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Understanding Industry Dynamics

Implications for Investment


 What is the need for Industry analysis?  A company will find it difficult to succeed if the industry dynamics are unfavorable  Understanding the stage of the industry  Stage will define risk and expected return of investment  Understanding the structure of industry  Bargaining power of the stakeholders of the industry  Understanding profitability drivers of the industry  What is the nature of the demand?  What affects the profitability of companies with in industry  Factors that affect all the players  Understand the role of value migration  Identify who is the loser and who is the winner  Identify potential winners  Companies with differentiated business model  Companies with significant moat  Companies with pricing power .

 What is value migration?   Shifting of value creating forces Value migrate from outdated business model to newly created business design   Three types of value flow?     Value flows from one industry to the other Value flows from one company to other Value flows with in business Three stages of value migration?    3 That satisfy better customer need Value inflow stage Value stability stage Value outflow stage .

Tyres Industry An Example 4 .

 What is the stage of the industry?  Growing  What industry is the structure of the industry?  Most likely monopolistic  Some player may have pricing power  What  The is the nature of the demand? demand is derived from demand for automobile (Derived Demand)  Source of demand is cyclical in nature  Two types of demand: OEM and replacement 5 .

 Natural rubber: 15%.  Rubber chemical: 13%.Costing Aspects of the Industry Raw-material Cost = 70% of cost of product and 50% of sales  Raw-material Major cost is the driver of the industry Raw-material  Nylon tyre cord: 55%.  Carbon black: 9%.  Synthetic rubber: 8% Major 6 costs are petroleum derivative .

Impact of Cost Increase Can this industry pass on the cost  Depends on demand situation  Depends on capacity level in industry  Depends price of imported tyres  Custom duty structure  Policy on dumping especially on refurbished tyres Generic substitute  Refurbished 7 tyres with better technology .

buses. and tractor  Higher value Cars  Higher Two visibility – More advertisement spend wheeler  Low value and high volume Cycles Specialty tyres Export market 8 Which company is in which segment? .Industry Segmentation Trucks.

Structural Changes in Industry Industry in consolidating Radialisation of tyres Backward linkages Availability of cheap re-furbished tyres Export market is expanding Composition between OEM vis-à-vis replacement market Sign of recovery in automobile industry Which company is in sweat spot? 9 .

Who can be potential winner Which  Who Who segment is likely to expand more? is present in that segment? has the excess capacity? Who is least leveraged? Who enjoy the highest gross profit margin? Who has the potential to address the need of higher radialisation? Who is diversified? Who exports? 10 .