Industry Analysis

Relationship between economy & industry

Past performance
Demand sustainable ?
Nature of competition in the industry
Change in life styles and social values
Government policies and regulations.

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Management Industry Analysis
 Classification of Industries –
normally move together
• Product based
• End use based
• National Industrial Classification (NIC) 2004
Keep in mind
Size & Technology
Inputs and their costs
Govt. regulations

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Management Industry Analysis
 Economic Cycles and Industries
Classify industries as
• Cyclical- capital goods, luxury
• Defensive- basic necessities- food, basic clothing
• Growth – cell phones in India
Some causes – Govt. spending, credit availability,
overcapacity
• Sub prime crisis
Forecast future direction of economy and identify
industries that are likely to do well

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Management Industry Analysis
 Sectoral Index Movements Jan 2000-June 2007

12000

10000

Bank

8000
Auto

Oil & Gas

6000

Metal

4000
FMCG

PSU
2000

0
Jan-02
Jan-00

Oct-00

May-02
Oct-02

Dec-03

Oct-04

Dec-05
May-06
Oct-06
May-00

Mar-01

Mar-03

May-04

Mar-05
Jul-05

Mar-07
Aug-03
Aug-01

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Management Industry Analysis
 Models for Analysis-
Stages of the Life Cycle
 
 
Examples
 
Introduction Growth Maturity Decline
• Human genome & health
S care
 A
 L
 E
• Mobile phones
S
 
 
• FMCG
• Pagers,video tapes
Time

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Management Industry Analysis
 Porters 5 forces- to determine
competitiveness and profitability
1.Threat of new entrants
2.Rivalry among existing firms
3.Threat of substitute products or services
4.Bargaining power of buyers
5.Bargaining power of suppliers

Security Analysis & Portfolio Chapter 8

Management Industry Analysis
 Porters 5 forces- examples
1.Threat of new entrants –more where
investment and technology low, less in
telecom
2.Rivalry among existing firms-prepaid mobile
schemes
3.Threat of substitute products or services-
packing of liquids
4.Bargaining power of buyers –auto cos and
tyre suppliers
5.Bargaining power of suppliers- microsoft
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Management Industry Analysis
   SWOT Analysis

Internal Strengths Weaknesses

External Opportunities Threats

Security Analysis & Portfolio Chapter 8

Management Industry Analysis
Industry Strengths Weaknesses Opportunities Threats

Cement Growing demand from Transportation cost Increased demand as Coal shortage, possible
infrastructure and leads to regional country develops, price control, cost of
housing sector growing supply constraints export potential transportation
(petroleum prices)

Chemicals World class products, Cost of power and Many products patents Cheap imports from
dominate domestic credit high, capital expiring , Intellectual China etc.
market intensive, property rights can
infrastructure protect new R&D
bottleneck for export

Consumer durables Strong distribution Seasonal demand, low Huge potential market, Cheap imports
networks, purchasing power increased sales with
established brands credit facilities

Energy Demand Price of imported Backward integration Private players (for

crude oil, price for oil exploration in PSU's)
controls on finished India and abroad
products
Food processing Availability of raw High working capital Global market Global players, low
material, Government requirement, salaries may lead to
support, domestic technology and manpower shortage
market equipment outdated

Pharmaceuticals Huge untapped domestic Fragmented and very Many patents Imports
demand, low cost of competitive, price expiring(can produce),
manufacturing, regulation by govt., new products can be
low R&D patented growing
health care industry

Textiles Raw material Low productivity, Growing global Cheap imports, trade
availability, skilled reservation for SSI, markets, high fashion agreements, consumer
labour, domestic and old technology market resistance to child labour
export market etc.

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Management Industry Analysis
 Past performance
Profits
Analyse revenues – future demand ,
customers and their bargaining power
Analyse costs –fixed, variable, major inputs
and supplier power, industry norms on
credit
Trends in ratios
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Management Industry Analysis
 Selected industry ratios (March 2007)
PBDITA/
Total
income
Industry sets* % RONW % Current ratio Debt/Equity ratio Price/Book ratio
A/C & refrigerators 6.27 15.21 1.21 0.69 4.73
Automobile 10.97 24.22 0.95 0.41 4.01
Cement 27.45 37.05 1.37 0.76 3.9
Cotton textiles 16.69 9.55 1.54 2.04 1.7
Crude oil & natural gas 47.48 25.9 1.07 0.01 2.19
Fertilisers 12.51 9.42 1.37 0.91 1.26
Food products 12.03 18.29 1.15 1.17 2.75
Paints & varnishes 17.18 34.33 1.04 0.28 5.99
Paper 17.98 12.5 1.38 1.19 0.99
Steel 23.64 30.74 1.42 0.96 2.26
Tyres & tubes 7.91 10.38 1.14 0.98 1.55
* predefined sets in the Prowess database

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Management Industry Analysis
 Selected ratios for the Cement industry over time
Return on
PBDITA/Total Net Current Debt/Equity Price/Book
Period income % Worth % ratio ratio ratio
Mar-01 17.22 4.12 1.19 1.46 1
Mar-02 16.49 3.2 1.19 1.76 1.14
Mar-03 15.83 1.57 0.94 1.67 1.2
Mar-04 16.52 7.68 1.06 1.49 2.52
Mar-05 17.03 12.45 1.1 1.3 3.25
Mar-06 18.35 16.25 1.19 1 5.21
Mar-07 27.45 37.05 1.37 0.76 3.9

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 Government Policy
Social or political reasons for quotas, price
controls, tariffs etc.
• Prices of petroleum prices
• Telecom licenses
• Luxury items, tobacco, liquor
• Credit policy and special rates

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Management Industry Analysis