6. Industry Analysis

Defining the industry-

Defining the industry is the very first step in conducting an industry analysis. However, it is not always an easy task as there can be several challenges in defining an industry. While there are standard industry classification systems such as NIC in India and NAICS in the US, they may not necessarily capture the substance of the industry. For instance, a single classification for the manufacture of passenger cars may not differentiate between entry-level compact car manufacturers and high-end luxury car manufacturers.

This challenge increases when a company competes in multiple industries to earn its income, such as PVR Limited, which competes with satellite channels, OTT platforms, live theaters, live performances, and sporting leagues. Narrow industry definitions create a risk of overlooking other competitors, while broader definitions make it difficult to compare the performance of different segments within the broader group.

An analyst should carefully consider the various factors that drive the business and classify it as part of the industry group that shares common driving factors. For example, if an analyst believes that PVR Limited’s business is driven by people’s propensity to spend time outside their home, it may be appropriate to classify it as part of the out-of-home entertainment industry. On the other hand, if the business is largely driven by people’s propensity to consume movie content, it may be appropriate to classify it as part of the entertainment media industry.

Understanding industry cyclicality-

Economic cycles affect all businesses. However, they affect some businesses more than others. Based on their cyclical nature, industries can be classified into three categories:

Category	Definition	Example
Defensive industries	These are industries that create products and services that have low-income elasticity, meaning that changes in income levels do not significantly impact demand for their products.	Healthcare: People require medical attention regardless of the economic situation, and this industry includes essential goods and services such as hospitals, pharmaceuticals, and medical devices. Utilities: Basic services such as electricity, gas, and water are necessary for daily life, and their demand does not fluctuate significantly with economic conditions. Consumer Staples: Products such as food, beverages, and household items are necessary for daily living and their demand is relatively stable over time.
Semi-cyclical industries	These industries experience some fluctuation in demand based on economic cycles, but have a certain level of base demand that helps maintain sales even during recessionary periods.	Automobiles: While demand for cars may decline during recessions, people still need transportation and may delay buying a new car rather than foregoing it entirely. Consumer durables: Products such as appliances, furniture, and electronics are not essential for daily living, but people may choose to delay replacing these items during a recession. Retail: While overall retail sales may decline during recessions, people still need to purchase basic necessities such as groceries and other essential goods.
Deep cyclical industries	These industries experience extreme fluctuations in demand based on economic cycles, and may be heavily impacted by commodity prices.	Capital goods: Companies may delay purchasing expensive equipment during a recession, causing a significant decline in demand for capital goods. Construction: Demand for new construction and infrastructure projects is heavily tied to economic growth and may decline significantly during a recession. Energy: The demand for energy products such as oil and gas is heavily tied to economic growth and commodity prices, leading to significant fluctuations in demand during economic cycles.

Market sizing and trend analysis-

Category	Definition	Examples
Market sizing	The process of determining the total size of a market, typically in terms of the number of potential customers or the total revenue generated by the market.	- Estimating the number of potential customers for a new product - Determining the total revenue generated by a particular industry
Trend analysis	The process of examining data over time to identify trends or patterns.	- Analyzing sales data over several years to identify seasonal trends - Examining social media data to identify changing consumer preferences

Secular trends, value migration, and business life cycle-

Category	Definition	Examples
Secular Trends	Long-term trends that persist over many years or even decades and can shape consumer behavior, technological developments, and other factors that affect the market.	The rise of e-commerce, the increasing importance of environmental sustainability, and the growing trend toward health and wellness.
Value Migration	The process by which the economic value of a product or service shifts from one part of the market to another due to changes in consumer preferences, shifts in the competitive landscape, or the introduction of new technologies.	The shift from traditional brick-and-mortar retail to e-commerce, the move from print to digital media, and the emergence of electric vehicles as a viable alternative to gasoline-powered cars.
Business Life Cycle	The stages of development that a business typically goes through, from its inception to its eventual decline or demise.	Start-up, growth, maturity, and decline.

Understanding the industry landscape-

Industry landscaping needs to be very comprehensive. While analysts can use their own frameworks, there are certainly established frameworks that can help understand the industry landscape. These include the following:
(i) Michael Porter’s Five Force Model
(ii) PESTLE analysis
(iii) BCG Matrix
(iv) SCP analysis

Michael Porter’s Five Force Model for Industry Analysis-

this model analyses any industry on the basis of five broad parameters or forces. These 5 forces are divided into 2 vertical and 3 horizontal ones, as listed below:
Horizontal Forces:
1. Threat of Substitutes
2. Threat of New Entrants
3. Threat of Established Rivals
Vertical Forces:
1. Bargaining Power of Suppliers
2. Bargaining Power of Customers

1. Threat of Substitutes: This force is concerned with the availability of substitute products or services that can meet the same customer needs as the industry’s offerings. When there are many substitutes available, the power of the industry decreases as customers have more options to choose from. For example, the availability of electric cars as a substitute to gasoline cars can have a significant impact on the automotive industry.

2. Threat of New Entrants: This force is related to the barriers to entry for new companies in the industry. If the barriers are low, then new entrants can easily enter the market, leading to increased competition and reduced profitability for existing firms. Barriers to entry can include high start-up costs, government regulations, brand loyalty of customers, and economies of scale.

3. Threat of Established Rivals: This force is related to the intensity of competition within the industry. When there are many established firms competing for market share, the rivalry is high, which can lead to price wars, reduced profitability, and increased marketing expenses. The threat of established rivals can be influenced by factors such as product differentiation, industry concentration, and exit barriers.

4. Bargaining Power of Suppliers: This force refers to the ability of suppliers to exert influence on the industry. When suppliers have significant bargaining power, they can increase their prices or reduce the quality of their products, which can have a negative impact on the profitability of the industry. Factors that can influence the bargaining power of suppliers include the number of suppliers, the availability of substitute inputs, and the importance of the input to the industry.

5. Bargaining Power of Customers: This force refers to the ability of customers to influence the industry by bargaining for lower prices, higher quality, or better service. When customers have significant bargaining power, they can demand these benefits and reduce the profitability of the industry. Factors that can influence the bargaining power of customers include the number of customers, the availability of substitutes, and the importance of the industry’s product or service to the customer.

By analyzing these five forces, businesses can gain a better understanding of the industry landscape and its potential opportunities and threats.

Political, Economic, Socio-cultural, Technological, Legal, and Environmental (PESTLE) Analysis-

Factor	Description
Political	The political environment of the country can have an effect on the company's operations. For example, changes in government policies, regulations, and taxes could affect the company's operations. The company could also be affected by political instability in the country.
Economic	The economic environment of the country can also have an effect on the company's operations. Economic factors such as inflation, unemployment, and the level of economic growth can influence the company's ability to operate successfully.
Socio-cultural	The socio-cultural environment of the country can also have an effect on the company's operations. Social trends and changes in consumer tastes can influence the company's ability to compete successfully.
Technological	The technological environment of the country can also have an effect on the company's operations. Advances in technology can make certain processes more efficient and can open up new opportunities for the company.
Legal	The legal environment of the country can also have an effect on the company's operations. Changes in laws and regulations can affect the company's ability to operate successfully.
Environmental	The environmental environment of the country can also have an effect on the company's operations. Pollution and climate change regulations can affect the company's operations.

Boston Consulting Group (BCG) Analysis-

Boston Consulting Group (BCG) is a management consulting firm that provides advice to help organizations improve their performance. BCG uses a variety of analytical techniques, including the BCG matrix, to help companies identify growth opportunities and allocate resources effectively

BCG’s signature tool, the BCG matrix, is a framework that helps companies analyze their businesses and identify growth opportunities. The matrix divides a company’s products or businesses into four quadrants based on their relative market share and market growth rate. The four quadrants are:

Stars: These are products or businesses with a high market share in a rapidly growing market. These are considered the most valuable businesses within a company, and they often require significant investment to maintain their position.

Cash cows: These are products or businesses with a high market share in a slow-growing market. These businesses generate significant cash flow, which can be used to invest in other areas of the company.

Dogs: These are products or businesses with a low market share in a slow-growing market. These businesses typically do not generate much value for the company and may be candidates for divestment.

Question marks: These are products or businesses with a low market share in a rapidly growing market. These businesses have the potential to become stars, but they also require significant investment to grow their market share.

By using the BCG matrix, companies can assess the potential of their different businesses and allocate resources accordingly. This can help them focus on the areas of their business that are most likely to generate value and growth.

BCG Matrix Quadrant	Description	Examples
Stars	High market share in a rapidly growing market.	Apple's iPhone in the smartphone market.
Cash cows	High market share in a slow-growing market.	Coca-Cola in the soft drink market.
Dogs	Low market share in a slow-growing market.	Nokia's Symbian operating system in the mobile operating system market.
Question marks	Low market share in a rapidly growing market.	Tesla's electric cars in the electric vehicle market.

Structure Conduct Performance (SCP) Analysis:

Structure: Structure refers to the structure of the market, including the number of sellers and buyers, the concentration of market power, and the extent of competition.

Conduct: Conduct refers to the behavior of firms in the market. This includes pricing strategies, marketing strategies, and product innovation.

Performance: Performance refers to the economic performance of the market, including the prices of goods and services, the quality of products, and the level of consumer welfare.

SCP analysis is a framework used to analyze the structure, conduct, and performance of a market. It is used to assess the efficiency of a market, identify areas of market failure, and suggest potential policy interventions. The analysis involves both quantitative and qualitative methods to assess the effectiveness of a market. This includes economic theory, market surveys, and empirical studies. The goals of SCP analysis are to improve market efficiency and consumer welfare.

Key Industry Drivers and Industry KPIs:

Key Industry Drivers:

Industry drivers are the factors that drive the growth and development of a particular industry. These factors can be internal or external to the industry and can include things like changes in technology, consumer preferences, regulations, and competition. Understanding industry drivers is important for businesses to stay competitive and adapt to changes in the industry. Here are some examples of key industry drivers:

Industry Drivers	Explanation
Technological	Advances in technology can drive growth and innovation in an industry. For example, the development of smartphones has driven growth in the mobile app industry.
Regulatory	Changes in regulations can impact an industry, for better or for worse. For example, increased government regulations can limit the growth of the tobacco industry.
Economic	Economic conditions such as recessions, inflation, and interest rates can impact an industry. For example, a recession can lead to decreased consumer spending, negatively impacting the retail industry.
Societal	Changes in societal values and trends can impact an industry. For example, the growing trend of eco-friendliness has driven growth in the renewable energy industry.
Competitive	Changes in competition, such as the entry of new competitors or mergers and acquisitions, can impact an industry.

Industry KPIs:

Industry KPIs, or Key Performance Indicators, are metrics that are used to measure the performance and success of a company or industry. These metrics can include things like revenue, profit, market share, customer satisfaction, and employee retention. Understanding these metrics is important for businesses to evaluate their performance and make strategic decisions. Here are some examples of key industry KPIs:

Industry KPIs	Explanation
Revenue	The total income generated by an industry during a specific period.
Profit	The amount of money an industry makes after deducting expenses from revenue.
Market share	The percentage of total market sales that an industry has.
Customer satisfaction	A measure of how satisfied customers are with the products or services provided by an industry.
Employee retention	A measure of the percentage of employees who stay with an industry over a certain period of time.

Regulatory environment/framework:

The regulatory environment, or regulatory framework, refers to the set of laws, regulations, and policies that govern an industry. It is important for businesses to understand the regulatory environment in which they operate, as changes in regulations can have a significant impact on their operations and profitability.

For example, changes in environmental policies can result in the closure of mines or factories, which can have a significant impact on the mining or manufacturing industries. Similarly, changes in tax laws or import/export regulations can affect businesses operating in the international market.

Businesses must comply with regulatory requirements and obtain necessary licenses and permits to operate legally. Failure to comply with regulations can result in fines, legal action, and reputational damage.

Taxation:

Taxes are tools that a government uses to earn income which can be used to meet its expenses. However, governments also use taxes as a tool to encourage or discourage certain businesses. For example, the state government of Kerala introduced a fat tax in 2017. They levied 14.5% additional tax on junk foods. This was done with the intention to discourage the junk food industry.
Similarly, at a national level, India has several slabs of Goods and Service Tax (GST). Many essential products have no GST or have lower GST rates while luxury products have much higher GST rates.

Type of Tax	Description	Examples
Direct Taxes	Taxes imposed directly on individuals or businesses by the government and are paid directly to the government.	Income Tax, Property Tax, Capital Gains Tax
Indirect Taxes	Taxes charged on goods and services and are collected from the consumer at the point of sale. They are paid by the consumer, but collected by the business.	GST, Excise Duty, Value Added Tax
Other Taxes	Taxes that do not fall under direct or indirect taxes, such as taxes on road use and stamp duty.	Road Tax, Stamp Duty, Securities Transaction Tax

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NISM Series-XV: Research Analyst Certification

CHAPTER 6- INDUSTRY ANALYSIS

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1. Which of the following principles should a research analyst or research entity adhere to according to the Code of Conduct for Research Analysts?

a. Honesty and good faith

b. Accuracy and timeliness

c. Independence and objectivity

d. Profitability and commercial viability

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2. "The bye-laws of the stock exchanges are same across exchanges and need to be approved by SEBI". State whether True or False.

a. -

b. 1

c. -

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3. What happens to the liability of an applicant if their application for a certificate of registration is rejected by the Board?

a. The liability of the applicant is transferred to the SEBI

b. The liability of the applicant is waived

c. The liability of the applicant remains unaffected

d. The liability of the applicant is transferred to the Board

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4. What is the period of validity for the certificate of registration granted under the regulations?

a. The certificate is valid until suspended or cancelled by the Board

b. The certificate is valid for a lifetime

c. The certificate is valid for 5 years

d. The certificate is valid for 10 years

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5. What is the procedure if the Board rejects an application for a certificate of registration?

a. The applicant can reapply immediately after the rejection

b. The applicant has the right to appeal the decision within 30 days

c. The Board must provide a detailed explanation for the rejection

d. The applicant is barred from applying again

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6. What is the aim of SEBI (Research Analyst) Regulation, 2014, and its amendments?

a. To enhance the capital adequacy of research entities

b. To establish rules for the listing and disclosure requirements of companies

c. To regulate insider trading and prevent market abuse

d. To foster objectivity and transparency in security research and provide investors with more reliable and useful information

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7. What is the networth requirement for a research analyst who is a body corporate or limited liability partnership firm under the regulations?

a. Not less than Rs. 1 crore

b. Not less than Rs. 50 lakh

c. Not less than Rs. 25 lakh

d. Not less than Rs. 10 lakh

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8. When can a research analyst or research entity publish or distribute a research report or make a public appearance regarding a subject company for which they acted as a manager or co-manager?

a. At any time after the completion of the public offering

b. Twenty-five days following the initial public offering

c. Fifteen days prior to the expiration of a lock-up agreement

d. Forty days following the initial public offering, or ten days following the further public offering

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9. What is the minimum net tangible assets requirement for an individual research analyst or partnership firm under the regulations?

a. Not less than Rs. 10 lakh

b. Not less than Rs. 25 lakh

c. Not less than Rs. 50 lakh

d. Not less than Rs. 1 lakh

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10. What is the requirement for maintaining confidentiality of a research report according to the Code of Conduct for Research Analysts?

a. The report must be accessible to the general public upon request

b. The report must remain confidential until it is made public

c. The report must be shared with selected individuals on a need-to-know basis

d. The report must be disclosed to competitors for benchmarking purposes

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11. What is the role of an interim resolution professional (IRP) in an insolvency proceeding under the Insolvency and Bankruptcy Code (IB?

a. Managing the affairs of the company

b. Mediating between the creditor and the debtor

c. Conducting forensic audits to uncover financial irregularities

d. Overseeing the liquidation process

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12. Which authority was set up with the primary responsibility of promoting old age income security by establishing, developing, and regulating pension funds?

a. Association of Mutual Funds in India

b. Securities Exchange Board of India

c. Insurance and Regulatory Development Authority

d. Pension Fund Regulatory Development Authority

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13. Which is the central bank in India with the responsibility of administering the monetary policy?

a. All of the above

b. Reserve Bank of India

c. State Bank of India

d. Central Bank of India

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14. What are the possible outcomes of an insolvency proceeding under the IBC?

a. Business continuation, profit-sharing, or debt forgiveness

b. Business restructuring, takeover, or liquidation

c. Business closure, financial penalties, or regulatory action

d. Business expansion, mergers, or acquisitions

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15. What is prohibited for research analysts or individuals employed as research analysts regarding investment banking or merchant banking or brokerage services business?

a. Engaging in sales or marketing related to investment banking or merchant banking or brokerage services

b. Communicating with current or prospective clients in the presence of personnel from investment banking or merchant banking or brokerage services divisions or company management about an investment banking services transaction

c. Engaging in sales pitches and deal road shows

d. All of the above

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16. Which of the following should be complete, timely, clear, and concise when it comes to the disclosure of conflicts of interest?

a. Recommendations made by research analysts

b. Disclosures of actual and potential conflicts of interest

c. Personal representations made by research analysts

d. Research reports issued by analysts

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17. What are the possible outcomes of an insolvency proceeding under the Insolvency and Bankruptcy Code (IB?

a. Bailout by the government, merger with a competitor, or privatization

b. Rehabilitation of the company, debt forgiveness, or acquisition

c. Restructuring of business, takeover, or liquidation

d. Sale of assets to repay creditors, debt consolidation, or recapitalization

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18. What should a research analyst or research entity establish to address potential conflicts of interest and maintain the independence of research activities?

a. Strong relationships with other market participants

b. Informal guidelines and verbal instructions

c. Disclosure requirements for clients and investors

d. Written internal policies and control procedures

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19. What should an applicant do if their application for a certificate of registration is rejected by the Board?

a. File a lawsuit against the Board for unfair rejection

b. Request a reconsideration of the decision within 15 days

c. Continue acting as a research analyst until further notice

d. Cease to act as a research analyst immediately

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20. What is prohibited in the distribution of research reports?

a. Making the report available selectively to internal trading personnel

b. Reviewing the report for any untrue statement of material fact

c. Disclosing any material conflict of interest

d. Having no business or contractual relationship with the third-party research provider

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21. Who can be part of the committee of creditors under the IBC?

a. Only financial creditors

b. Only operational creditors

c. Both financial creditors and operational creditors

d. Only the IRP

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22. What can investment banking or merchant banking or brokerage services division's personnel of a research entity do regarding research analysts?

a. None of the above

b. Direct research analysts to engage in sales or marketing related to an investment banking or merchant banking or brokerage services

c. Direct research analysts to engage in communication with current or prospective clients about the division's transaction

d. Provide feedback to research analysts on the impact of research reports

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23. What are the minimum qualifications required for individuals registered as research analysts under the regulations?

a. A professional qualification or post-graduate degree accredited by All Indian Council for Technical Education, National Assessment and Accreditation Council, or any other council/board established under an Act of Parliament in India

b. A post-graduate diploma in finance, accountancy, business management, commerce, economics, capital market, financial services or markets from an accredited institute or university

c. A professional qualification or post-graduate degree in finance, accountancy, business management, commerce, economics, capital market, financial services or markets from a recognized university or institute

d. A graduate degree in any discipline with at least five years of experience in activities related to financial products or markets

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24. Which of the following actions by a research analyst or research entity is prohibited under the Code of Conduct for Research Analysts?

a. Engaging in insider trading or front running

b. Sharing research reports with external auditors

c. Accepting undisclosed compensation from a subject company

d. Modifying research reports to align with the company's interests

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25. Which schedule of SEBI (Research Analyst) Regulation, 2014 specifies the application process for obtaining a certificate of registration?

a. Fourth Schedule

b. Third Schedule

c. First Schedule

d. Second Schedule

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26. What additional information should be provided in a research report if a rating or price target is assigned for at least one year?

a. Graph of yearly closing prices

b. Graph of monthly closing prices

c. Graph of daily closing prices

d. Graph of weekly closing prices

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27. What happens when an application for insolvency proceeding is filed and the adjudicating authority is satisfied that a default has occurred?

a. The committee of creditors is formed to oversee the insolvency process

b. The company's board is dissolved and all management personnel report to the IRP

c. An interim resolution professional (IRP) is appointed to manage the affairs of the company

d. The IRP is responsible for collating the list of amounts outstanding

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28. What is the purpose of the Insolvency and Bankruptcy Code (IB?

a. To regulate the functioning of financial creditors and operational creditors

b. To consolidate all the laws related to reorganization and insolvency proceedings

c. To ensure that every insolvency proceeding is completed within 180 days

d. To provide guidelines for managing the affairs of companies in financial distress

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29. What is the time frame within which every insolvency proceeding should be completed under the IBC?

a. 90 days

b. 60 days

c. 180 days

d. 365 days

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30. What is the responsibility of a research analyst or research entity distributing a third party research report?

a. Make the report available selectively to internal trading personnel

b. Disclose any material conflict of interest of the third party research provider

c. Have no direct or indirect business or contractual relationship with the third party provider

d. Review the third party research report for any untrue statement of material fact

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31. What is the timeframe for an applicant to request a reconsideration of the decision if their application is rejected by the Board?

a. 30 days

b. 60 days

c. 15 days

d. 5 days

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32. What should a research analyst or research entity do if they employ a rating system in their reports?

a. Clearly define each rating

b. Both a and b

c. Neither a nor b

d. Provide time horizon and benchmarks

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33. What certification is required for individuals registered as research analysts under the regulations?

a. Association of Certified Fraud Examiners (ACFE) certification

b. Chartered Financial Analyst (CF certification

c. Certified Financial Planner (CFP) certification

d. NISM certification for research analysts as specified by the Board or any other certification recognized by the Board

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34. How long do existing research analysts have to comply with the capital adequacy requirement from the date of commencement of the regulations?

a. 2 years

b. 5 years

c. 6 months

d. 1 year

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35. What is the requirement for compensating research analysts as per the SEBI (Research Analyst) Regulations?

a. Compensation should be based on the overall financial performance of the research entity

b. Compensation should be directly linked to the profitability of the research analyst's recommendations

c. Compensation should be solely determined by the senior management of the research entity

d. Compensation should not be determined or based on specific merchant banking or investment banking or brokerage services transactions

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36. Who can be part of the committee of creditors in an insolvency proceeding under the Insolvency and Bankruptcy Code (IB?

a. Both financial and operational creditors

b. Operational creditors

c. Only the company itself

d. Financial creditors

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37. Which of the following entities can initiate insolvency proceedings against a company under the Insolvency and Bankruptcy Code (IB?

a. Any creditor to the firm (financial creditors or operational creditors)

b. Only operational creditors

c. Only the company itself

d. Only financial creditors

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38. Who can initiate insolvency proceedings against a company under the IBC if the undisputed amount outstanding is more than Rs. 1,00,000?

a. Only operational creditors

b. Only the company itself if it defaults on any payment

c. Both financial creditors and operational creditors

d. Only financial creditors

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39. What is the time frame within which an insolvency proceeding should be completed under the Insolvency and Bankruptcy Code (IB?

a. 365 days

b. 90 days

c. 180 days

d. 30 days

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40. Unhealthy practice in the Securities Markets includes which of the following?

a. Transparency

b. Disclosure

c. Insider Trading

d. Surveillance

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41. Who should bear the primary responsibility for maintaining appropriate standards of conduct and adherence to proper procedures in a research analyst or research entity?

a. The board of directors

b. The senior management

c. The compliance department

d. The research analyst

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42. What are the limitations imposed on trading by research analysts under the SEBI (Research Analyst) Regulations?

a. Trading in securities is prohibited for all research analysts

b. Trading in securities recommended or followed by the research analyst is allowed only after obtaining prior written approval

c. Trading in securities recommended or followed by the research analyst is prohibited within a specified timeframe

d. Trading in securities is allowed without any restrictions

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43. What is the responsibility of a research analyst or research entity regarding facts in research reports?

a. Both a and b

b. Ensure reliable information

c. Define terms consistently

d. None of the above

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