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. |
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.
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.
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.
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.
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.
Highly sensitive to economic changes. Perform well in expansions and decline in downturns.
Less affected by economic cycles. Stable demand across good and bad times.
Perform better during economic slowdowns due to cost-saving behavior or policy support.
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 is often broken down into three levels:
The overall demand for a product or service across the entire market, assuming 100% market share.
The part of the TAM that a company can actually serve based on its reach, offerings, and resources.
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.
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.
Ongoing rise in demand due to innovation, rising incomes, or changing lifestyles. Example: Digital payments.
Impact of innovation like automation, AI, and renewable tech. Example: Solar replacing fossil fuels.
Changes in consumer behavior. Example: Shift toward healthy food, online shopping, or eco-friendly products.
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.
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.
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.
The company or product is new. High investment, low revenue. Focus is on awareness and adoption.
Revenues grow rapidly. Customer base expands. Margins improve. Competitors start entering.
Growth stabilizes. Market is saturated. Focus shifts to cost control and defending market share.
Sales and profits drop. Newer alternatives emerge. Company must innovate or exit.
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.
This model helps assess how competitive and attractive an industry is by examining five major forces that influence profitability:
Looks at how intensely companies compete. More players and lower switching costs lead to price wars and lower profits.
Substitute products can reduce demand. The more alternatives available, the higher the pressure on prices and margins.
If customers have many choices or buy in bulk, they can demand lower prices or better service, squeezing margins.
When suppliers are few or have unique products, they can raise prices or limit supply, affecting business costs.
If new competitors can easily enter the market, existing players face pressure. High barriers protect profits; low barriers invite disruption.
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:
This model helps companies manage their product/business portfolio based on market share and industry growth:
High share in a fast-growing market. Need heavy investment but are strong future performers.
High share but slow market. Stable profits with less need for reinvestment. Fund other areas.
Low share in high-growth industries. Need close attention and strategic choices—invest or exit.
Low share and slow market. Limited growth and profits. Usually candidates for shutdown or divestment.
This model explains how an industry’s structure affects the behavior (conduct) of firms and their overall performance:
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.
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.
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.
KPIs help analysts compare companies across the same industry and assess operational efficiency and performance. Here are common KPIs across sectors:
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.
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.
Direct taxes are levied directly on individuals or businesses and are paid to the government without any intermediary.
Indirect taxes are imposed on goods and services and collected at the point of sale. The burden is passed to the consumer.
Some industries are subject to additional levies depending on their activities or location.
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.