chapter 8 fundamental analysis-industry analysis
TRANSCRIPT
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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.
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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
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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
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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
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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
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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
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SWOT Analysis
Internal Strengths Weaknesses
External Opportunities Threats
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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.
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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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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
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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
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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