Packed with lots of interesting examples, this video covers answers to questions like ‘What is Industry Analysis?; ‘Why is it important? What is the best approach to follow while doing so?’ and more. It also covers all the key aspects to consider while analysing any given industry before making investment decisions.
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Welcome to our new series- Learn with Upstox. In this series we will discuss ratio analysis, industry analysis, balance sheet analysis and many other topics like these.
In this article, we will discuss Industrial Analysis. We will also discuss the various parameters required to do these analyses as well as Porter’s Five Forces Model.
We have all experienced how shortlisting things for even a simple holiday requires a lot of analyses. It only makes sense then that choosing one company from the many many listed will also involve a similar, if not more of a vigorous, analyses. That is exactly what we do in Fundamental Analysis.
Fundamental Analysis
Fundamental Analysis is an analysing technique which uses two approaches - the Top Down approach and the Bottom Up approach.
Let’s start with understanding what these terms mean:
- The Top Down Approach: This approach focuses on Economy analysis, Industry analysis and then the Company analysis.
- The Bottom Up Approach: This approach is exactly opposite to the Top Down Approach. In this, the focus is first on Company analysis, then the Industry analysis and then the Economy analysis.
But what exactly are we going to discuss here? In this article, we are going to learn how to analyse an industry.
How to analyse an industry?
There are many points that we need to look for while conducting an analysis. But we will keep it simple and look at all these points one by one.
The first one focuses on the government's attitude towards the industry. This includes the reliefs, rebates, tax structures, FDI details etc and many such things. Let’s take an example.
Assume that for a specific industry, in the last 20 years, there was a $1000 billion FDI inflow, which was received in the country. Let’s compare this with the last five years and assume that in the last five years, there was an FDI inflow of $500 billion. Now, if we compare $500 billion in the last five years and the $1000 billion from the last 20 years, we can easily analyze that in the last five years, that specific pickup rate of the FDI has been very high. Is that a positive trend? The answer is absolutely, yes.
Now that we understand the government's attitude or initiatives, let's move on to the second point.
In the second point, we try to analyze the size of the market. Like the total addressable market, the market share, the global industry size, the industry share to the GDP and more points like these.
Cement Industry in India
Let’s take an example of the cement industry. After China, India is the second largest producer of cement in the world. The world had 2400 million tonnes of production in the latest financial year of 2020. This tells us that 2400 million tonnes is the total share of this industry. For India, the cement production reached 329 million tonnes in the financial year 2020 and is projected to reach 381 million tonnes by the financial year 2022. Remember, we talked about the size of the industry? If the total production is going to increase at such a nice pace, then the total size of the industry will also grow. That's how we can analyze the size of the industry.
One more example can be India's overall cement production capacity was nearly 545 million tonnes in FY 2020 and accounted for over 8% of the global installed capacity in FY 2020. This helps us understand what India's total capacity is in comparison with the global scenario.
Now, let's move on with the third point.
Understanding the market trends and demography of the country
This point seeks to answer the following questions: How is the customer behaviour? What are the market trends? How is the demography of the country? What is the median age of Indians? What is the percentage of working women in the country? What are the preferences of people?
Again, Let’s take a simple example.
Right now in India, the median age of Indians is around 27/28. Which means that
- The percentage of people who want to eat out is increasing
- The percentage of working women is increasing and
- The percentage of urbanization is also growing very fast.
If we take all these points into consideration, we can imagine quite a few industries which will be positively impacted because of this. It's very easy to analyze this. The impact on the ready to eat category of industry will be positive. When women are going to work for 8 to 10 hours, the possibility of people going for ready to eat foods is going to be more. In fact, the QSR industry will also be positively impacted.
Now what is QSR?
QSR is like a quick service restaurant category of industry. Best examples of these are McDonald's and Domino's Pizza.
Let's start with the Porter's Five Forces Model now.
Porter's Five Forces
This is one of the most famous models for industry analysis. Let's take all the five points one by one in detail.
First: Threats of New Entrants.
What do we mean by this? It means that we need to analyse if there is an easy entry inside this industry. Let’s take a simple example. In the case of a capital intensive industry, which requires a lot of capital, we see that it won’t be an easy entry. There will be a lot of entry barriers, and so the threat of having many competitors is comparatively lower. Which means that it's a good thing for the existing players in the industry.
Second: Buying Power of the Customers.
Some industries are cyclical in nature, which means that these industries will perform well, when the overall position like the GDP position of the country is good, and they'll perform bad when the GDP is bad. Like the automobile industry which performs well when the buying power of the customers is really nice, but if the buying power of customers itself is less then the automobile industry is not going to pick up. Then there are some industries which are not cyclical in nature like the pharma industry, because people will buy medicines irrespective of their buying power.
Third: The Supplier Power.
It is profitable for a company to have a huge availability of suppliers. Because if the number of suppliers is limited then it gives them the power position, and it affects the company’s profitability.
Fourth: Threat of Substitutes.
If the substitution is easy, it can weaken your position and affect your profitability.
Fifth: Industry Competitors.
If the competition is intense, the industry will have a hard time posting good profits. Take the example of airline companies. Do you remember when there were so many airlines like Jet, Vistara, Spicejet etc. So many airlines were competing for a maximum chunk of customers which reduced the profitability. The same can be said about the telecom companies. Hence, if the competition in an industry is cut throat, it will never be profitable for the industries.
The end
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