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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 the 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 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 has a large market share. This segment generates increasing cash for the business with time. Cera Sanitary Ware could be a good example of a “star&rdquo 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 could be a good example of a “ cash cow in the business of books and notebooks business. The industry grows at a predictable and steady rate each year.
Question Marks Business segments in a fast-growing market with a low market share. The right strategies and investments can help the business's market share grow, but they also run the risk of consuming cash in the process of increasing market share and, in the end, not generating enough cash. Tata Nano can be considered as an example of a question mark which did not succeed, whereas Bajaj Pulsar may be considered 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 used to analyze 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 new millennium's first decade. Retail store formats rely on low-cost procurement of goods from manufacturers and selling it on wafer-thin margins to many people.
Banking/ NBFC/ Housing: Monetary Policy by the RBI is this sector's most significant impacting factor. 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 are almost always under pressure as there is intense competition in the sector, and content providers to media companies charge 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 several 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 to have a clear picture of the situation. Similarly, the analysts can document opportunities for the business and potential risks in the form of opportunities and threats. In a way, SWOT analysis is nothing but a way of concisely documenting strengths, weaknesses, opportunities, and threats in one place. Hence, without an analysis of the company, investing can be riskier, and for better research, one needs better knowledge of the stock market. It is recommended to join stock market classes in delhi and study the different modules of the stock market, then take the step forward of investing.
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
Start with a demonstration class.
