometimes 1. Currently in mid teens (10-15 %) Extremely poor economics. ROE consistenly 2. Fairly uniform as the industry is in in single digits with some loss years a growth phase

Textiles

Retail Lifestyle and Value retailing etc

Chemical Fertilizer 1. Asset TO low at 1.2. Has improved from 0.8 to 1.2 2. Poor margins at 3-4 %. Less than 5 % and sometimes negative too 3. ROA poor to due 1 and 2 4. Debt levels high. Debt equit at 1.2 :1 5. ROE poor due to poor margins, low ROA. Has gone negative some times. consistently below 10 %

Dupont analysis

1. Asset TO less than 1 or at 1 2. Low margins at 1-2 %. Have improved to just under 5 % 3. ROA also poor at below 5 % 4. High debt equity at 1:1 . Has seen reduction from 1.3:1 . 5. Poor ROE at 9 % now due to above reasons

FA Intensity

1. Fairly high TO ( 4-5 times) 2. Addition to FA happening in the form of new stores 3. Intangibles important in terms of brand and reach. Supply chain efficiencies ae crucial for success 1. Fairly high TO ( > 4-5 times) 2. WCAP is mainly in inventory which could be financed by suppliers if the company manages its supply chain well Yes, for New store additions and resulting WCAP increase (Till economies of scale release capital from WCAP) 1. Margins are low in retail. In the order of 4-5 % for the value segment such as food bazar, central mall etc ) 2. Margins are higher for the speciality retai/ lifestyle in the range of 8-9 %. Capital requirement is higher

WCAP Intensity

Capital intensive ?

Margin intensive ?

RM as % of sales and implication

Textiles

Retail Lifestyle and Value retailing etc

Chemical Fertilizer 1. 2. 3. 4. Industrial production index Capacity utilisation Inventory to sales ratio Producer price index (PPI)

Key Industry ratios and statistics

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Domestic demand 2. Major export demand to overseas market due to quota removal 1. Location, pricing and branding are 1. Performance of the agricultre important 2. Demographics and rising disposable income

Key supply drivers

1. Cotton price 2. Skilled low cost labor 3. Low cost design resources

1. Cost of rentals ( Property ) at the required locations 2. Overhead costs 3. supply chain cost - Difference between GPM and NPM (sourcing efficiency) 4. Inventory and merchandising 5. Financing options 1. Overhead costs 2. Brand - in house would give higher margins 3. Economies of scale 4. Logistics and sourcing infrastructure and scale 1. High degree of change due to lack of protection of process (any one can copy ) 2. Branding may help in some categories 3. Threat of entry from foreign majors

Shareholder Value creation drivers

1. Fully integrated with economies of scale 2. Strong customer relationship

Degree / nature of change

1. Product stable, but due opening of quotas , industry undergoing change

Textiles

Retail Lifestyle and Value retailing etc

Chemical Fertilizer

Predictability of business

1. Low predictability of the business due 1. Demand is predictable change in business model 2. Retailing is tough business with thin margins and requirement of scale

Cyclical nature ?

1. Low as india is move to organised retail format

Ability to increase price ahead of 1.Low pricing for yarn and textile 1. Low as value add is limited to own inflation (Pricing power) commodity brands. For outside brands it is not 2. Moderate pricing for Branded clothes possible 3. Good pricing for high end branded products

Some sort of monoploy or Oligopoly

none

1. None

Does the company have a recurring revenue stream

yes. But dependent on a few large buyers in the export market

Yes

Does the business have franchise / brands or is it commodity

commodity for the high growth export market. However vertically integrated companies have branded products which give some pricing strenght

1. Moderate Brand in some categories such as - Garments, Restaurant

Does the industry enjoy high growth rates ? For how long

yes currently due to the removal of the Yes for now quotas in international markets

Low. Related to mainly agricultre

Textiles

Retail Lifestyle and Value retailing etc 1. Inventory turns. FA turns 2. NPM ( over head costs = GPM NPM ) 3. Store expansion plans 4. Per store stats - sales , profit etc

Chemical Fertilizer

Key industry variable which drive the performance

1. Scale - high production capacities 2. Design capabilities 3. Managing relationship / order for global retailers like walmart, JC penny etc 4. Execution capability

Source of competitive advantage

None Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

1. Differentiation important - can be in the form of brand, pricing or experience etc 2. Low switching cost if differentiation is based on cost 3. Network effect not important

Commodity product with no brand differentiation

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

NA

None

Network taxonomy

None

NA

None

Network profits based on

None

1. Mainly based on economies of scale

None

Textiles

Retail Lifestyle and Value retailing etc 1. Value chain indivisibility and fit of process very important to keep cost down (as retail is low margin business) 2. Process cost change in india is currently high 4.Not copyright protection. Medium term advantage of location and long term leases 5. Not much resource uniqueness, expect high management skill is imp in this business

Chemical Fertilizer A. Process economies are crucial for profitability 1. Value chain indivisibility is imp for cost reduction 2. Process filt and complexity is moderate 3. Process cost change is moderate and has impact on total cost 4. No patent / R&D assets 5. Resource uniquness is limited to access of potash

Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses )

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies in production and competitive edge if the ratio of purchasing. advertising to a small fixed cost / Variable cost for the extent for branded product companies market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

A. 1. Indivisbility of value chain to small extent as backward integration helps in reducing costs 2. Process cost changes are moderate over time 3. Resource access in the form of cotton and manpower has some advantage in india

B. Scale economies very crucial for B. Scale economies very crucila for all the factors (with merchandising at production and pruchasing the local level)

Distinctive capability analysis

Architecture

1. Process/ knowledge base to develop low cost position 2. Relationship with global retailers such as walmart etc for repeat business

1. Relationship with supliers Process knowldege resulting in low cost supplier management is a key production is the only differentiator capability 2. Inventory management / Merchandising / Procurement process is crucial 1. Distribution network is important. But can be built None

Strategic assets

1. Distribution network for retail 2. Plant for mfg 3. Access to low cost Raw material is important

Textiles

Retail Lifestyle and Value retailing etc 1. Low and can be copied

Chemical Fertilizer None

Innovation

Low

Cost

Very important due to commodity nature

Financial strength

Reputation

1. Not easy to maintain . Requires constant effort on part of management Important, due to attempt by companies 1. Very critical for managing growth to capture global markets and supply to global retailers such as walmart, target etc Low, only for retail 1. critical in some categories

V. Imp

Imp for capacity additions

None

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Poor returns due to fragmented nature of industry, commodity nature of product and price competition. Also entry barriers are not too high and competition is high. Buyer power is high for the large global contracts and from other countries. Supplier and subsititute does not have an impact Sunrise and growth industry. Entry barriers are coming up. Early mover adavantage for the companies which scale up. Rivarly is expected to intense in future and from foreign competiton too. This will drive down returns. Other factors do not have a large impact Poor industry returns due to low growth, govt controlled pricing, high competition and low entry barriers. Supplier power is moderate as there is some conc. Of supplier. Buyer power and substitute are low impact.

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Entry barriers are low for retail. For global business scale is critical and hence barriers could be high to get contracts and develop relationships

1. Economies of scale is critical Low entry barrier. However due to low 2. Brand is critical in some demand growth and poor returns, not too categories. Franchise - profitable is many new entrants. possible for some categories 3. Cost structure / Management / Logisitics & Procurement process can create entry barriers

Asset specificity

Yes. High

1.Moderate. Retail space can be vacated , sold 1. Very critical as the business is based on low profit margins

High

Economies of Scale

High

High

Textiles

Retail Lifestyle and Value retailing etc 1. Low for most companies

Chemical Fertilizer Low

Proprietary Product difference

Moderate to low

Brand Identity Switching cost

Important only for branded retail local market medium to high for the global buyers

1. Relevant to some categories such Low as restaurant, garments 1. Low Low

Capital Requirement

High

1. High especially in case of rapid store expansion. Low if franchise route is taken.In such case brand / Franchise related costs are incurred 1. High

High

Distribution strength

Relevant moderately only for the local retail market. Not very important though Important especially for the Export market important.

High

Cost Advantage

Government Policy

1. High if the economies of scale exist 2. High is integrated logistics and procurement is in place 1. Critical in india - FDI / Land laws etc 2. Entry of retail to foreign competition 1. high

Moderate

High

Expected Retaliation

??

High

Production scale

Very crititcal

NA

High

Anticipated payoff for new entrant

Moderate to low

High currently

Low

Precommitment contracts

High

Low. More so on the supply side

Low

Learning curve barriers Network effect advantages of incumbents

?? None

High especially in indian context 1. Moderate to an extent that the incumbent can setup the retail channel and support infrastructure

?? NA

Textiles

Retail Lifestyle and Value retailing etc 1. High. Expected competition from foreign players

Chemical Fertilizer high competition

No. of competitors - Monopoly / high competition ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT High due to fragmented industry

Rivalry is high and this results in high High due to fragmented industry competition. Foregn competition can be expected

Industry growth

Moderate to high

High

Low

Fixed cost / value added Intermittent overcapacity Product difference

High High Low for suppliers

High Can be high in local areas - like metros Low in most cases

Moderate High Low

Informational complexity Exit Barrier Demand variability

Low High ??

Low High Low Low supplier power is a low competitive threat

Low High High

SUPPLIER POWER

Low

Low, driven by Petroleum industry

Differentiation of input Switching cost of supplier

1. Low 1. Low except in case of some branded goods. Still low 1. Yes 1. Low in most categories

None moderate - to check

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

None To check, for gas high

1. High ?? 1. High. But low in each category v/s High total sales 1. Low Low High for global contracts Buyer power is a very low competitive threat Low

Textiles

Retail Lifestyle and Value retailing etc Low

Chemical Fertilizer

Buyer conc. v/s firm concentration Buyer volume

High

High

Low

Buyer switching cost Buyer information

Low to moderate High

Low Moderate to high

Ability to integrate backward Substitute product

No None

NA Substitution exist for competition and Moderate. Most farming done with chemical not product. Competitive pressure fertilizers due to substitution is high

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

1. High in most categories 1. High in most categories 1. Low in most 1. Low 1. High

High High Low Low High

Intangible assets

1. Brands have a moderate impact only for companies involved in selling finished product 2. Distribution has a bit importance for companies involved in selling branded products 3. Customer relation / contracts / agreements very important for the export market

1.Logistics infrastructure None 2. Store brands are relevant for garments 3. Overall Brand for the retail company is important to pull in traffic 4.Distribution infrastructure is critical - no. and location of outlets

Valuation model

Textiles

Retail Lifestyle and Value retailing etc 1. PE 2. NPM / ROE 3.DCF

Chemical Fertilizer

Valuation approach

High PE Low PE for the industry Avg PE for the industry Valuation drivers

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

Chemical Basics - organic / inorganic and speciality

Power PAINTS Power generation and associated activity

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales 1. Asian paints - 42% 2. Goodlas nerolac - 18 % 3. Berger paint - 18 % 4. ICI - 16 % 5. Shalimar - 4 % total industry - 5490 Cr 1. NTPC - 55 % 2. Tata power - 10 % 3. Reliance power - 9 % 4. PTC India - 7 % 5. Nyvelli Lignite - 6 % 6. CESC - 5 % 7. Torrent power - 3 % 8. Gujarat industries Total industry size - 45000 cr

Profitability pool analysis ranking by ROE

1. 2. 3. 4. 5.

Asian paints - 18% Goodlas nerolac - 22 % Berger paint - 20 % ICI - -4 % Shalimar - -5 %

All companies have 12-13 % ROE. Must be due to regulation.Only PTC has 19 % ROE and Torrent has 23 %

Market share stability analysis

1. Market share consoldiation happening High as the T&D is controlled by towards top players. Asian paints and government regulation. Regulation berger have gained market share and being eased now the smaller players like J&N and shalimar have gone down. Also unorganised market is reducing - Asian paints - +3.4 % increase - Berger - +3 % increase - GNP - +.2 % increase - ICI - -1.8 % decrease - J&N - -6.4 % decrease

Chemical Basics - organic / inorganic and speciality Pricing stability

Power Power generation and associated activity Fairly stable pricing. FG price increase in Decided by the CERC based on a the last 2 years by 8 - 10 % due to formulae - mainly a fixed return on increase in pertroleum prices. The key capital with added incentive on PLF players are able to pass price increase with a lag PAINTS

Industry structure type

95 % of organised industry controlled by top 4 players. Also the unorganised sector is now shrinking and being taken up with the top organised players

Key Industry products or segments

Top 4 players have 80 % of market. National player is mainly NTPC. Tata power also has some presence across country. Reliance power has presence mainly in bombay and some circle. Most of these companies are generation and in some cases distribution companies 1. Domestic 2. Industrial/ commercial

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest) Not applicable

Economic model
Return on capital : 1. Below tens (10%), but has increased in the last 3 years to 10% + due improvement in margins and asset TO High. High only for APIL / GNP/ Berger 1. Mid tens ( 10-15 %) 2. Fairly uniform (not cyclical ) supply shortage . Also for most company the pricing is fixed by government based on a fixed return on asset. Hence ROC is uniform for the industry

Dupont analysis

Chemical Basics - organic / inorganic and speciality 1. Generally greater than 1 and has increased from 1.1 to 1.4 in the last few years 2. Fairly low. Was in 2-3 % range and has increased to 6-7% driving the ROE 3. Has seen improvement from 2-3 % to 8-9 %. However is below 10 %. 4. Debt / equity ratio is generally 1:1 and has reduced a bit recently. not a very conservative number 5. ROE is < 10 % and has improved recently mainly due to improvement in NPM

PAINTS 1. Asset TO steady at 2.2 to 2.3 2. NPM have been steady at 5.8 - 5.7 %. Reduction to around 4 % in 2005 due to petroleum prices. Should recover to 5.5 % + in future 3. ROA is consitently in double digits 10 % + 4. Debt equity is low at 0.5 : 1 5. ROE has come down for industry from 20 % + to around 10 % , mainly to reduction in margin due to petroleum prices and also due to poor profitability of players like ICI and shalimar and collapse of J&N

Power Power generation and associated activity 1. Asset TO is fixed at 0.5 2. Margins are very stable at 16-18 % 3. ROA are fixed between 8-9 % 4. Debt equity is stable around 0.5 : 1 5. ROE is stable around 13-14 % These steady numbers are mainly due to pricing controls by government based on fixed ROE for these companies and due to high % share of NTPC which is owned by governmnet

FA Intensity

1. Not an asset light model. Asset TO seem to be 1-1.3 times sales

High FA TO.

High FA TO . Greater than 1 in most cases

WCAP Intensity

Low ratios. Paints is WCAP intensive. RM Wcap intensive due to fuel costs as cost of FG is high. AR is high ~ 30 days. RM/ FG inventory is also high.

Capital intensive ?

Moderate intensity. Asset specificity is low

Capital intensive for New projects, and poor recievables. Cash flow is tied into SEB bonds for government companies. Companies like reliance do not have recievables issue Fixed returns due to government pricing controls

Margin intensive ?

RM as % of sales and implication

The business does not have high Low margins . NP < 10 %. cyclical for margins. Also the margins appear to be industrial paints. cyclical dependent on the industrial growth. Also as the business is commodity, margins would be dependent on the demand supply scenario

Main RM is fuel which has increased from 58% to 62% in the last 5 years due to fuel price increases. NPM are stable due to increase of consultancy and other income

Key Industry ratios and statistics

Chemical Basics - organic / inorganic and speciality 1. Industrial production index 2. Capacity utilisation 3. Inventory to sales ratio 4. Producer price index (PPI)

Power PAINTS Power generation and associated activity 1. ROC 2. PLF factor 3. T&D losses for distribution

Business units

1. Power generation 2. Power distribution 3. Power trading

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Performance for end industry such as 1. Rural demand 1. Industrial activity auto for rubber, consumer durables / 2. Conversion from lime to Distemper to 2. No. of retail customer consumer goods for plastics etc Paint 3. GDP growth 3. Unorganised sector to organised 1. Performance of economy sector 2. Government policy 4. Housing boom 3. Demand Gaps 5. New segments - exterior 6. Auto boom 1. Petroleum prices 1. Fuel prices 2. Tio2

Key supply drivers

Shareholder Value creation drivers

1. Strong brands 2. Distribution infrastructure 3. NPD pipeline and ability to launch successful new products 4. Innovation capability Low. 90 % controlled by the top 4 companies

1. Low T&D losses 2. Low operating cost - via fuel and others

Degree / nature of change

Low

Chemical Basics - organic / inorganic and speciality Predictability of business

Power PAINTS High. Depends on the economy / Rural demand Power generation and associated activity High

Cyclical nature ?

Moderate

Moderate

Ability to increase price ahead of inflation (Pricing power)

Moderate, especially for the mid to top end product range. Products like primers etc have poorer pricing power

1. Regulated companies. Pricing decided by Return on asset. More pricing flexibility for industrial and commercial customer. Poor for retail customer. Very poor power (and ability to collect ) for rural

Some sort of monoploy or Oligopoly

??

Yes. Consolidation happening in industry Monopoly in each area, but pricing fixed by government. Electricity act 2003 is introducing competition for bulk consumers Yes. However re-purchase cycle is long. Yes , from retail / industrial / Rural customer

Does the company have a recurring revenue stream

??

Does the business have franchise / brands or is it commodity

??

The business has franchise / brands. 1. No franchise at all. Regulated Commoditisation reducing due to tinting monopoly at best where return are machines. decided by government

Does the industry enjoy high growth rates ? For how long

Moderate. Related to economic growth. Moderate. Being led by new categories, High. Major power deficiet cyclical in nature auto & housing boom

Chemical Basics - organic / inorganic and speciality Key industry variable which drive the performance

Power PAINTS 1. 2. 3. 4. Distribution depth Brands Net margins / Wcap management No. of Tinting machines Power generation and associated activity 1. Government regulation 2. Fuel pricing

Source of competitive advantage

Competitive advantage limited to licensing. Additional returns made via more efficient operations 1.Brand effect is strong 2. Lock-in at dealer level due to tinting machines 1. Switching not possible for retail. For industry difficult to switch to cogen. Larger consumers tend to setup own power generation and new electricity act could allow for more competition

Customer advantage Factors Commodity product with no brand resulting in moat (customer differentiation. Speciality chemical has captivity) lockin with customer Higher durability than production advantage factors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

1. Network economies exist due to the None distribution network. Barrier due to this network none None

Network taxonomy

None

Network profits based on

None

1. Mainly due to economies of scale and None entry barriers of the distribution network

Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

Chemical Basics - organic / inorganic and speciality A. Process economies are crucial for profitability 1. Value chain indivisibility is imp for cost reduction 2. Process filt and complexity is moderate 3. Process cost change is moderate and has impact on total cost 4. No patent / R&D assets for basic chemical. R&D and patent are important for speciality chemicals

PAINTS A. 1. Value chain fit important as production, logisitics and distribution is important cost differentiator 2.Protection through contract on color machines 3. (Analyse process cost change)

Power Power generation and associated activity A. 1. Value chain linkage important to keep costs low 2. Protection mainly though license 3. Access to fuel such as coal, gas is crucial

B. Scale economies very crucial for B. Scale economies are critical in production and pruchasing for basic distribution, purchasing, Ad, and R&D chemical. Not so important for speciality chemicals

B. Scale economies in production (scale of power plant), distribution (although T&D is not with the producers), purchasing (for fuel)

Distinctive capability analysis

Architecture

1. Process knowldege resulting in low cost production is the only differentiator for basic chemicals 2. Process knowledge / patent and R&D assets help for speciality chemicals

- Strong relationship with distribution network through tinting machines - Strong process / IT to control costs and manage distribution

1. Relationship with SEB to supply power 2. Process/ systems to manage power plants and distribution systems to keep costs under control

Strategic assets

Patent / R&D on speciality chemical is - distribution network the only asset. For basic chemical none - Brands such asset - Knowledge base to manage processes / value chain

1. 2. 3. 4.

Plant License Access to low cost Rawmaterial Switiching cost due to license

Innovation

Chemical Basics - organic / inorganic and speciality R&D and innovation important for speciality chemicals V important for basic chemicals

Power PAINTS Power generation and associated activity Low

Cost

Financial strength

Imp for capacity chemicals

sustaining innovation. Product innovations and also delivery innovations such tinting machines, pack sizes critical for good ROE as the product Important, although tariffs are fixed Cost is RM dependent by govt based on return on investment method High importance now to expand Important to sustain recievables and internationally for growth opportunities NA

Reputation

Brands have moderate role for speciality Brands / trademarks very crucial in chemicals domestic market to get strong pricing

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns High industry return due high entry barriers, good demand and moderated competition (top 4 company account for a big share). Also supplier, buyer power and substitutes have low impact Returns are fair, mandated by government. Entry barriers are more due to economics of the business and government control. Rivalry is absent, due to licensing, but will increase in future. Supplier power is moderate. Substitution is due to power generation by customer, however it is not cost competitive. Industry constrained by goverment and the economics of power 1. Limited competition with government controlled monopolies 2. Pricing controlled by government with poor recoveries by SEB

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Entry barriers are high due to distribution and Brands

Asset specificity

Low.

High asset specificity

Economies of Scale

Distribution economies of scale. Purchasing economies of scale

High economies of scale

Chemical Basics - organic / inorganic and speciality Proprietary Product difference

Power PAINTS Moderate Power generation and associated activity None

Brand Identity Switching cost

High Low.

None Low if available

Capital Requirement

High, due brand building and Distribution infrasturcture

High

Distribution strength

High

High. Mainly through T&D network

Cost Advantage

Low.

Critical if competition exists. However in india govermnet granted monopoly and returns exist Critical in india, as SEB's are key suppliers of electricity and channels of distribution (SEB are controlled by government ) Low as limited competition in the sector (To analyse ???) Important for being a low cost provider in this commodity industry High. However the industry is controlled by the government and AR collection is poor Important with bigger industrial consumers. However currently distorted competition exists ?? None

Government Policy

None

Expected Retaliation

High

Production scale

Economies of production are not too high. Distribution/ advertising economies more imp Low.

Anticipated payoff for new entrant

Precommitment contracts

Low.

Learning curve barriers Network effect advantages of incumbents

High High. Distribution network is of big advantage

Chemical Basics - organic / inorganic and speciality No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT

PAINTS Very few competitiors

Power Power generation and associated activity Currently monopolies / Duopolies at best

Moderate rivalry. Mainly top 4 None companies now. As a result ROE is high for most of these companies. There is no price brutal competition now

Industry growth

Moderrate

None

Fixed cost / value added Intermittent overcapacity Product difference

Low. Low. High

None None None

Informational complexity Exit Barrier Demand variability

Moderate Low. Low.

None None None

SUPPLIER POWER

Low

coal / Gas - low to none

Differentiation of input Switching cost of supplier

Low. Low.

None high

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

No. Rutile has to be used Low High High moderate Low

Low moderate High High Low Low, due to restricted competition

Chemical Basics - organic / inorganic and speciality Buyer conc. v/s firm concentration Buyer volume

Power PAINTS Low Power generation and associated activity Low

Low

Low

Buyer switching cost Buyer information

Low Moderate to low

High Low

Ability to integrate backward Substitute product

None Brand substitution is low

Yes, but limited to large customer Inhouse power generation

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

Medium High Medium

High Depends on the nature of buyer Low

Medium ?? Low to medium. Painter are key decision ?? maker

Intangible assets

2. Patents, knowledge asset important for speciality chemicals 4. Customer relationships 6. Customer lockins for speciality chemicals

1. Brands critical and add to consumer 1. Local monopoly in the form of advantage - results in pricing strenght distribution rights for the company 2. Process based innovation to create 2. Distribution infrasture critical in terms a low cost structure for the company of critical dealer openings / Color tinting 3.Switching cost very high (not machines which add to dealer lockin switching possible for retail) 3. Dealer tinting machines results in dealer lockins ( long term contract / agreement)

Valuation model

Valuation approach

Chemical PAINTS Basics - organic / inorganic and speciality 1. Price to book 1. P/E 2. DCF ( based on normalised earnings ) 2. Cash flow 3. Reproduction costs

High PE Low PE for the industry Avg PE for the industry Valuation drivers

Power Power generation and associated activity 1. Price to revenue ratio - bench mark is 0.5-0.6 times revenue 2. DCF approach or multiple of assets 17-19 12-13 13-15 1. Cash flow 2. Re-investment of cash flow and capital 3. Cost structure 4. Licenses

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

10-14 % 10-12 % 6-8 years Maintenance capex ~ Deprecitation expense

Logistics Power Power cables Paper Logistics - goods

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales 1. 2. 3. 4. 5. KEI industries - 31% Diamond cables - 16% Nicco - 21% Universal - 19% Torrent - 10% Top 6 players control 80 % of industry 1. Ballarpur industry - 31 % 2. TN news print - 13 % 3. Orient paper - 13 % 4. JK paper - 12 % 5. West coast paper - 9 % Bhadrachalam is missing in the list Total size 5900 Cr+

Profitability pool analysis ranking by ROE

KEI / Torrent most profitable in last 23 years (25 %+) Others have returns between 1015%. Prior to 2004, most companies were in losses and KEI has single digit returns

Poor ROE of the industry. Currently at 1. Concor 13 % 2. GATI 1. Ballarpur industry - -2 % 3. Maersk 2. TN news print - 0% 3. Orient paper - losses 4. JK paper - 5 % 5. West coast paper - 10 %

Market share stability analysis

??

Data not available

Logistics Power Power cables Pricing stability Low. Decided by demand and RM pricing scenario Paper Logistics - goods

Data not available

Pricing seems to be good with margins being maintained. However pricing could get impacted for trucking companies during a downturn

Industry structure type

Top 5-6 players are roughly the same Multiple players. Top 7 control 80 % size 300-400 Crs and KEI is around of industry. Not a very profitable 600 Crs. Large no. of players in the industry due to commodity nature industry

Key Industry products or segments

1. 2. 3. 4.

Power Industry Oil and gas Realty

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest) KEI seem to have better competitive advantage than other companies

Economic model
Return on capital : 1. 20%+ lately due to high demand in the power, industry and infrastructure 2. Normative return is lower (cannot put a number) due to cyclical nature of the industry 1.Poor ROE , usually below 10 %. As 1. 20 % + ROE for the companies the industry is commodity in nature , ROE is cyclical depending on the net margins

Logistics Power Power cables Dupont analysis Paper Logistics - goods

1. Asset TO has improved from < 2 to 1. Asset TO are low at around 1 around 2.8-3 2. NPM have fluctuated from -ve to 5 2. Margins have now improved to % based on the demand and supply almost 8-9 % inspite of RM increases condition 3. Improvement to 15-19 % 3. Debt equity is on higher side at 1:1 4. Varies by company 4. ROA is poor due to low margins 5. Fairly high at 25-30% lately due to and low asset TO high growth 5. ROE is cyclical , depending on the The above numbers represent two NPM which in turns depends on the companies in the sector - KEI, torrent pricing (demand and supply) cables. All others have losses till 2004 or 2005 and have had good performance in the last 2 years. several have had -ve Net worth in the past

FA Intensity

Low amount of FA needed. For most companies is around 3-4 times sales

1. Asset heavy

WCAP Intensity

High WCAP requirement. Especially for inventory and debtors in the recent past

1. Very Low WCAP intensity. Some companies work with -ve WCAP

Capital intensive ?

Low obsolesence

Yes. FA requirement is high

Margin intensive ?

Cyclical margins. Losses during downturn. Several companies in the sector incurred losses for 2-3 years during the down cycle

RM as % of sales and implication RM is almost 70% with copper, steel, aluminium and insulation products being the major component

Logistics Power Power cables Paper Logistics - goods

Key Industry ratios and statistics

1. Order book 2. Demand/ growth in power, industry, retail

Business units

1. Institutional sales 2. Retail sales 3. Exports

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Growth in the following sectors - power - industry - realty - exports 1. GDP growth . Industrial growth 2. Inter-regional trade 3. Export growth

Key supply drivers

1. Price of RM such copper, steel , aluminum and insulation material

1. Fuel prices for the Road / Rail transport 2. Container availability 3. Steel / cost of equipment such as Trucks/ Cranes etc

Shareholder Value creation drivers

1. Volume growth 2. Order booking 3. Exports 4. Low cost of operation via scale, backward integration and RM cost management Moderate - demand is variable and dependent on the other industry - cost are highly variable and account for 70% of sale price

1. Asset utilisation level 2. Margins ( depending on industrial growth )

Degree / nature of change

1. Low. Movement happening to containerised transport. 2. Multi-modal business model 3. Service component / Logisitics service increasing

Logistics Power Power cables Predictability of business High, but demand is cyclical or variable Paper Logistics - goods

High

Cyclical nature ?

yes, but for some time there could be high growth in the sector

Less for multimodal companies like Concor, high for trucking companies

Ability to increase price ahead of Not for current project, but for new inflation (Pricing power) contracts the pricing can be negotiated

1. Fair pricing power especially for companies like concor which have a sort of monoply 2.Trucking companies ??

Some sort of monoploy or Oligopoly

No

None. Intense competition in trucking business

Does the company have a recurring revenue stream

Yes, from EPC company/ retail network

yes

Does the business have franchise / brands or is it commodity

Commodity. Weak brand pull in retail

Brand important for certain segment.

Does the industry enjoy high growth rates ? For how long

High for the next couple of years

Low. Related to economy. Cyclical in Yes. Especially multimodal nature companies for 3-5 years

Logistics Power Power cables Key industry variable which drive the performance 1. Growth in the following sectors - power - industry - realty - exports 2. RM prices Paper Logistics - goods

Source of competitive advantage

None Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

None

4. Network effect exists

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None None None a) scale economies due to network. Barriers due to network as companies with stronger network can provide better service levels None

Network taxonomy

None

None

Network profits based on

None

None

Network profits based on economies of scale and entry barriers

Logistics Power Power cables Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) A. Process economies - value chain indivisibility - complexity and value chain fit - Small benefit from learning curve Paper Logistics - goods

A. Process economies 1. Value chain indivisibility helps drive down cost 2.Rate of change in process cost is moderate

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies from competitive edge if the ratio of - Production fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

A. Substantial process based economies 1. Value chain has high indivisbility through distribution hubs, transport vehicles etc 2. Process complexity and fit is crucial 3. Rate of change in process cost is high. Longer the time spent in building the network, lower the cost can be driven 5. Only concor had a unique access to railnetwork. But this unique access B. Scale economies in manufacturing, has been taken away logisitics B. Scale economies in distribution and purchasing network, distribution and purchasing too

Distinctive capability analysis

Architecture

1. Relationship with key customers such EPC, power companies etc 2. Knowledge base / experience to implement turnkey projects

1. Relationship with pulp suppliers, distributors etc 2. Process knowledge for speciality products 3. Relationship with export customers None which add to competitive advantage

1. Customer relationship 2. Systems / Processes to manage the large fleet / network and deliver low cost

Strategic assets

1. Plant 2. Distribution network for retail 3. Marketing team

1. Large fleet or containers 2. Depots at key locations

Logistics Power Power cables Innovation None Paper Logistics - goods

Sustaining innovations at best

NA

Cost

V imp

Important as it is a commodity industry Important to expand capacity and add asset to reduce cost

Critical

Financial strength

Imp

Critical factor

Reputation

Important - both for institutional and Not too important retail

Brands / image in form of reliability / Location served / Low cost provider

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Low to moderate returns due to weak compeptitive advantage. Weak to moderate entry barrier, high rivalry, strong buyer power and no control on input cost results in cyclical and weak returns High returns due to high entry barriers. High competition for the road/ trucking industry, low for multimodal. Buyer power, supplier power is less. Interchange of traffic between different transport modes based on cost situation

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Moderate entry barriers mainly due to economies of scale, customer relationship

1. High asset specificity 2. High economies of scale resulting in lower cost, bigger network and long term relationships results in competitive advantages 3. Brand / customer relationships resulting from value added service, economies of scale and bigger network results in enduring CA High asset specificity - Wagons, containers etc can be used by this industry only High economies of scale advantages. Companies with large no. of trucks, wagons, containers have advantage over smaller players

Asset specificity

Moderate

Economies of Scale

High

Logistics Power Power cables Proprietary Product difference Low Paper Logistics - goods

Brand Identity Switching cost

Moderate Low

Difference in the form of service and reach of the network. Higher value added service and bigger network can be provided by the bigger players Moderate to high High as a company may provide long term logisitics service. Low for the low end smaller players High

Capital Requirement

Moderate

Distribution strength

Moderate

Not too critical

Cost Advantage

Important

High for companies with high economies of scale Important as the monopoly on rail transportation has been taken from Concor.

Government Policy

Low and indirect

Expected Retaliation

High

High

Production scale

High

NA

Anticipated payoff for new entrant

Low

Low initially till scale is realised and new contracts signed

Precommitment contracts

High

Important for the larger players. Important asset even for the smaller players High. As it results in higher capacity utilisation and lower costs Not much

Learning curve barriers Network effect advantages of incumbents

Moderate None

Logistics Power Power cables No. of competitors - Monopoly / None ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT High Paper Logistics - goods

High no. of players

High in the trucking business. Low in the multimodal buisness due to less number to players / high capital requirement

Industry growth

Low to moderate - cyclical

Fixed cost / value added Intermittent overcapacity Product difference

Low Moderate Low

Moderate. Depends on EXIM and inter-region trade. More towards containerised trade High - hence utilisation rate is critical. V imp in the transport business High especially in the trucking busines Low. Difference is in the value added service / No. of locations serviced High as the asset have to be managed efficiently High due to asset specificity Low

Informational complexity Exit Barrier Demand variability

Moderate Moderate High

SUPPLIER POWER

Supplier power is low. However RM pricing depend on metal prices in the global markets which the companies cannot influence None Low

Low for Multimodal business for wagons / Containers. Moderate for Trucks Low Medium to low. In some regions cost is very high if TELCO has high market share None High NA High Low High for trucking business especially for small operator.Low for large companies like Concor

Differentiation of input Switching cost of supplier

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

None Low Low High None High especially for institutional customer

Logistics Power Power cables Buyer conc. v/s firm concentration Buyer volume High Paper Logistics - goods

High for trucking. Low for multimodal

High

High for trucking for large companies. Moderate for multimodal companies

Buyer switching cost Buyer information

Low High

Low High

Ability to integrate backward Substitute product

None None

Low None for trucking. Moderate to high for containerised business via rail ( can be send through road )

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

High Low Low Low High

High High for some industries Low Low to moderate high for standard service. Lower for long term contracts for export services with bigger companies

Intangible assets

1. Brands to a small extent in retail and instutional sales 2. Customer relationship

1. Moderate advantage through R&D 1. Brand to moderate extent, mainly and distribution infrastructure for long term relationship with big customers 2. Customer relationship and contract - especially long term contract with big customers

Valuation model

Logistics Power Power cables Valuation approach DCF Paper Logistics - goods

1.DCF 2.PE

High PE Low PE for the industry Avg PE for the industry Valuation drivers

12-14 5-7 9-10 1. Cash flow 2. COGS 3. ROC 4. Order book and growth in consumer industry

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions

20% + for the top players, < 10% for the weaker player 15% 1 yr for strong players, 0 for weaker

25 % + 12-13 % 7-9 years Maintenance cap is roughly equal to Dep due to high FA TO and negative Wcap

Maintanance capex ?? (approximate) as % of sales / Dep as % of sales

Logistics Courier - documents

Telecom services

Sugar

** - Reliance infocomm missing. Some private companies missing in the analysis

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales 1. Bharati televentures - 44 % 2. Reliance infocomm 3. VSNL - 15 % 4. MTNL - 21 % 80 % of industry controlled by 5-6 players (some private players like Reliance , IDEA, hutch etc are missing) Fragmented industry . 15 companies forming top 80 %. Also due to the nature of industry (sugar company have to be located close to supply of RM). Top 2 in the list to be checked. Not sure 1. Bajaj Hindustan - 10 % 2. Triveni - 9 % 3. Balarampur chini - 9 % 4. EID parry - 7 % 5. Dhampur sugar mills - 7 % 6. Sakthi sugars - 6 % 7. Mawana sugar - 5 %

Profitability pool analysis ranking by ROE

1. Bharati televentures - 31 % 2. Reliance infocomm 3. VSNL - -5 % 4. MTNL - -8 % Only Bharati is profitable among listed companies. Details not available for non listed companies. Some small operators like shyam telecom are profitable

All companies have a very High ROE currently (avg ROE is over 20%) . However ROE is very cyclical and has to analysed by company over entire business cycle

Market share stability analysis

Logistics Courier - documents

Telecom services

Sugar

Pricing stability

Pricing in this industry is continously down. Prices due to competition and technology are continously going down

Pricing has improved in the last 5 years. Increase of 15-20 %. Also due to supply shortage and low imports, capacity utilisation and hence margins/ Profits are high

Industry structure type

Intense competition among major players. Consolidation among major players may happen

Fragmented. Companies are located in UP, bihar close to cane growing areas where supply can be procured easily.

Key Industry products or segments

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Economic model
Return on capital : 1. Reducing from 20 % + (pretelecom opening up ) to current 9 %. Drops mainly due to compeition and also due to -ve profitability of several players such as MTNL, VSNL and smaller players Poor return on capital. Improvement in the last few years ( from 3-4 % to 9 %). Improvement has happened due to interest expense reduction. Operating profits roughly the same. ROC is highly cyclical

Logistics Courier - documents

Telecom services

Sugar

Dupont analysis

1. Asset TO fairly stable at 0.7 to 0.8 as this industry requires constant investment due to high obsolence 2. Continuous slide in margins from 15 % + to < 10 % 3. ROA has gone down from 10 % + to below 10 % ( and < 5 % ) 4. Debt equity is same 0.4 : 1 . Not too high debt scenario. most financing may be through equity 5. ROE due to margin pressure (dropping price) is also sliding down

1. Asset TO ration not high at 1-1.2 2. Low NPM @ < 5 %. Lately have gone up due to tight supply and dropping inventory 3.Return on asset low due to poor NPM. Improvement recently due to tight supply 4. Ratio is high (> 2.5) , showing high debt levels in industry. Companies raising equity to bring this down 5. ROE low during down cycle. Has improved recently to 15 % +

FA Intensity

1. FA intensity is high. 2. Low intangible assets

WCAP Intensity

1. WCAP ratio is high due to both inventory and recievables

Capital intensive ?

High capital intensity due to obsolence

High capital intensity. Mainly a commodity industry. Asset TO in the range of 0.8 - 1.2

Margin intensive ?

The business low Net margins which Poor margins. Typically < 5 % are continously going down due to competition and new technology

RM as % of sales and implication

Avg profit margins are 15 %. High Depreciation and interest expenses due to high debt component

Logistics Courier - documents

Telecom services

Sugar

Key Industry ratios and statistics

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Basic food commodity

Key supply drivers

1. Cane prices

Shareholder Value creation drivers

1. Enduring low cost position

Degree / nature of change

Very low change

Logistics Courier - documents

Telecom services

Sugar

Predictability of business

Very low change. Critical factor is demand supply situation

Cyclical nature ?

Cyclical nature of industry. Depends on demand supply scenario

Ability to increase price ahead of 1. Moderate pricing strenght. Value inflation (Pricing power) added services have more pricing strenght 2. Low end document services have lower pricing power

1. Constant drop in pricing for most services

1. Close to none. Depends on supply demand

Some sort of monoploy or Oligopoly

None

No monoply. Each license area has 3- None. Commodity industry 4 operators. Competition from alternate technology / new business model too Yes. From retail and corporate customers yes

Does the company have a recurring revenue stream

Yes , from retail and corporate customers

Does the business have franchise / brands or is it commodity

1. Moderate brand / franchise exist. Brands like DHL/ Bluedart are able to charge higher prices for the value added service. 2. Low end document movement has become commoditised

1. Moderate brand / pricing power. 1. No Brand / Franchise . Pricing More due to lockin (or network based on demand supply effects). 2. Telecom companies trying to improved pricing through innovation and lockins Very high due increase in telecom penetration Moderate growth. Based om GDP growth

Does the industry enjoy high growth rates ? For how long

Logistics Courier - documents

Telecom services

Sugar

Key industry variable which drive the performance

1. Demand supply level 2. % revenue from alcohol / Power 3. Cane prices

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

None

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

Network taxonomy

None

Network profits based on

None

Logistics Courier - documents

Telecom services

Sugar

Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

Distinctive capability analysis

Architecture

1. Relationship with government on 1. Relationship with farmer to license and other issues procure cane 2. Relationhip with handset providers 3. Process / knowledge to operate the telecom network, marketing

Strategic assets

1. License is very critical. 2. Network effects very strong and critical 3. Distribution is very crucial to get subscribers

access to raw material at favorable terms

Logistics Courier - documents

Telecom services

Sugar

Innovation

Cost

None Disruptive innovation has high impact in this industry and can effect long term economics Low position is important as it is help Very critical as it is a commodity achieve profitiability early industry Very important as it is a capital intensive industry Important for capacity expansion

Financial strength

Reputation

None Branding is important for getting customers. However cost of service is also important

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns Good returns due high growth industry. Entry barriers due to high initial cost and scale effect. Also licensing has an impact. Entry barriers also due to network effect and early mover advantage. Rivalry is intense due to multiple player in the industry. also competition is also driven by price. buyer power, supplier and substitutes do not impact the industry much cyclical returns driven by demand and supply. Government intervention. Low entry barrier and high competition between firms due to fragmented industry. Other factors do not impact much. As a result poor industry returns

ENTRY BARRIER - No. 1 Factor deciding industry profitability

High entry barriers due to fixed costs Moderate entry barriers. and scale effects

Asset specificity

Very high

High

Economies of Scale

High

High. Depends more on availability of raw material (captive supply)

Logistics Courier - documents

Telecom services

Sugar

Proprietary Product difference

Low

None

Brand Identity Switching cost

Moderate Low

Very low Low

Capital Requirement

High

High.

Distribution strength

High

Low

Cost Advantage

High

High

Government Policy

Moderate

Critical. Government sets the procurement price for sugarcane.

Expected Retaliation

High

Moderation

Production scale

NA

??

Anticipated payoff for new entrant

??

Low

Precommitment contracts

Low

Low

Learning curve barriers Network effect advantages of incumbents

High High

moderate None

Logistics Courier - documents

Telecom services

Sugar

No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT

Multiple players

High competition

High in each circle due 2-3 players in High, due to commodity nature. each circle

Industry growth

High

Low

Fixed cost / value added Intermittent overcapacity Product difference

High Not yet Low

High High Low

Informational complexity Exit Barrier Demand variability

Low High Not yet

Low Moderate Low

SUPPLIER POWER

Low

Very low

Differentiation of input Switching cost of supplier

Low Low

None Farmers cannot switch

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

High Low High High Low Low

None None High High None Low

Logistics Courier - documents

Telecom services

Sugar

Buyer conc. v/s firm concentration Buyer volume

Low

Low

Buyer switching cost Buyer information

Low High

Ability to integrate backward Substitute product

NA None Artifical sweeteners. However these are niche product which would not effect sugar demand

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

Intangible assets

None

Valuation model

Logistics Courier - documents

Telecom services

Sugar

Valuation approach

1. DCF

High PE Low PE for the industry Avg PE for the industry Valuation drivers

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

Pharma

Managed Health care

Construction

Competitive landscape (and identification of competitive advantage)
List of companies (by size) with names - By sales Top 25 companies form 80 % of industry. Very fragmented industry. Top companies are indian companies (mainly due to patent laws ?) 1. Ranbaxy - 10 % 2. Cipla - 9 % 3. DRL - 6 % 4. Lupin - 5 % 5. Glaxo Smithline - 4 % 6. Sun pharma - 4 % 7. Nicholas piramal - 4 % Total industry size - 33000 Cr

Profitability pool analysis ranking by ROE

Fairly variable. But all top players (25) have ROE higher than 15 % and most more than 20 %

Market share stability analysis

Pharma

Managed Health care

Construction

Pricing stability

Pricing for generics is controlled by government and is commodity business Patented / non generics is decided by companies and allows them to get high returns DPCO controls pricing on all listed / notified drugs Fragmented industry

Industry structure type

Key Industry products or segments

Segment and company mapping Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Economic model
Return on capital : 1. ROC capital trend is upwards with avg ROC at 15 % + 2. Not much cyclicality. ROC is increasing

Pharma

Managed Health care

Construction

Dupont analysis

1. Asset TO ratio is around 1- 1.2. Not very high ratios 2. NPM is around 10% + and has been increasing steadily (need to check why) 3. Total asset / equity is 1.6- 1.8 which should moderate debt and has improved the ROE 4. Good ROE (15 % + ) and increasing. increase seems mainly due to improvement in NPM

FA Intensity

Low - asset light model except for generic outsourcing companies

WCAP Intensity

Low

Capital intensive ?

1. Capital intensity is low for FA. Most expense is related to R&D which should be expenses out

Margin intensive ?

1. NPM 10% + showing strong margins. Should be defensible for companies with strong distribution, brands. Patent based protection is low for most companies (indian)

RM as % of sales and implication

Pharma

Managed Health care

Construction

Key Industry ratios and statistics

1. No of ANDA applications filed 2. No. of molecules in various stages of development

Business units

Business model
Key Demand Drivers : 1. Why would there be a continued demand for the product / service 1. Health care is a basic need. Rising income level also raising need for higher level of health care 2. For domestic co. demand will depend on no. of expired patents which can challenged successfully Not much. Depends on access to patent medicine

Key supply drivers

Shareholder Value creation drivers

Degree / nature of change

1. Patents 2. Effective R&D spends 3. Ability of indian companies to effectively challenge off patent drugs 4. Operational effectivenes/ scale economies for generics High

Pharma

Managed Health care

Construction

Predictability of business

1. Patented drugs have patent protection 2. Generics are price based and depends on brand pull - marketing and sales important 3. Generics also impacted by government pricing for some drugs No

Cyclical nature ?

Ability to increase price ahead of 1. High pricing power for Patent, inflation (Pricing power) high end life style based drugs 2. Very low pricing for generics. In most cases pricing decided by Government (DPCO)

Some sort of monoploy or Oligopoly

High competition based on price for generic. Monopoly scenario only in patented or complex product. Less in case for indian companies Yes, from retail customers and hospitals

Does the company have a recurring revenue stream

Does the business have franchise / brands or is it commodity

Franchise or brands especially for prescription medicine. For generics , it is commodity business, hence cost of production is important

Does the industry enjoy high growth rates ? For how long

Yes, but low drug usage in india. Pricing is still controlled by government - Via the DPCA

High due increased demand for healthcare

Very high, due to real estate boom

Pharma

Managed Health care

Construction

Key industry variable which drive the performance

1. DPCO controlled pricing 2. Government policy on patent, new products etc 3. New product introductions by industry 4. Export market - generics growth

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

1.High switching cost especially for patented drugs (once prescribed by docs they stick to it) 2. Habit forming from doctor prescription point to view 3. Brand effect for doctors especially for critical drugs

Presence of Network economics - customer advantage factor network Radial or combitorial economics

Network taxonomy

Network economics have an impact. Once a drug is prescribed and favored by majority of doctors, the other doctors will prescribe the same None drug

Network profits based on

None

Pharma

Managed Health care

Construction

Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of fixed cost / Variable cost for the market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

Process economies mainly through 1. Patent protection 2. R&D effectiveness 3. Learning curve in production processes

Scale economies for branded products (customer captivity) mainly for specific product lines 1. Advertising / sales benefit for large companie as the same fixed cost can be distributed across multiple products 2. R&D expense can averaged out over multiple products 3. Scale economies depend on product lines (cardio, neurologicals) and sometime the product line combined with Geo. (economies to scale exist in product segment)

Distinctive capability analysis

Architecture

Architecture crucial to create the competitive advantage on 1. Customer - through sales force, branding etc 2. Production - through patents via R&D Patents, low cost manufacturing process

Strategic assets

Pharma

Managed Health care

Construction

Innovation

critical to create patentable products Relevant only for genrics

Cost

Financial strength

Important to spend on R&D and accquisitions to create production based competitive advantages Important for products off patents to create customer advantages

Reputation

Porter's model : 5 factor for industry attractiveness
Industry attractiveness sumarry and reasons for low high returns high returns due to very high entry barrier and moderate competition. Other factors are not very crucial. Generics business has lower returns due to low entry barrier, high competition and substantial buyer power

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Very high barriers due to patent, Distribution / Marketing network to doctors, R&D organisation and capital requirement to develop new molecules. In india similar barriers exist. Not so in generics, where reverse engineering capability and sales/ Distribution network is critical Specificity in terms of R&D and Patents/ Brands Important for generics. Process patents could result in cost advantages

Asset specificity

Economies of Scale

Pharma

Managed Health care

Construction

Proprietary Product difference

High. Depends on the patented product

Brand Identity Switching cost

Moderate to high for generics High especially for established brands. Consumers / Patients would stick with know brands. OTC brands are also strong High for basic research and developing new molecules

Capital Requirement

Distribution strength

High. Sales network to reach doctors for new drugs

Cost Advantage

Critical for developing new drugs

Government Policy

Critical in india / US in terms of patent regime / New drug approvals

Expected Retaliation

High

Production scale

Medium to low

Anticipated payoff for new entrant

High, but difficult to develop new molecules. Indian companies entering through generics Low

Precommitment contracts

Learning curve barriers Network effect advantages of incumbents

High Low

Pharma

Managed Health care

Construction

No. of competitors - Monopoly / Moderate to high for generics ologopoly or intense competition (concentration ratio ) RIVALRY DETERMINANT High for generics. Low in patented drugs as long as similar drug is developed through different patent by competition

Industry growth

Moderate to high

Fixed cost / value added Intermittent overcapacity Product difference

Low Low High

Informational complexity Exit Barrier Demand variability

High Low Low

SUPPLIER POWER

Low

Differentiation of input Switching cost of supplier

Low Low

Presence of substitute Supplier Concentration Imp of volume to supplier Cost relative to total purchase Threat of forward v/s Backward integration BUYER POWER

Low Low High / Low Low Low Low. High is the company is contract manufacturer

Pharma

Managed Health care

Construction

Buyer conc. v/s firm concentration Buyer volume

Low. Except for companies in government contracts for generics/ or MNC customers for Local companies High if the pharma company is contract manufacturer

Buyer switching cost Buyer information

Low to moderate High in contract mfg. Low for consumer High for contract. None for consumer Buyer would switch if generic exists. In contract cost and capability are critical factor. Propensity to switch is high if the buyer can find a more effective supplier High High High Low if generic exist High

Ability to integrate backward Substitute product

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

Intangible assets

1. Brands are crucial in the pharma for both generic and other products 2. Patents very crucial and involve high R&D 3. S&D expenses high for building customer relationship with doctors 4. Relationship with key influencers - the Doctors is critical 5. None 6. Switching cost / Customer lockin happens through point 1/3

Valuation model

Pharma

Managed Health care

Construction

Valuation approach

1.DCF

High PE Low PE for the industry Avg PE for the industry Valuation drivers

25 10 18 1. Top line growth 2. New product introduction 3. ANDA and other filings 4. Distribution and mkt infrastructure 5. R&D expenses as % of sales

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

20% 8-10 % 7-10 years

general Overhead cost as a % of sale Asset TO ( shud be > 1.5 ) Easier to increase asset TO than margins ( to increase ROI ) Margins driven or Asset TO driven Sustainability of CA Volatile earnings or steady earnings Underlying business subject to change / intense competion ?

Commodity Asset based valuation to be given equal weights valuation to be seen in light of the commodity cycle CA based on cost adavantage to be seen .Can the cost advantage be maintained ?

Technology Low capital intentsity in some businesses High rate of change / obsolence Higher margin of safety Higher mortality of companies Winner takes all market Network effects / Lock ins Does the business have strong CA - as low capital requirements

Media What media assets ? - Film library, content, Key personnel Does the business have a strong Distribution infrastructure ? Does the Business have a history of good content ? Is the business able to respond to changing entertainment tastes ? Does the Business have mutliple content type - films / television program etc

consumer goods Earnings based valuation more meaningful Dsitribution assets important Brands are imp Predictable earnings Medium - low growth business except certain category NPD pipeline and past history of developing NPD Financial institution Book value to be weighed more than earnings Adjusted book value ( net of NPA ) to be seen

Other income analysis to be done in detail to find the nature of recuring/ non recurring expense asset based valuation more meaningful Expense ratios for FI to understand the spreads available Loan book quality - made up of loans to weak co.s / sectors ? Key ratios Return on Asset ( atleast > 1.5 %) NPA Return on Networth Cost / income ratio CAR

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AUTO A

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Answer

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Answer Question Answer Question

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