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What are Industry Analysis and Company Analysis in Equity Stock Market

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What are Industry Analysis and Company Analysis in Equity Stock Market

What are Industry Analysis and Company Analysis in Equity Stock Market

Deepak Sharma 27 Oct 2020

Industry Analysis in Stock market

Michael Porter’s Five Force Model for Industry Analysis

Horizontal Forces

Threat of Substitutes

The threat of New Entrants

The threat of Established Rivals

Vertical Forces:

Bargaining Power of Suppliers

Bargaining Power of Customers 

Barriers to entry (threat of new entrants):

Entry barriers in an industry can be understood by following simple industry characteristics.

They would be high if:

There are lots of licensing required in the business

Patents and copyrights prevent new entrants

Huge investments in specialized assets pose a challenge

Strong Brands, strong distribution network, specialized execution capabilities, customer loyalty with existing products/services exist in the business.

Attractive Industry from the Equity shareholders’ perspective:

Low competition

High barriers to entry

Weak suppliers’ bargaining power

Weak buyers’ bargaining power

Few substitutes

Pestle Analysis

Pestle Analysis stands for Political, Economic, Socio-cultural, Technological, Legal, and Environmental Analysis for investment in Stock Market. Some models also extend this to include Ethics and Demographics, thus modifying the acronym to STEEPLED. This analysis is done more from the perspective of a business that is looking to set up a unit offshore and analyzing several countries to choose from in the share market. This model primarily analyses the external environmental factors that will act as influencers for a business.

Boston Consulting Group (BCG) Analysis

Stars: These are segments in a business where the market is growing rapidly and the company is having a large market share. This segment generates increasing cash for the business with the passage of time. Cera Sanitary ware could be a good example of a “star” with a large market share, continuous growth, and significant cash generation.

Cash Cows: These are segments that require low cash infusion for investment to maintain market shares because of low growth prospects but at the same time steadily generate cash for the company from the established market share. Navneet Publications, which is into the business of books and notebooks, could be a good example of a “cash cow”. The industry grows at a predictable and steady rate each year.

Question Marks Business segments in a fast-growing market but having a low market share. The right strategies and investments can help the market share of the business grow, but they also run the risk of consuming cash in the process of increasing market share and in the end turning out to be not enough cash generating. Tata Nano can be considered as an example of a question mark, which did not succeed; whereas, Bajaj Pulsar may be considered as an example of a question mark product that succeeded.

Dogs: Business segments, which have slow growth rates and intensive competitive dynamics that lead to the low generation of cash are categorized as Dogs.

 

Key Industry Drivers for Various Sectors in share Market:

Telecom: A key parameter while analyzing this sector is the Average Revenue Per Unit (ARPU). It is calculated by total revenue divided by the number of subscribers and the higher it is, the better for the company. It must be noted that India has amongst the lowest ARPUs in the world. Other parameters like mobile penetration and spectrum costs are also important for the Telecom industry.

 IT/ BPO/ KPO: The IT sector in India grew primarily due to a large available pool of English speaking young talent at a low cost. IT companies earned in Dollars and spent in Rupees and made huge profits. Even today, the USDINR rate, the attrition rate among employees, the concentration of revenues with selected clients, the concentration of geographies, etc. are important parameters to watch out for in IT and related sectors.

Retail: The retail sector saw a huge jump in the first decade of the new millennium. Retail store formats rely on low-cost procurement of goods from manufacturers and selling it on wafer-thin margins to a large number of people.

Banking/ NBFC/ Housing: Monetary Policy by the RBI is the single largest impacting factor for this sector. NPA levels, provisioning norms, tight/loose regulatory reserve requirements all impact banks, and NBFCs.

Media: Any media company depends upon content, hence a company generating its own content will have an advantage over others. Distribution companies would almost always be under pressure as there is intense competition in the sector and content providers to media companies would be charging a premium. Television Rating Points (TRPs) are the most widely tracked indicator in electronic media.

COMPANY ANALYSIS 

Qualitative Dimensions for Investments

What does the company do and how does it do?

Who are the customers and why do customers buy those products and services?

How does the company serve these customers?

There are over 6000 companies listed on Indian exchanges. It is not possible to track and understand all of them. Investors should consider buying shares of a few companies they understand rather than invest in a number of companies they don’t understand. Quoting Warren Buffet: Wide diversification is only required when investors do not understand what they are doing.

Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis

Every business has its own strengths and weaknesses. It is good for the analysts to clearly understand and document both of these to have a clear picture of the situation. Similarly, opportunities for the business and potential risks to the business can be documented by the analysts in the form of opportunities and threats. In a way, SWOT analysis is nothing but a way of documenting strengths, weaknesses, opportunities, and threats in one place in a concise manner.

Sources of Information for Analysis

Annual/Quarterly reports - Most easily available, reliable and consistent source of information

Conference Call transcripts

Investor Relation (or Company) Presentations

Management interviews on the internet

Company website

Ministry of Corporate Affairs website

Research Report from Credit Rating Companies

Research Report from various other sources – media reports

Parent Company’s annual report and website

Competitors’ website including international competitors

Print media reports on companies

Discussion with suppliers, vendors, consumers, and competitors 


 

 

 

 

 

 

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