business analysis working
TRANSCRIPT
-
8/2/2019 Business Analysis Working
1/199
Tea Others - cleaning, hom
Competitive landscape (and
identification of
com etitive advanta e
Details
List of companies (by size) with
names - By sales
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
FMCG
-
8/2/2019 Business Analysis Working
2/199
Tea Others - cleaning, ho
FMCG
Pricing stability Pricing seems to be poor and has dropped
from 1999 by 4-5 %
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 DetailsReturn on capital : 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 % f
-
8/2/2019 Business Analysis Working
3/199
Tea Others - cleaning, h
FMCG
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
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 around0.5:1
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 in
outsourcing of man
suppliers
WCAP Intensity 1. Which component of WCAP is high -
inventory / recievables and why
High Ratio as payab
Recievable are most
WCAP component is
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 mo
cyclical. Structural r
RM as % of sales and implication
-
8/2/2019 Business Analysis Working
4/199
Tea Others - cleaning, ho
FMCG
Key Industry ratios and
statistics
Business units
Business modelKey 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
3. Down trading happ
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
2. Global pricing determined by international
demand
1. Price of LAB / Oils
Shareholder Value creation drivers Important Drivers which which would
enhance the long term value
1. Strong brands
2. Distribution infrast
3. NPD pipeline and asuccessful new produ
4. Innovation capabil
Degree / nature of change 1. Does the underlying need for the
product remain the same
2. Can the need be met with substitute
products ?
Was low. Currently b
changing due to loca
increasing
-
8/2/2019 Business Analysis Working
5/199
Tea Others - cleaning, h
FMCG
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 ?
High. However grow
categories due to h
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
inflation (Pricing power)
1. Is the business able to increase price
easily ? This is a strong indicator of CA
1. Poor for unbranded. Depends on demand /
supply situation
2. Moderate for the branded. However
demand growth is low and moving towards
unbranded and hence poor pricing power
Was high. Has got i
players and intense
major players. Food
have moderate pric
Some sort of monoploy or Oligopoly 1. Is consolidation happening ?
2. 80 % market share controlled by how
may firms ?
None Multiple co.s . Multi
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 few
years
1. Brands are present. Poor pricing / Franchise
levels
The business has fr
Commoditisation ha
Does the industry enjoy high growthrates ? For how long
No. Growth is negative due to migration tocoffee
Low growth in genein niche categories
-
8/2/2019 Business Analysis Working
6/199
Tea Others - cleaning, ho
FMCG
Key industry variable which drive
the performance
1. Distribution depth
2. Ad spend / Brand
3. Net margins
Source of competitive
advantage
Strong competitive advantages create entry
barriers for incumbents, preventing entry of
competition and enables incumbents to
earn high returns
Customer advantage Factors -
resulting in moat (customer captivity)
Higher durability than production
advantage factors
1. Habit forming and High Differentiation -
No. 1
2. Experience goods (brand effect,
trademarks) - No. 2
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)
1. Habit forming, but low differentiation.
Although companies are moderately
successfully in branding part of the market
1.Habit forming and
through branding an
2.Brand effect strong
such as cold drinks,
etc
Presence of Network economics -
customer advantage factor
Presence of network effect increases
switching cost for the customerRadial or combitorial network
economics
a) Scale economics due to network effects
b) Barriers to entry due to network effect
NA NA
Network taxonomy 1. Transaction based (like ebay)
2. Community based (like Fools)
3. Complementary products (VHS+ players)
NA NA
Network profits based on 1. Commerce transaction
2. advertising
3. Subscription
4. Data
5. Incubation (Like windows network
NA NA
-
8/2/2019 Business Analysis Working
7/199
Tea Others - cleaning, h
FMCG
A. Process economies (resulting in 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
A. Not much process economies A.
2. Complexity and p
certain categores su
B. Scale economies
Purchasing, Advertis
brand and reducing
B. Scale Economies ( In conjuction with
demand captivity result in very sustainable
competitive advantages )
1.Distribution
2. Purchasing
3. Advertising
4. R&D
B. Scale economies exist for Distribution /
Advertising and moderately for production in
farms
b. Scale economies v
customer based adv
competitive advanta
1. Distribution - stro
2. Purchasing efficie
3. Information based
advertising
Distinctive capability
analysis
Distinctive capability analysis applied to
specific market (product or geographic
create the customer based or production
based advantages
Architecture Relationships with all stakeholder / systems
/ process / Knowledge base /
- analyse the architecture v/s the target
market
Strong know how fro
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 th
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
-
8/2/2019 Business Analysis Working
8/199
Tea Others - cleaning, ho
FMCG
Innovation R&D / Innovation history /NPD
- Disruptive innovations ?
- Sustaining innovations ?
None Moderate innovation
currently
Cost Low Cost position Important in the industry Costs structure are o
Financial strength Strong Balance sheet NA Companies are finanflows and low debt
Reputation Brands / trademarks Important in the industry Strong brands for ev
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 unorganizedsector. 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 prevent the
customer from switching to competitor due
to price. Else a know brand will not
translate to a profitable franchise
2. Strategic assets above can also create
entry barrier thus maintaining a profitablefranchise
Entry barriers exist in the form of scale,
branding and distribution strenght. However
unorganised market has made impact on
growth and pricing
Entry barriers are hig
Brands
Asset specificity High, especially for backward integrated
companies having their tea gardens
Economies of Scale Important - in production, distribution and
marketing
Distribution economi
economies of scale
-
8/2/2019 Business Analysis Working
9/199
Tea Others - cleaning, h
FMCG
Proprietary Product difference Low Minimal
Brand Identity Moderate Strong brand differe
Switching cost Low Low
Capital Requirement High only if integrated backwards to tea
gardens
High, due brand bu
infrasturcture
Distribution strength High High. Getting erode
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 Moderate
Network effect advantages of
incumbents
None
-
8/2/2019 Business Analysis Working
10/199
Tea Others - cleaning, h
FMCG
No. of competitors - Monopoly /
ologopoly or intense competition
(concentration ratio )
High competition
RIVALRY DETERMINANT Rivarly is high now due to poor growth and
unorganised sector
Rivalry is high now.
intense. Due to high
brands and distribut
the industry is weak
Industry growth Low for organised sector Low now
Fixed cost / value added ?? Low
Intermittent overcapacity High High now as these p
Product difference Low Medium. Quality ->
Differentiation is ma
and brandsInformational complexity Low Low
Exit Barrier moderate. Low for unorganised Medium . BusinessDemand variability Low
SUPPLIER POWER Low as tea is a commodity Supplier power is lo
Differentiation of input Low Low
Switching cost of supplier Low Low
Presence of substitute Yes, from other tea gardens Yes
Supplier Concentration Low No
Imp of volume to supplier High High
Cost relative to total purchase High Low
Threat of forward v/s Backward
integration
Low Low
BUYER POWER Low as the final consumer is the final buyer Buyer power on ind
-
8/2/2019 Business Analysis Working
11/199
Tea Others - cleaning, h
FMCG
Buyer conc. v/s firm concentration Low Buyer conc. Is low a
Buyer volume Low Buyer volume is low
Buyer switching cost Low Buyer switching cost
Buyer information High, mostly priced based other than brand
and taste
Good, although not
Ability to integrate backward None No
Substitute product Coffee Brand substitution h
detergents / oral car
Price sensitivity Yes High and hence sub
happen
Price / Total Purchase Low LowProduct difference High Medium to low now
Switching cost Low LowBuyer propensity to Subsititute Low, new generation moving toward coffee High
Intangible assets 1. Brands - requiring high ad spends for
maintenance
2. Patents / Knowledge asset- requiring
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
-
8/2/2019 Business Analysis Working
12/199
Tea Others - cleaning, h
FMCG
Valuation approach 1. P/E
2. Cash flow
Hi h PE
Low PE for the industrAvg PE for the industry
Valuation drivers
Avg ROC numbers of industry
Av Growth for industrAvg CAP assumptions
Maintanance capex (approximate) as
% of sales / Dep as % of sales
-
8/2/2019 Business Analysis Working
13/199
Competitive landscape (and
identification ofcom etitive advanta eList of companies (by size) with
names - By sales
Profitability pool analysis - ranking by
ROE
Market share stability analysis
Automobiles - cars / HCV Auto components Batteries
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
1. Eicher - 50.5 %
2. Tata - 19.8 %
3. Maruti - 13.2 %
4. Ashok - 12.9 %
5. Force - -10%
1. Bharat forge - 28 %
2. Rico auto - 15 %
3. MICO - 12 %
4. SRF india - 10 %
5. Exide - 8 %
6. SRF/ Amtek - 7 %
7. Sundaram fastner - 4 %
8. Wheels india - 2 %
Stable and competitive
AUTO AND ANCILLARIES
-
8/2/2019 Business Analysis Working
14/199
Pricing stability
Industry structure type
Key Industry products or segments
Segment and company mapping
Identification of companies
possessing competitive advantage
(sequence from strongest to weakest)
Economic modelReturn on capital :
Automobiles - cars / HCV Auto components Batteries
AUTO AND ANCILLARIES
Low stability due to competition
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
1. Cars
2. 2 wheelers
3. Trucks and heavy vehicles
1. Maruti
2. Tata motors
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
-
8/2/2019 Business Analysis Working
15/199
Dupont analysis
FA Intensity
WCAP Intensity
Capital intensive ?
Margin intensive ?
RM as % of sales and implication
Automobiles - cars / HCV Auto components BatteriesAUTO AND ANCILLARIES
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, theROA 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)
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 4-7 %
range
3.Return on asset has improved from 5-6 %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
Moderate TO ratio. Generally > 2.
Moderate. Auto companies have reduced the
WCAP requirements and increased the TO
ratios
High capital intensity due to high FA and
moderate WCAP requirements
Yes. The Ratios have improved from < 1 to
almost 2 times TO ratios. Asset efficiency has
improved the ROC
Very low margins currently. Low margins
causing poor return on capital. Margins are
cyclical in nature
14-17 % Avg OPM. NPM has increased from
3-4 % to 8-9 %. Major improvement
achieved through debt reduction
65-70% of sales. RM cost has high impact.
Cost of steel, aluminum, rubber etc has high
impact on margins
-
8/2/2019 Business Analysis Working
16/199
Key Industry ratios and
statistics
Business units
Business modelKey Demand Drivers :
1. Why would there be a continued
demand for the product / service
Key supply drivers
Shareholder Value creation drivers
Degree / nature of change
Automobiles - cars / HCV Auto components Batteries
AUTO AND ANCILLARIES
1. Market share
2. New model launches
1. Consumer demand for cars. Depends on
general affluence level.
2. Commercial vehicle demand depends onindustrial activity
3. Availability of finance and interest rates
1. Driven by demand for commerical and cars
2. Some parts also driven by industrial
demand
1. Driven by OEM sa
and Tractors
2. Replacement dem3. Industrial deman
1. Steel prices
2. Metal prices such as Aluminium, rubber etc
1. Steel prices 1. Price of key raw
Plastics ( both toget
75 % of RM cost )
1. Strong brands
2. Enduring low cost position
3. NPD pipeline and ability to launchsuccessful new products
4. Innovation capability
1. Patents / Technology skills
2. Strong R&D capability
3. Ability to develop new products to meetthe demands of the auto industry
1. Patent / Technolo
2. Strong R&D and
3. Distribution for a4. Relationship with
Moderate.Smaller life cycle of a product.
Changes in technology
High. Smaller product life due to continous
improvement in technology and change in car
models
1. Low driven mainl
technology
-
8/2/2019 Business Analysis Working
17/199
Predictability of business
Cyclical nature ?
Ability to increase price ahead of
inflation (Pricing power)
Some sort of monoploy or Oligopoly
Does the company have a recurring
revenue stream
Does the business have franchise /
brands or is it commodity
Does the industry enjoy high growthrates ? For how long
Automobiles - cars / HCV Auto components BatteriesAUTO AND ANCILLARIES
high. Due car buying by consumer and
Commercial vehicle for Goods movement
High especially if long term contracts are
being signed. Auto component companies are
moving to higher end items improving the
predictability of the business
High. Low level of
Moderate for cars. High for commercial
vehicle
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 volatilit
1. OEM business is
2. After sales follow
less cyclical
Poor 1. Poor for the OEM except for long term
contract. Depends more if technology is able
to drive costs low
2. Much higher for the spare parts business
1. Poor for the OEM
contract and inbuil
Depends more if te
costs low
2. Much higher for
Though lower than
Low in india. High competitive intensity
especially in mid segment
Multiple companies. Very high market s
Yes. High value purchase with long cycle Yes. However from limited customer Yes - From OEM co
Franchise / branding is strong in india 1. No brands. Franchise is more production
(cost driven) in OEM
2. For service market brands and pricing
power is present (moderate)
1. No brands. Fran
(cost driven) in OE
2. For service mark
power is present (
strong brand.
Overall batteries ha
Commerical vehicles is cyclical. Cars /personal vehicle have a much steadier trend
Yes. Trend towards good growth due changein global dynamics
1. High currently. D2. Later to be drive
-
8/2/2019 Business Analysis Working
18/199
Key industry variable which drive
the performance
Source of competitive
advantage
Customer advantage Factors -
resulting in moat (customer captivity)
Higher durability than production
advantage factors
Presence of Network economics -
customer advantage factorRadial or combitorial network
economics
Network taxonomy
Network profits based on
Automobiles - cars / HCV Auto components BatteriesAUTO AND ANCILLARIES
1. Brands
2. Cost of manufacturing
3. R&D
4. Exports
1. R&D
2. Long term contracts
3. Cost of mfg ( Cost competitiveness)
4. Ability to deliver on quality and service
levels
1. R&D
2. Long term contra
3. Cost of mfg ( Co
4. Ability to deliver
levels
5. Distribution and
Relationship with O
share in each )
1.High differentiation among products
2. Brand effect is strong
3. Moderate lockins due long purchase cycle
1. Switching cost / Locking exist moderately
due to technology transfers and long term
contracts
1. Moderate differe
Network effect for after sales service and
repairs. Companies with higher market share
get better maintenance infrastructure such as
maruti, Tata motors
None None
None None None
None None Economies of scale
manufacturing and
-
8/2/2019 Business Analysis Working
19/199
Distinctive capability
analysis
Architecture
Strategic assets
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
Automobiles - cars / HCV Auto components Batteries
AUTO AND ANCILLARIES
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
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
A.
1. Value chain indiv
cost. Lead procurem
manufacturing cost
2. Complexity and
impact
3. Moderate benefit
knowhow
B. Scale economies in production/
Purchasing/ Ad/ R&D
B. Scale economies exist for purchasing,
distribution (for retail) and R&D
B. Scale economies
purchasing , Ads an
1. Relationship with suppliers is important
2. Process/ knowledge base important to
keep cost of production low
3. Internal process important for car
companies
1. Relation with OEM
2. System / process to apply technology for
lower cost production of the Auto
components
1. Distribution network is important - dealers
are important
1.Patents
2. Switching cost of OEM , though not too
high
-
8/2/2019 Business Analysis Working
20/199
Innovation
Cost
Financial strength
Reputation
Porter's model : 5 factor for
industry attractiveness
Industry attractiveness sumarry and
reasons for low high returns
ENTRY BARRIER - No. 1 Factor
deciding industry profitability
Asset specificity
Economies of Scale
Automobiles - cars / HCV Auto components BatteriesAUTO AND ANCILLARIES
Important - but technology is mainly
imported
1. Sustaining innovation
Important Very important. Main trend driving
outsourcing from india
Very important as Auto companies have largescale
Important as auto companies globalise
Very importan as Auto purchase depends on
brands and reputation
Important only in retail
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 fo
on the market. How
OEM reduces return
less due to high ma
Supplier power and
high impact
Entry barriers are high and hence maruti and
other first movers have a higher advantage.
high entry barriers due to
1. Economies of scale
2. Customer relationship and contracts
3. Tech knowhow and R&D assets
High entry barrier d
in the OEM and afte
High. An automobile plan is capital intensive high Moderate
High for manufacturing/ Purchasing/
Marketing etc
1. Purchasing / Manufacturing and marketing
economies of scale
1.Purchasing / Man
and Advertising eco
-
8/2/2019 Business Analysis Working
21/199
Proprietary Product difference
Brand Identity
Switching cost
Capital Requirement
Distribution strength
Cost Advantage
Government Policy
Expected Retaliation
Production scale
Anticipated payoff for new entrant
Precommitment contracts
Learning curve barriers
Network effect advantages of
incumbents
Automobiles - cars / HCV Auto components BatteriesAUTO AND ANCILLARIES
Moderate. New technology is being added.
But it gets copied quickly
1. High due to employement of technology /
R&D spend
1. Moderate. Brand
meaningfull differe
High 1. Medium to low (if supplying OE vendors) 1. Strong. Gives pr
marketmoderate. New buyers have tendency to stick
to their brand.
1. High for the OE Low
High for the industry High to achieve global scale economies ??
Critical 1.Not critical as many supplier are located
close to OE
2. Important only if the company is a
domestic retail la er
Critical, especially f
High 1. Critical component between players due
technology difference, Advantages of scale
??
Moderate 1. Low impact NA
High high, especially in the lower end of spares
market
??
High High for achieving cost effciences Important, especia
where price is very
Moderate Low as capacity / Technology / Customer
relationship needs to be establised
??
No Yes. Extremely critical Important for the O
volumes, but lowe
High High ??
Moderate None None
-
8/2/2019 Business Analysis Working
22/199
No. of competitors - Monopoly /
ologopoly or intense competition
(concentration ratio )
RIVALRY DETERMINANT
Industry growth
Fixed cost / value added
Intermittent overcapacity
Product difference
Informational complexity
Exit BarrierDemand variability
SUPPLIER POWER
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
integrationBUYER POWER
Automobiles - cars / HCV Auto components BatteriesAUTO AND ANCILLARIES
Low concentration ratio for all segments
except entry level. Maruti and Tata motors
dominate specific segments
1. Intense competition due to a no. of small
companies
2. Some companies building scale to global
levels - would result in lower com etition
High market share
Rivarly is high due to high fixed investments.
Muted currently due to good demand growth
Low rivalry among major competitor as most
of the autocomponent companies operate in
different product lines
Low, due to domin
High High in india due to high exports Moderate
High High ??
Moderate currently low for specific product due to shift
in global model
Not very critical
Moderate High due to technology input and
Manufacturing processes
Moderate. Driven m
OEM relationship
Moderate High due to R&D Moderate.
High High ??High Low Low. Reduced by r
Low Low. Main supplier are steel/ metals company
where the cost depends on the commodity
cycle
Low, due to comm
Low Low Low
Moderate Medium - Only if some special RM type is
required
Low
High None Yes
Low Low No
High Low ??
High High ??
Low Low Low
Low High high for OEM resu
for Replacement m
mar ins
-
8/2/2019 Business Analysis Working
23/199
Buyer conc. v/s firm concentration
Buyer volume
Buyer switching cost
Buyer information
Ability to integrate backward
Substitute product
Price sensitivity
Price / Total PurchaseProduct difference
Switching costBuyer propensity to Subsititute
Intangible assets
Valuation model
Automobiles - cars / HCV Auto components BatteriesAUTO AND ANCILLARIES
Low High High for OEM, low
market
Low 1. OE buyer is high from a company and
hence high impact
2. Retail is low individual volume and retail
does not add to a large component of
business
High for OEM, low
market
Low 1. High as lot of companies invest in
developing their vendors
Low
High 1. High as key vendors are important for the
auto makers in their total cost structure
High for OEM, low
marketNone 1. Low. Most top auto companies are trying
to out source as much as possible
Low
Public transport - not really a key factor Low None, except for b
High High
Low LowHigh. Taken care through vendor selection
process
Moderate
High LowLow if quality and cost is maintained Low
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
standpoint3. Distribution and after sales service
infrastructure is critical
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 only4. Customer relationships very important for
the OEM market and can result in moderate
lockins
5. Technology tie-ups are also important
1. Brands - importa
2. R&D and knowh
products and to im
reduce cost
3. Distribution infra
markets
4. Customer relatiorelationships
-
8/2/2019 Business Analysis Working
24/199
Valuation approach
Hi h PE
Low PE for the industrAvg PE for the industry
Valuation drivers
Avg ROC numbers of industry
Av Growth for industrAvg CAP assumptions
Maintanance capex (approximate) as
% of sales / Dep as % of sales
Automobiles - cars / HCV Auto components BatteriesAUTO AND ANCILLARIES
1. P/E
2. Cash flow
1. P/E
2.DCF
1. PE
2. DCF - normalise
18
10-1212-16
1. New product launches
2. RM pricing
3. Growth
4. ROC
5. Cash flow
20% +
10% + reducin now1-2 years
-
8/2/2019 Business Analysis Working
25/199
Competitive landscape (and
identification of
com etitive advanta eList of companies (by size) with
names - By sales
Profitability pool analysis - ranking byROE
Market share stability analysis
Tyres Hardware BPO
1. CEAT 1. HTMT
Technolo
-
8/2/2019 Business Analysis Working
26/199
Pricing stability
Industry structure type
Key Industry products or segments
Segment and company mapping
Identification of companiespossessing competitive advantage
(sequence from strongest to weakest)
Economic modelReturn on capital :
Tyres Hardware BPOTe
Poor. In the region of 7 - 12 % . OPM drop
has resulted in drop to 7 %. Asset efficiency
is steady
-
8/2/2019 Business Analysis Working
27/199
Dupont analysis
FA Intensity
WCAP Intensity
Capital intensive ?
Margin intensive ?
RM as % of sales and implication
Tyres Hardware BPOT
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
Very low margins for the last 6 years inspite
of boom in the auto industry
In the range of 7 - 12 %. Reduction to 7 %
in the recent years . This has resulted in
further drop in NPM and depressed ROE
-
8/2/2019 Business Analysis Working
28/199
Key Industry ratios and
statistics
Business units
Business modelKey Demand Drivers :
1. Why would there be a continued
demand for the product / service
Key supply drivers
Shareholder Value creation drivers
Degree / nature of change
Tyres Hardware BPOTech
1. Driven by OEM sales of cars, two wheelers,
and Tractors
2. Replacement demand
1. Offshoring of servic
1. Price of key raw material - rubber 1. Educated mapowe
2. Continous skill enh
3. Exchange rate - ru
-
8/2/2019 Business Analysis Working
29/199
Predictability of business
Cyclical nature ?
Ability to increase price ahead of
inflation (Pricing power)
Some sort of monoploy or Oligopoly
Does the company have a recurring
revenue stream
Does the business have franchise /
brands or is it commodity
Does the industry enjoy high growthrates ? For how long
Tyres Hardware BPOT
1. Poor for the OEM except for long term
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 ?? None
Yes - From OEM contracts and retail sales ?? Yes, but only after
signed
1. No brands. Franchise is more production
(cost driven) in OEM
2. For service market brands and pricing
power is present (moderate)
Brand power results in moderate pricing. Not
very attractive customer franchises
Weak to moderate
due to Switching c
Yes - From OEM contracts and retail sales Yes, due increasing penetration by computers Yes, very high due
-
8/2/2019 Business Analysis Working
30/199
Key industry variable which drive
the performance
Source of competitive
advantage
Customer advantage Factors -
resulting in moat (customer captivity)
Higher durability than production
advantage factors
Presence of Network economics -
customer advanta e factorRadial or combitorial network
economics
Network taxonomy
Network profits based on
Tyres Hardware BPO
Te
1. Moderate differentiation due to brands 1. Moderate brand effect. Commoditisation
happening now
2. From some electronic products such as
consumer electronics brand effect is
increasing for the high end
1. Lock or high swit
vendor company du
sharing with the ven
None None None
None Network effect for some consumer electronics
(but not in india)
None
None None None
-
8/2/2019 Business Analysis Working
31/199
Distinctive capability
analysis
Architecture
Strategic assets
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
Tyres Hardware BPOTe
A.
1.Indivisibility of value has impact on
manufacturing costs
2. Process fit not too complex
A. Process economies due to
1. Value chain fit and process cost reduction
over time
A. Process econom
1. Complexity and f
BPO kind of operat
end than the vanilla
2. Process cost red
3. Acess to quality
B. Scales economies in manufacturing,
distribution, purchasing , R&D and
moderately in R&D
B. Scale economies in
1. Production
2. Distribution which is critical for electronics
3. Purchasing of components
4. Advtg
4. R&D for new products (non existent in
india)
B. Scale economies
1. manpower availa
2. Sales and marke
-
8/2/2019 Business Analysis Working
32/199
Innovation
Cost
Financial strength
Reputation
Porter's model : 5 factor for
industry attractiveness
Industry attractiveness sumarry and
reasons for low high returns
ENTRY BARRIER - No. 1 Factor
deciding industry profitability
Asset specificity
Economies of Scale
Tyres Hardware BPOTec
Extremely attractive
demand and high va
Entry barrier have nolarger firms have bec
destructive due to h
is not very high and
Substitute does not i
the industry currentl
industry
1. Entry barriers exis
- economies of scale
- Strong customer re
- learning curve barr
Low
High. High volume h
meeting new deman
training costs / Fixed
-
8/2/2019 Business Analysis Working
33/199
Proprietary Product difference
Brand Identity
Switching cost
Capital Requirement
Distribution strength
Cost Advantage
Government Policy
Expected Retaliation
Production scale
Anticipated payoff for new entrant
Precommitment contracts
Learning curve barriers
Network effect advantages of
incumbents
Tyres Hardware BPOT
None
Low
High
Moderate to low. C
critical
None
High
Low
Moderate to low
NA
Good
Highly critical in th
High
None
-
8/2/2019 Business Analysis Working
34/199
No. of competitors - Monopoly /
ologopoly or intense competition
(concentration ratio )
RIVALRY DETERMINANT
Industry growth
Fixed cost / value added
Intermittent overcapacity
Product difference
Informational complexity
Exit BarrierDemand variabilit
SUPPLIER POWER
Differentiation of in ut
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
inte rationBUYER POWER
Tyres Hardware BPOT
Multiple players
Industry growth is
growth mode and
internal competitio
High
Low
None
Low
Moderate
LowLow
None
None
None
None
None
None
None
None
High, especially fo
-
8/2/2019 Business Analysis Working
35/199
Buyer conc. v/s firm concentration
Buyer volume
Buyer switching cost
Buyer information
Ability to integrate backward
Substitute product
Price sensitivity
Price / Total PurchaseProduct difference
Switching costBuyer propensity to Subsititute
Intangible assets
Valuation model
Tyres Hardware BPO
Te
High for each firm.
High for new firms
Moderate
High
Moderate
No product substitu
Vendors can be su
technologies can m
obsolete
NA
NANA
NANA
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 relationshipimportant for retail
1. Customer relatio
IT services
2. Knowledgement
-
8/2/2019 Business Analysis Working
36/199
Valuation approach
Hi h PE
Low PE for the industrAvg PE for the industry
Valuation drivers
Avg ROC numbers of industry
Av Growth for industrAvg CAP assumptions
Maintanance capex (approximate) as
% of sales / Dep as % of sales
Tyres Hardware BPOT
-
8/2/2019 Business Analysis Working
37/199
Competitive landscape (and
identification ofcom etitive advanta eList of companies (by size) with
names - By sales
Profitability pool analysis - ranking by
ROE
Market share stability analysis
IT services BANKS Rating agency
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
account for 80 %. Total no. of banks is 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 %
1. Crisil -
2. ICRA -
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
NA Cannot analyse. However accquisition
mergers should reduce the no. of players.
Financial instituiton
-
8/2/2019 Business Analysis Working
38/199
Pricing stability
Industry structure type
Key Industry products or segments
Segment and company mapping
Identification of companies
possessing competitive advantage
(sequence from strongest to weakest)
Economic modelReturn on capital :
IT services BANKS Rating agencyFinancial instituiton
Pricing is better for Top tier and specialist
companies. For Tier II and III companies
pricing is squeezed due to reliance on key
customers
Competition has made pricing of credit
competitive. However it decided more by
interest rates
High, due to oligpo
companies
Fragmented. But consolidating at the Top and
to specialist vendors
Very fragmented. Should consolidate through
M&A
oligopoly between
1. CRISIL
2. CARE
3. ICRA
1. Retail lending
2. Corporate lending
3. Treasury operations
4. Fee based incomes
1. Ratings
2. Market research
1. SBI
2. ICICI
1. CRISIL
2. CARE/ICRA
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 cycle.
High in last few years due to reducing int
rates. Better for private and some psu due
better lending and risk management
processes
1. Very high to stro
( > 50 %)
-
8/2/2019 Business Analysis Working
39/199
Dupont analysis
FA Intensity
WCAP Intensity
Capital intensive ?
Margin intensive ?
RM as % of sales and implication
IT services BANKS Rating agencyFinancial instituiton
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 cashrich
5. Persitently high ROE, in excess of 20 %
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
1. High Asset TO r
2. NPM 15-20 %
3. ROA is high. 30-
4. Low to no debt
5. High ROE in the
High FA TO as business requires only Building
and IT infrastructure
Not relevant : FA is mainly branches and IT /
ATM infra
1. Asset light mode
Very Low WCAP - Main WCAP is Debtors, no
inventory, Low creditors. Tier 1 companies
have debtors days of 30 days. Tier 2 has 60-
90 days of Debtors
Not relevant : 1. WCAP needs are
Low capital intensity Very capital intensive. Operates with high
level of leverage ( 10:1)
1. Low intensity of
ratios
High margins due to GDM model. To go down
over long term due to competition
Low margins (NII and other income). ROE is
good due to high leverage.
1. High margins -
Salary cost. Currently under pressure due to
labor shortage
Cost of funds. Depends on interest rate. Does
not impact as long as the bank can manage
the asset liability durations
1. High margins - 3
-
8/2/2019 Business Analysis Working
40/199
Key Industry ratios and
statistics
Business units
Business modelKey Demand Drivers :
1. Why would there be a continued
demand for the product / service
Key supply drivers
Shareholder Value creation drivers
Degree / nature of change
IT services BANKS Rating agency
Financial instituiton
1. Interest rates and yield curve
2. GDP performance
3. NPA
4. NIM
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 c
2. No. of companies
and getting rated
1. Educated mapower at reasonable cost
2. Continous skill enhancement of employees
Demand deposit / Time deposit and cost of
deposit
None
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 rates2. Other income streams as Fee based
income , treasury income, Distribution income
Brand name,FCF
High degree of change - due to technology
changes / high competition
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
Low level of change
-
8/2/2019 Business Analysis Working
41/199
Predictability of business
Cyclical nature ?
Ability to increase price ahead of
inflation (Pricing power)
Some sort of monoploy or Oligopoly
Does the company have a recurring
revenue stream
Does the business have franchise /
brands or is it commodity
Does the industry enjoy high growthrates ? For how long
IT services BANKS Rating agencyFinancial instituiton
Predicability is low due fast technology
changes. Clock speed for the Business is
high. Changes in the environment every 2-3
years
Medium - Change due to disaggregation of
channel / Change due to IT / Price shopping
Highly predictable
Not yet as the model is moving to offshore Cyclical based on economy . Low now due to
Retail loans / Retail business which depends
on the growing affluence
Not cyclical
Very moderate. More demand supply gap
driven. Commoditisation at lower end and
moving up the value chain
1. Not very high due low differentiation levels
for retail services
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 curve
1. Very high for th
crisil / ICRA etc
None at all - close to perfect competition. None at all Restricted competi
firms - CRISIL , IC
Yes Yes, high recurrence of reveneues Yes , if new debt is
crisil have develop
like Risk assesmen
research etcWeak to moderate brand.No franchise.Lock in
due to Switching costs
Moderate branding - Not resulting in a
franchise
Branding / Franchi
good pricing powe
High growth currently due model shifts.Looks likely for the next few years
High growth currently as banking not toodeveloped in india
No, moderate in th
-
8/2/2019 Business Analysis Working
42/199
Key industry variable which drive
the performance
Source of competitive
advantage
Customer advantage Factors -
resulting in moat (customer captivity)
Higher durability than production
advantage factors
Presence of Network economics -
customer advanta e factorRadial or combitorial network
economics
Network taxonomy
Network profits based on
IT services BANKS Rating agencyFinancial instituiton
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 )
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
1. No of new custo
2. Margins
3. Other income - o
other than rating se
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 branding
and distribution network / size
2. Brand effect is high
3. Moderate lockin for retail customer
1. High brand effec
2. High lockin (High
None Scale economies come due to bigger network none
None None none
None Network profits are based on economies of
scale as banks with large network can
expand their retail business and also access
low cost deposits
none
-
8/2/2019 Business Analysis Working
43/199
Distinctive capability
analysis
Architecture
Strategic assets
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
IT services BANKS Rating agency
Financial instituiton
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
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
High customer adv
regulation . Rating
of fixed co.s - CRIS
B. Scale economies not too high other than
staffing
B. Scale economies in securing low cost
deposit
Scale economies in fee based income from
retail
Scale economies in Advertising
No significant proce
1.Domain specific IPR and knowledge base
2.Employee relationship and recrutiment /
retention capability
3.Experience / knowledge base of IT project
execution
Crucial architecture factors : Relationship
with depoitors / Risk management processes
/ Knowldege base / Employees
- Systems / knowle
details / industry e
1. Domain specific IPO and Knowledge base
2. Key employees groups with knowledge
assets
3. Moderate switching costs
Distribution network. Though does not offer
very high CA
Brand / Toll gate li
agency as any com
capital market have
-
8/2/2019 Business Analysis Working
44/199
Innovation
Cost
Financial strength
Reputation
Porter's model : 5 factor for
industry attractiveness
Industry attractiveness sumarry and
reasons for low high returns
ENTRY BARRIER - No. 1 Factor
deciding industry profitability
Asset specificity
Economies of Scale
IT services BANKS Rating agencyFinancial instituiton
Weak to none Low None
Currently low cost position. Endurability ? Imp - Depends on access to low cost deposit
/ Credit management and Risk management
rocesses
Not critical
High .1. Relevance in outsourcing
2. Relevance in Acquisitions
V Imp . CAR decide the growth capability ofthe bank
Not critical
Moderate to low. India brand stronger than
individual company brands
Brand / strenght important for accessing low
cost deposit
V imp. Any compan
capital market has t
companies - like a t
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 d
barriers, low rivarly
competition. No buy
or substitutes
- 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
- Economies of scale important for
Distribution (retail), advertising and for
getting low cost deposit
- Switching cost moderate especially as
consumers generally stay with the bank
1. Entry barrier very
brand (Franchise)
Low Moderate Low. Limited to bui
Economies important at low end - epecially
for outsourcing
High Low
-
8/2/2019 Business Analysis Working
45/199
Proprietary Product difference
Brand Identity
Switching cost
Capital Requirement
Distribution strength
Cost Advantage
Government Policy
Expected Retaliation
Production scale
Anticipated payoff for new entrant
Precommitment contracts
Learning curve barriers
Network effect advantages of
incumbents
IT services BANKS Rating agencyFinancial instituiton
None - IPR / knowledge base for vertical is
the only differentiator
Low high. Credit rating
will not have enou
new agency
Specific for verticals Medium High
High Medium High
Low Capital requirement is high and essential Low
NA Important in the retail Low
High - but applicable to all Imp for all banks Low
NA Critical as banking license is controlled by RBI Low. Can have an
decides to create a
credibility
High High. Extremely fragmented and competitive
industry
Not likely to happe
Other streams of w
com etitionNA Not applicale Low
High Moderate Low
High for loans high. Being leverag
revenue
High Medium High
None High. Higher no. of branches is critical in the
industry
Low
-
8/2/2019 Business Analysis Working
46/199
No. of competitors - Monopoly /
ologopoly or intense competition
(concentration ratio )
RIVALRY DETERMINANT
Industry growth
Fixed cost / value added
Intermittent overcapacity
Product difference
Informational complexity
Exit BarrierDemand variability
SUPPLIER POWER
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
integrationBUYER POWER
IT services BANKS Rating agencyFinancial instituiton
Intense competition Intense competition now Limited number of
Medium rivalry. However firms in the industry
due to low exit barriers do not engage in
destructive competition. Expected to increase
with growth in the US companies in india
Intense competition now Low due to limited
High High Medium. New strea
Low High Low
Low NA Low
Low Low Low
Medium to Low Low High
Low High LowLow High to medium Low
None - Input is manpower Supplier is essential deposit holder who
provides low cost deposit. 1. Branch
infrastructure 2.Brand image imp for low cost
de osits
Not relevant, excep
financial backgroun
None None NA
None None NA
None None NA
None None NA
None None NA
None None NA
None None NA
% Sales contributed by Top 5 account. High
for smaller companies
Imp in wholesale a/c. Retail not critical Not too high
-
8/2/2019 Business Analysis Working
47/199
Buyer conc. v/s firm concentration
Buyer volume
Buyer switching cost
Buyer information
Ability to integrate backward
Substitute product
Price sensitivity
Price / Total PurchaseProduct difference
Switching costBuyer propensity to Subsititute
Intangible assets
Valuation model
IT services BANKS Rating agencyFinancial instituiton
Varies for companies. Tier II companies have
higher Buyer conc
Low Low
High for Tier II companies Low Low
High for buyers Low to medium High
High High NA
Low. The reverse is happening None Not possible !!
Substitution is feasible with another vendor.
However switching costs are high. Hence
repeat business is key variable
1.Capital markets for Industry
2. ECB markets
None
High for low end work High
High HighLow Low
Medium LowHigh High only for corporate. Retail none
1.Customer relationships important
2. Knowledgement management important.
3.Branding important more from recruitement
point of view. Branding becoming critical for
the top vendors
4.Research for creating IP for high end is
gaining importance
1.Brand critical on the deposit side
2. Distribution infra important for deposit side
/ for retail sector for other products such as
insurance , mutuals etc. Distribution also
important for retail business
3. Customer relationship important for
corporate business.4.Risk management systems important for
keeping NPA low and for treasury income
1. Brand very impo
three main agencie
2. Customer relatio
clients for the ratin
3. Distribution now
provide research se
-
8/2/2019 Business Analysis Working
48/199
Valuation approach
Hi h PE
Low PE for the industrAvg PE for the industry
Valuation drivers
Avg ROC numbers of industry
Av Growth for industrAvg CAP assumptions
Maintanance capex (approximate) as
% of sales / Dep as % of sales
IT services BANKS Rating agencyFinancial instituiton
1. DCF 1.Price to Book - private market value is 2 to
max of 3
1. DCF
40
515
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 withoutmore equity
1. Cash flow
2. No. of clients
3. Non ratings reve
10% +
10% +4-5 years 8-10 years
NA Low ..< 5%
-
8/2/2019 Business Analysis Working
49/199
Competitive landscape (and
identification ofcom etitive advanta eList of companies (by size) with
names - By sales
Profitability pool analysis - ranking by
ROE
Market share stability analysis
Cement steel Metals
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. Hindalco - 36 %
2. Sterlite - 24 %
3. NALCO - 15 %
4. NMDC - 12 %
5. Sesa Goa - 5 %
1. ACC - 22 %
2. Guj ambuja - 11 %
3. Birla cement - 11 %
4. Grasim - 5 %
5. Ultra tech cement (L&T) - 2 %
6. Jaiprakash associate - 31 % (?)
7. India cement - -7%
1. SAIL - 20 %
2. TISCO - 32 %
3. JSW steel - 90 %
4. Ispat industry - -81%
5. Jindal steel - 2
6. Jindal saw - 2 %
7. 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
analyse specifics. Is
industry ?
Market share changes show consolidationhappening 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 andbeing captured by smaller players
1. SAIL has lost 2% to 59.5 %
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
Aluminum - NALCOCopper - Hindalco -
COMMODITY
-
8/2/2019 Business Analysis Working
50/199
Pricing stability
Industry structure type
Key Industry products or segments
Segment and company mapping
Identification of companies
possessing competitive advantage
(sequence from strongest to weakest)
Economic modelReturn on capital :
Cement steel MetalsCOMMODITY
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 %)
Very high price swing . Almost 80 % price
increase from 2002 to 2005. Price increase
the main cause of high profitability
Currently a lot of companies. Top 4
companies comprise of 55 % of industry. A
lot a poor profitablity regional players.
Consolidation likely in the next downturn
cycle
Kind of a duoploly with 74 % industry
between SAIL and TISCO and top 3
companies 82 % of industry. Not too much
left to consolidate
Industry is mainly d
copper. As a result
more stable
1. Poor return on capital. Less than 10 %
over complete business cycle
2. A few companies with cost advantage can
have 15 % plus ROC over business cycle
1. Poor return on capital. Less than 10 %
over complete business cycle
2. A few companies with cost advantage can
have 15 % plus ROC over business cycle
1. Good return on
5-6 years
2. Cyclical to an ex
between 13 % and
-
8/2/2019 Business Analysis Working
51/199
Dupont analysis
FA Intensity
WCAP Intensity
Capital intensive ?
Margin intensive ?
RM as % of sales and implication
Cement steel MetalsCOMMODITY
1. Not much of an improvement in asset TO
ratios for the industry. Small improvement
from 0.8 to 0.9. Industry not becoming any
more efficient
2. Margins have expanded from 1-2 % to
almost 10 %. Margins do not look sustainable( to analye as margins may have come
through cost cutting and not price hikes )
3.ROA have gone from 1-2 % to 9 %. again
ROA is not too good
4.Debt levels have dropped marginally. Ratio
has come down from 2.7 to 2.2
5. ROE is poor (< 10 %). has improved only
in the last 2 years to improvement in
margins. not sustainable and purely
dependent on demand supply gap. Also the
poor ROE is due to the smaller players
1. High improvement in Asset TO. As the
industry is cyclical, any upturn has high
tendency to increase the TO ratios as
operating leverage is high
2. NPM has gone to 10% + from -ve margins
due to high commodity nature of the industry3. Return on asset depends on 1 and 2 has
turned +ve due to upturn in the cycle
4.Debt levels down from 2.3:1 to 1.6:1 . But
still high
5. ROE very cyclical. gone up during upturn.
Can come down drastically during downturn.
Not a high amount of value creation in the
industry
1. Asset TO ratio h
1.1. On an average
2. NPM between 1
3. ROA is also cycl
12 % in 2000 to l
current high of 20 4. Average DE rati
5. ROE is cyclical a
% to 27 % with th
Low FA TO ratio. Typical FA TO ratios are : Low FA TO ratio. Typical FA TO ratios are : Asset heavy mode
1
Low WCAP intensity for Co. like GACL , others
have poor WCAP ratios
Low WCAP intensity
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 inten
capital investment
network (sales / pu
distributors etc
Poor margins during Demand supply
mismatch. In excess supply scenario the
margins come under pressure.
Poor margins during Demand supply
mismatch. In excess supply scenario the
margins come under pressure.
High margins, typi
due to the duopoly
AL and copper
28 % plus for TIER one companies. Other
companies which are not low cost producer
have lower OPM
28 % plus for TIER one companies. Other
companies which are not low cost producer
have lower OPM
-
8/2/2019 Business Analysis Working
52/199
Key Industry ratios and
statistics
Business units
Business modelKey Demand Drivers :
1. Why would there be a continued
demand for the product / service
Key supply drivers
Shareholder Value creation drivers
Degree / nature of change
Cement steel MetalsCOMMODITY
1. Demand supply mismatch due to excess
supply can put pressure on margin
2. Infrastructure growth / HousingConstruction demand especially in higher
urbanisation areas
1. Demand supply mismatch due to excess
supply can put pressure on margin
2. Infrastructure growth / HousingConstruction demand especially in higher
urbanisation areas
3. Performance of downstream companies
1. Price of coal/ limestone
2. Energy price such as oil / coal etc
1. Price of iron ore
1. Enduring low cost position 1. Enduring low cost position
1. Low. Strongly dependent on business cycle
and demand supply gaps
2. Industry consolidation would help in
improving returns and reduce competition
1. Low. Strongly dependent on business cycle
and demand supply gaps
-
8/2/2019 Business Analysis Working
53/199
Predictability of business
Cyclical nature ?
Ability to increase price ahead of
inflation (Pricing power)
Some sort of monoploy or Oligopoly
Does the company have a recurring
revenue stream
Does the business have franchise /
brands or is it commodity
Does the industry enjoy high growthrates ? For how long
Cement steel MetalsCOMMODITY
1. Medium 1. Medium
1. high 1. high
1. Only if there is supply shortfall, else poor 1. Only if there is supply shortfall, else poor 1. Only if there is s
1. None
2. Consolidation would result in better pricing
power
1. None ??
Yes. Yes. ??
Commodity with poor brand / franchise value Commodity with poor brand / franchise value Commodity with p
Medium growth rates especially in india.However growth would add value only if
there is industr consolidation
Highly cyclical industry Cyclical
-
8/2/2019 Business Analysis Working
54/199
Key industry variable which drive
the performance
Source of competitive
advantage
Customer advantage Factors -
resulting in moat (customer captivity)
Higher durability than production
advantage factors
Presence of Network economics -
customer advantage factorRadial or combitorial network
economics
Network taxonomy
Network profits based on
Cement steel Metals
COMMODITY
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)
1. Demand supply mismatch
2. Global demand and pricing
3. Production cost (cost of goods sold as %
of sales)
1. Demand supply m
2. Global demand a
3. Production cost (
of sales)
Low customer advantage except for
moderate brand effect
None None
None None
none none None
none none None
none none None
-
8/2/2019 Business Analysis Working
55/199
Distinctive capability
analysis
Architecture
Strategic assets
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
Cement steel MetalsCOMMODITY
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
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
A. Process econom
1. Value chain indiv
2. Process complex
important for some
3. Process cost red
5. Resource access
high important
B. Scale economies in purchasing,
distribution(logistics)
B. Scale economies in purchasing,
distribution(logistics)
B. Scale economies
and purchase of ra
1. Process capabilities can help achieve low
cost position. Difficult to sustain
1. Process capabilities can help achieve low
cost position. Difficult to sustain
1. Process capabilit
cost position. Diffic
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
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 distributio
market . May not b
2. Tie up of RM fro
Ownership of mine
can add to low cos
-
8/2/2019 Business Analysis Working
56/199
Innovation
Cost
Financial strength
Reputation
Porter's model : 5 factor for
industry attractiveness
Industry attractiveness sumarry and
reasons for low high returns
ENTRY BARRIER - No. 1 Factor
deciding industry profitability
Asset specificity
Economies of Scale
Cement steel MetalsCOMMODITY
None. None. Would be limited to new processes /
practises
None. Would be lim
practises
Very critical factor Very critical factor Very critical factor
Critical for continous capital investment intothe Business
Critical for continous capital investment intothe Business
Critical for continouthe Business
Low Low Low
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 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
High High
High High
-
8/2/2019 Business Analysis Working
57/199
Proprietary Product difference
Brand Identity
Switching cost
Capital Requirement
Distribution strength
Cost Advantage
Government Policy
Expected Retaliation
Production scale
Anticipated payoff for new entrant
Precommitment contracts
Learning curve barriers
Network effect advantages of
incumbents
Cement steel MetalsCOMMODITY
None None
None None
None None
High High
Medium Medium
Low - only for some Low - only for some
Low Low
High High
High High
Moderate Low
Low Low
Moderate Moderate
None None
-
8/2/2019 Business Analysis Working
58/199
No. of competitors - Monopoly /
ologopoly or intense competition
(concentration ratio )
RIVALRY DETERMINANT
Industry growth
Fixed cost / value added
Intermittent overcapacity
Product difference
Informational complexity
Exit BarrierDemand variability
SUPPLIER POWER
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
integrationBUYER POWER
Cement steel MetalsCOMMODITY
High. 60 % capacity with top 6. Too many
players
High. Too many players such mini mills ,
Integrated steel plant etc
high competitive intensity causes poor
profitability of industry. Fragmented industry -
now consolidating
high competitive intensity causes poor
profitability of industry. Fragmented industry -
now consolidating
Medium. Dependent on demand supply gap Medium. Dependent on demand supply gap
High (upto 5 usd per tonne ) High
High High
Low Low
Low Low
High HighHigh High
Medium Medium - Ore suppliers / Coal / Lime is
controlled by government or few suppliers
and can have impact on the prices
Low Low
Low Low
None. Cost escalation of RM has impact on
Margins
None. Cost escalation of RM has impact on
Margins
Medium - For coal and fuel Medium - For coal and fuel and iron ore
Low Moderate
High High
None None
Low Low
-
8/2/2019 Business Analysis Working
59/199
Buyer conc. v/s firm concentration
Buyer volume
Buyer switching cost
Buyer information
Ability to integrate backward
Substitute product
Price sensitivity
Price / Total PurchaseProduct difference
Switching costBuyer propensity to Subsititute
Intangible assets
Valuation model
Cement steel Metals
COMMODITY
Low Low
Low Low
Low Low
Medium Medium
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
High HighNone Low
None NoneNone High
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
2. Process innovations / improvements for
cost reductions
1.Brands also do no
2. Process innovatio
cost reductions
-
8/2/2019 Business Analysis Working
60/199
Valuation approach
Hi h PE
Low PE for the industrAvg PE for the industry
Valuation drivers
Avg ROC numbers of industry
Av Growth for industrAvg CAP assumptions
Maintanance capex (approximate) as
% of sales / Dep as % of sales
Cement steel MetalsCOMMODITY
1. Price to book
2. DCF ( based on normalised earnings )
3. Re roduction costs
1. Price to book
2. DCF ( based on normalised earnings )
3. Re roduction costs
1. Price to book
2. DCF ( based on
3. Re roduction co
-
8/2/2019 Business Analysis Working
61/199
Competitive landscape (and
identification ofcom etitive advanta eList of companies (by size) with
names - By sales
Profitability pool analysis - ranking by
ROE
Market share stability analysis