CHAPTER 6: INDUSTRY ANALYSIS

Chapter 6: Industry Analysis – Outline

Section	Title	Description
6.1	Role of Industry Analysis in Fundamental Analysis	Highlights why understanding industry trends and structure is critical for evaluating a company.
6.2	Defining the Industry	Explains how to clearly define the scope and boundaries of an industry.
6.3	Understanding Industry Cyclicality	Discusses how industries move in sync with economic and business cycles.
6.4	Market Sizing and Trend Analysis	Covers how to assess market potential, demand, and long-term growth trends.
6.5	Secular Trends, Value Migration, and Business Life Cycle	Explores shifts in value chains and the evolution of businesses over time.
6.6	Understanding the Industry Landscape	Includes competition, barriers to entry, substitutes, and buyer/supplier power.
6.7	Key Industry Drivers and Industry KPIs	Identifies critical variables that drive performance and how to track them.
6.8	Regulatory Environment/Framework	Discusses how policies and regulation impact the functioning of specific industries.
6.9	Taxation	Covers how tax policies (direct and indirect) impact profitability and pricing.
6.10	Sources of Information for Industry Analysis	Lists reliable sources for conducting detailed industry-level research.

6.1: Role of Industry Analysis in Fundamental Analysis

Industry analysis is a key pillar in fundamental analysis. It serves as the bridge between macroeconomic factors and company-specific research. By evaluating the industry in which a company operates, analysts can assess the external environment that directly influences the company’s financial performance, competitive position, and long-term prospects.

📌 Why Industry Analysis Matters

Provides context for evaluating company performance relative to peers and sector norms.
Reveals industry-specific risks and opportunities that may not be visible at the company level.
Helps in assessing the overall attractiveness of the sector based on growth, margins, and entry barriers.
Guides allocation of capital into favorable sectors aligned with macroeconomic trends.

🔍 How It Complements Fundamental Analysis

Combines with economic analysis to identify sectors likely to perform well under current conditions.
Supports company analysis by identifying whether success is driven by internal efficiency or industry-wide trends.
Ensures a more accurate valuation by factoring in industry growth rates, market dynamics, and competition.

📈 Use in Stock Selection

Acts as a filter in the top-down approach, helping analysts shortlist industries before selecting individual stocks.
Highlights sector rotation opportunities during different economic phases (e.g., defensive vs. cyclical sectors).
Strengthens conviction in long-term investment decisions by understanding industry life cycle and value drivers.

6.2: Defining the Industry

Before analyzing an industry, it is important to clearly define what it includes and excludes. This ensures accurate comparisons, relevant benchmarking, and proper understanding of opportunities and threats within that industry.

📌 What Is an Industry?

An industry is a group of companies that produce similar products or services that compete with each other. Industries can be defined based on product type, customer segments, or even delivery channels.

Broad Example: Financial Services (includes banks, NBFCs, insurance, mutual funds).
Narrow Example: Private Sector Banks or Microfinance Institutions (MFIs).

🔍 How to Define an Industry

Understand the core product or service being offered.
Identify the target customers and their needs.
Study distribution channels (online, physical, B2B, B2C).
Use industry classification systems like NAICS, NIC, or sectoral codes on stock exchanges.

🎯 Why It Matters

Helps in selecting correct peers for benchmarking and ratio comparison.
Avoids mixing companies with different business models or risk profiles.
Improves precision in forecasting trends, revenues, and competition intensity.

6.3: Understanding Industry Cyclicality

Industry cyclicality refers to how the performance of different industries is affected by phases of the economic cycle—such as expansion, slowdown, or recession. Knowing whether an industry is cyclical or defensive helps analysts choose the right sector at the right time.

🔁 What is Industry Cyclicality?

Some industries grow fast during booms and slow down sharply during recessions—these are cyclical. Others remain stable regardless of the economy—these are defensive. There are also counter-cyclical industries that perform better during downturns.

📈 Cyclical Industries

Highly sensitive to economic changes. Perform well in expansions and decline in downturns.

Examples: Automobiles, real estate, capital goods, travel.
Suitable for aggressive investors during bull markets.

🛡 Defensive Industries

Less affected by economic cycles. Stable demand across good and bad times.

Examples: FMCG, healthcare, utilities, telecom.
Ideal for long-term and conservative investors.

🔄 Counter-Cyclical Industries

Perform better during economic slowdowns due to cost-saving behavior or policy support.

Examples: Discount retailers, debt recovery, low-cost financial services.
Used for hedging during recessions or volatile periods.

🎯 Why Understanding Cyclicality Matters

Helps align sector choices with current economic phase.
Improves portfolio diversification and risk control.
Supports timing strategies like sector rotation.

6.4: Market Sizing and Trend Analysis

Market sizing tells us how big the opportunity is in a particular industry or sector. It helps analysts understand the potential revenue or customer base a business can target. Trend analysis shows how this market is growing or changing over time.

📐 Market Sizing: TAM → SAM → SOM

Market sizing is often broken down into three levels:

Total Addressable Market (TAM)

The overall demand for a product or service across the entire market, assuming 100% market share.

Serviceable Available Market (SAM)

The part of the TAM that a company can actually serve based on its reach, offerings, and resources.

Serviceable Obtainable Market (SOM)

The portion of the SAM that a business can realistically capture in the near term.

Example: If the TAM for electric scooters in India is ₹50,000 Cr, a startup might aim for ₹10,000 Cr as SAM, and ₹800 Cr as its SOM.

📊 Industry Trend Analysis

Trend analysis helps identify long-term patterns and changes in an industry. It allows analysts to understand whether the industry is growing, maturing, or declining.

🔼 Growth Trends

Ongoing rise in demand due to innovation, rising incomes, or changing lifestyles. Example: Digital payments.

⚙️ Technological Trends

Impact of innovation like automation, AI, and renewable tech. Example: Solar replacing fossil fuels.

🛍 Consumer Trends

Changes in consumer behavior. Example: Shift toward healthy food, online shopping, or eco-friendly products.

6.5: Secular Trends, Value Migration, and Business Life Cycle

Understanding where the market is headed, how value shifts between business models, and what stage a company is in its life cycle helps analysts evaluate long-term sustainability, disruption risks, and growth potential.

6.5.1 💡 Value Migration

Value migration is the shift of profitability and growth potential from outdated business models to more efficient and customer-centric ones. This shift is usually caused by innovation, changing customer preferences, or new technologies.

Stage 1: Old business models dominate (e.g., physical retail stores).
Stage 2: New players emerge with better value (e.g., online marketplaces).
Stage 3: Value migrates to the new model; old players lose market share.
Example: Flipkart and Amazon replacing local retailers, or digital banks replacing traditional banks.

6.5.2 📊 Business Life Cycle

Every business goes through a life cycle that includes different growth phases. Knowing which stage a company is in helps analysts assess risk, profitability, and required strategies.

1️⃣ Introduction

The company or product is new. High investment, low revenue. Focus is on awareness and adoption.

2️⃣ Growth

Revenues grow rapidly. Customer base expands. Margins improve. Competitors start entering.

3️⃣ Maturity

Growth stabilizes. Market is saturated. Focus shifts to cost control and defending market share.

4️⃣ Decline

Sales and profits drop. Newer alternatives emerge. Company must innovate or exit.

🎯 Key Takeaways

Look for where value is moving — not where it used to be.
Invest in businesses with room to grow or ability to reinvent in decline.
Match investment strategies to where a company stands in its life cycle.

6.6: Understanding the Industry Landscape

To evaluate a company accurately, it’s important to understand the environment it operates in. The industry landscape includes all the external forces and internal dynamics that affect how businesses compete, grow, and stay profitable. Several models help break this down.

6.6.1 ⚔️ Michael Porter’s Five Forces Model

This model helps assess how competitive and attractive an industry is by examining five major forces that influence profitability:

Industry Rivalry

Looks at how intensely companies compete. More players and lower switching costs lead to price wars and lower profits.

Threat of Substitutes

Substitute products can reduce demand. The more alternatives available, the higher the pressure on prices and margins.

Bargaining Power of Buyers

If customers have many choices or buy in bulk, they can demand lower prices or better service, squeezing margins.

Bargaining Power of Suppliers

When suppliers are few or have unique products, they can raise prices or limit supply, affecting business costs.

Barriers to Entry

If new competitors can easily enter the market, existing players face pressure. High barriers protect profits; low barriers invite disruption.

6.6.2 🌐 PESTLE Analysis

PESTLE is used to analyze the big-picture factors that can influence an industry. These are often out of the company’s control but affect its operations and future:

Political: Government rules, taxes, trade laws, or political stability.
Economic: Interest rates, inflation, income levels, unemployment.
Socio-cultural: Changing lifestyles, population trends, education, habits.
Technological: Innovation, digitalization, automation, R&D levels.
Legal: Regulations, compliance, labor laws, consumer rights.
Environmental: Climate concerns, sustainability norms, pollution laws.

6.6.3 🧮 BCG Matrix – Portfolio Analysis

This model helps companies manage their product/business portfolio based on market share and industry growth:

🌟 Stars

High share in a fast-growing market. Need heavy investment but are strong future performers.

🐮 Cash Cows

High share but slow market. Stable profits with less need for reinvestment. Fund other areas.

❓ Question Marks

Low share in high-growth industries. Need close attention and strategic choices—invest or exit.

🐶 Dogs

Low share and slow market. Limited growth and profits. Usually candidates for shutdown or divestment.

6.6.4 🔍 SCP (Structure-Conduct-Performance) Model

This model explains how an industry’s structure affects the behavior (conduct) of firms and their overall performance:

Structure: Number of firms, product types, entry barriers, and market power.
Conduct: How firms behave—pricing, marketing, investments, R&D, competition tactics.
Performance: End results—profits, efficiency, innovation, and sustainability.

6.7: Key Industry Drivers and Industry KPIs

Every industry has certain critical variables or “drivers” that directly influence its performance, profitability, and scalability. Along with these drivers, analysts track KPIs (Key Performance Indicators) that are specific to each industry to measure how businesses perform in their sector.

6.7.1 💰 Unit of Pricing

Industries have their own units of pricing depending on the nature of products or services sold. These units help track revenue trends, costs, and profitability more clearly.

Oil & Gas: Per barrel
Telecom: Per subscriber, per GB, or per minute
Airlines: Per seat-kilometer (ASK, RPK)
Power Sector: Per kilowatt-hour (kWh)
Cement: Per tonne
Real Estate: Per square foot
FMCG: Per unit or pack size (gram/ml)

6.7.2 🚧 Key Constraining Factors

While drivers push growth, every industry also faces limitations that restrict output or scale. Recognizing these constraints helps assess the risks and bottlenecks in that industry.

Raw Material Availability: Affects sectors like steel, cement, chemicals.
Land and Power: Essential for manufacturing, infrastructure, and real estate.
Skilled Labor: Important for IT, healthcare, engineering, and construction.
R&D Spending: Necessary for pharma, biotech, and tech sectors to remain competitive.
Regulations: Licensing, compliance, and environmental clearances in sectors like mining, telecom, and banking.
Distribution Reach: Crucial for FMCG, pharma, and consumer electronics.
Import Dependence: For sectors that rely on foreign equipment or inputs, like electronics, auto components.

6.7.3 📊 KPIs for Select Industries

KPIs help analysts compare companies across the same industry and assess operational efficiency and performance. Here are common KPIs across sectors:

🏭 Cement

Realization per tonne
Capacity utilization
Volume growth (domestic/export)

📞 Telecom

ARPU (Average Revenue Per User)
Minutes of usage
Data consumption per user
Subscriber churn rate

🏥 Healthcare

Bed occupancy rate
Revenue per bed
Doctor-patient ratio

🚗 Auto

Volume growth (passenger/commercial)
Utilization levels
Operating leverage

🏦 Banking

Net Interest Margin (NIM)
Non-Performing Assets (NPA %)
Credit growth
CASA ratio

🛒 FMCG

Volume growth
Gross margins
Distribution reach

6.8: Regulatory Environment/Framework

Every industry operates under a regulatory framework defined by the government and regulatory bodies. This framework includes the rules, laws, and compliances that companies must follow. These laws not only ensure fair practices and investor protection, but also influence profitability, entry barriers, and strategic decisions.

📌 Importance of Regulatory Framework

Promotes transparency, accountability, and investor confidence.
Ensures fair competition and ethical practices across industries.
Protects the interests of stakeholders, including consumers, employees, and investors.
Creates a level playing field by controlling monopolistic or exploitative behavior.
Sometimes creates entry barriers or cost overheads for companies.

🏛 Key Regulatory Bodies in India

SEBI (Securities and Exchange Board of India): Regulates capital markets, mutual funds, stockbrokers, and research analysts.
RBI (Reserve Bank of India): Regulates banking, NBFCs, and monetary policies.
IRDAI (Insurance Regulatory and Development Authority of India): Regulates insurance companies and intermediaries.
TRAI (Telecom Regulatory Authority of India): Regulates the telecom sector including tariffs, spectrum allocation, and licenses.
CCI (Competition Commission of India): Prevents anti-competitive practices, monopolies, and promotes fair competition.
FSSAI, DGCA, PNGRB, etc.: Sector-specific regulators for food safety, aviation, oil & gas, and more.

⚖️ Impact of Regulations on Industry

Can impose compliance costs, licensing requirements, and periodic disclosures.
Positive regulations can help sectors grow (e.g., FDI relaxations in retail, incentives for EVs).
Strict or sudden changes (e.g., GST, import bans, price caps) may disrupt business operations.
Analysts must factor regulatory risk when evaluating industry potential.

6.9: Taxation

Taxes have a direct impact on a company’s earnings and competitiveness. Analysts need to understand the types of taxes applicable to an industry and how they influence costs, pricing, and profitability. Taxation in India is broadly classified into direct, indirect, and other industry-specific taxes.

6.9.1 💼 Direct Taxes

Direct taxes are levied directly on individuals or businesses and are paid to the government without any intermediary.

Corporate Tax: Tax on the income of companies, typically 22% for domestic firms (plus surcharge/cess).
Minimum Alternate Tax (MAT): Ensures companies with low taxable income pay a minimum tax (currently 15%).
Dividend Distribution Tax (DDT): Abolished in 2020, dividends are now taxed in the hands of shareholders.

6.9.2 🛒 Indirect Taxes

Indirect taxes are imposed on goods and services and collected at the point of sale. The burden is passed to the consumer.

Goods and Services Tax (GST): Replaced many older taxes (excise, VAT, service tax). Standardized taxation across India.
Customs Duty: Tax on imported goods to protect domestic industries or generate revenue.
Excise Duty: Still applicable to specific items like alcohol, fuel, and tobacco.

6.9.3 📦 Other Taxes

Some industries are subject to additional levies depending on their activities or location.

Stamp Duty: Applicable to property or financial transactions like share transfers.
Environmental Taxes: Levied on polluting industries as part of ESG initiatives.
State-Specific Levies: For example, entry taxes or local development cess in specific states.
Export Duties: Levied on select items to regulate supply or pricing in domestic markets.

6.10: Sources of Information for Industry Analysis

To perform effective industry analysis, analysts need reliable and up-to-date information from credible sources. These sources can be government publications, company filings, sector reports, databases, or direct surveys.

🏛 Government and Regulatory Bodies

Ministry of Corporate Affairs (MCA): Company filings, annual reports, ownership structures.
Reserve Bank of India (RBI): Sectoral credit growth, NBFC performance, monetary policy updates.
SEBI (Securities and Exchange Board of India): Reports on capital markets, mutual funds, and listed companies.
Ministry of Commerce & Industry: Trade and export-import data.
National Statistical Office (NSO): GDP, IIP, CPI, labor data.

🏭 Industry Reports and Trade Associations

FICCI / CII / ASSOCHAM: Sector reports, white papers, policy recommendations.
CRISIL / ICRA / CARE Ratings: Industry research reports and risk assessment insights.
Brokerage Houses: Equity research, sectoral outlooks, earnings previews and reviews.
Chambers of Commerce: Local market data and MSME sector insights.

📰 Financial & Business News Platforms

Economic Times, Business Standard, Mint, Bloomberg: Real-time news, interviews, and commentary.
TV Channels: CNBC TV18, ET Now, Zee Business — useful for market reactions and analyst opinions.
Online Portals: Moneycontrol, Screener, Investing.com — for quick access to ratios, filings, and peer data.

📋 Primary Research Methods

Company Management Interviews: Provide forward-looking insights and strategic plans.
Channel Checks: Speak with distributors, dealers, and customers for ground-level feedback.
Surveys and Focus Groups: Used to validate consumer trends or behavioral patterns.
Site Visits: Help validate operations, inventory levels, or capex execution.