chapter 8 fundamental analysis-industry analysis

8/3/2019 Chapter 8 Fundamental Analysis-Industry Analysis

1/12

Industry Analysis

Relationship between economy & industry

Past performance

Demand sustainable ?

Nature of competition in the industry

Change in life styles and social valuesGovernment policies and regulations.


2/12

Classification of Industries

normally move together Product based

End use based

National Industrial Classification (NIC) 2004

Keep in mind

Size & Technology

Inputs and their costsGovt. regulations


3/12

Economic Cycles and IndustriesClassify industries as

Cyclical- capital goods, luxury

Defensive- basic necessities- food, basic clothing

Growth cell phones in IndiaSome causes Govt. spending, credit availability,

overcapacity

Sub prime crisis

Forecast future direction of economy and identifyindustries that are likely to do well


4/12

Sectoral Index Movements Jan 2000-June 2007

0

2000

4000

6000

8000

10000

12000

Jan-00

May-00

Oct-00

Mar-01

Aug-01

Jan-02

May-02

Oct-02

Mar-03

Aug-03

Dec-03

May-04

Oct-04

Mar-05

Jul-05

Dec-05

May-06

Oct-06

Mar-07

Bank

Auto

Oil & Gas

Metal

FMCG

PSU


5/12

Models for Analysis-

Stages of the Life Cycle

Introduction Growth Maturity Decline

S

A

L

E

S

Time

Examples

Human genome & health

care

Mobile phones

FMCG

Pagers,video tapes


6/12

Porters 5 forces- to determine

competitiveness and profitability

1.Threat of new entrants

2.Rivalry among existing firms3.Threat of substitute products or services

4.Bargaining power of buyers

5.Bargaining power of suppliers


7/12

SWOT Analysis

Internal Strengths Weaknesses

External Opportunities Threats


8/12

Industry Strengths Weaknesses Opportunities Threats

Cement Growing demand from

infrastructure and housing

sector growing

Transportation cost

leads to regional supply

constraints

Increased demand as

country develops, export

potential

Coal shortage, possible

price control, cost of

transportation (petroleum

prices)

Chemicals World class products,

dominate domestic market

Cost of power and

credit high, capital

intensive, infrastructure

bottleneck for export

Many products patents

expiring , Intellectual

property rights can

protect new R&D

Cheap imports from China

etc.

Consumer durables Strong distribution

networks,

established brands

Seasonal demand, low

purchasing power

Huge potential market,

increased sales with

credit facilities

Cheap imports

Energy Demand Price of imported crudeoil, price controls on

finished products

Backward integration foroil exploration in India

and abroad

Private players (for PSU's)

Food processing Availability of raw

material, Government

support, domestic market

High working capital

requirement,

technology and

equipment outdated

Global market Global players, low

salaries may lead to

manpower shortage

Pharmaceuticals Huge untapped domestic

demand, low cost of

manufacturing,

Fragmented and very

competitive, price

regulation by govt., low

R&D

Many patents

expiring(can produce),

new products can be

patented growing health

care industry

Imports

Textiles Raw material availability,

skilled labour, domestic

and export market

Low productivity,

reservation for SSI, old

technology

Growing global markets,

high fashion market

Cheap imports, trade

agreements, consumer

resistance to child labour

etc.


9/12

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


10/12

Industry sets*

PBDITA/

Totalincome

% 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 1.7Crude 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 2.26Tyres & tubes 7.91 10.38 1.14 0.98 1.55

Selected industry ratios (March 2007)

* predefined sets in the Prowess database


11/12

Period

PBDITA/Total

income %

Return on

Net

Worth %

Current

ratio

Debt/Equity

ratio

Price/Book

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 5.21Mar-07 27.45 37.05 1.37 0.76 3.9

Selected ratios for the Cement industry over time


12/12

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

chapter 8 fundamental analysis-industry analysis

Documents