Chapter 7: Company Analysis – Business and Governance – Outline
| Section | Title | Description |
|---|---|---|
| 7.1 | Role of Company Analysis in Fundamental Research | Explains why analyzing a company’s business model, management, and governance is vital in investment research. |
| 7.2 | Understanding Business and Business Models | Describes how companies operate, deliver value, and monetize through various business models. |
| 7.3 | Pricing Power and Sustainability of This Power | Evaluates how and why some companies can command premium prices and sustain them. |
| 7.4 | Competitive Advantages/Points of Differentiation | Identifies moats such as brand strength, IP, network effect, or cost leadership. |
| 7.5 | SWOT Analysis | Uses SWOT framework to assess strengths, weaknesses, opportunities, and threats. |
| 7.6 | Quality of Management and Governance Structure | Covers leadership, decision-making track record, board composition, and ethics. |
| 7.7 | Risks in the Business | Lists internal and external risks that can affect business stability and future earnings. |
| 7.8 | History of Credit Rating | Shows how credit rating changes over time reflect trustworthiness and risk. |
| 7.9 | ESG Framework for Company Analysis | Covers Environmental, Social, and Governance parameters increasingly relevant for responsible investing. |
| 7.10 | Sources of Information for Analysis | Lists credible sources such as annual reports, management calls, and regulatory filings. |
7.1: Role of Company Analysis in Fundamental Research
Company analysis is a core part of fundamental research. While economic and industry analysis set the broader context, analyzing the company itself reveals its true potential. This step helps analysts evaluate whether a specific business is strong, sustainable, and worth investing in.
🎯 Purpose of Company Analysis
- Understand how the company earns revenue and what its core operations are.
- Evaluate the strength of its business model and whether it has a sustainable edge.
- Assess management quality, strategy, governance, and ethical conduct.
- Identify risks specific to the business and how they are managed.
- Track growth, profitability, capital efficiency, and financial health over time.
🔍 Where It Fits in Fundamental Research
- Top-down Approach: Analysts start from macroeconomic and industry levels, then narrow down to the most attractive companies in that sector.
- Bottom-up Approach: Focus begins with a company showing strong fundamentals, regardless of broader market or industry trends.
- Company analysis supports both strategies by validating long-term investment potential and pricing strength.
📈 Key Areas Covered in Company Analysis
- Business model, revenue sources, and segment performance
- Competitive strengths and weaknesses (SWOT)
- Pricing power and profitability margins
- Management quality and track record
- Corporate governance and transparency
- Past financial performance and credit rating history
- Readiness for ESG and sustainability practices
7.2: Understanding Business and Business Models
To analyze a company effectively, it is important to understand how its business operates, how it makes money, and whether its business model is scalable and sustainable. A business model explains the company’s value proposition, customer base, revenue sources, cost structure, and profit margins.
🧩 What Is a Business Model?
A business model is a framework that describes how a company delivers value to customers and how it captures that value as revenue and profits. It answers questions like: Who are the customers? What do they pay for? How are the products or services delivered?
🔍 Key Elements of a Business Model
- Customer Segments: Who the company serves (B2B, B2C, niche markets, mass markets).
- Value Proposition: What problem the company solves or what need it fulfills for its customers.
- Revenue Streams: How the company earns revenue — product sales, subscriptions, ads, commissions, etc.
- Cost Structure: Major fixed and variable costs needed to operate the business.
- Distribution Channels: How products/services are delivered — online, offline, franchise, retail, etc.
- Key Activities: What the company must do exceptionally well — manufacturing, R&D, logistics, etc.
- Scalability: How easily the business can grow without increasing costs at the same pace.
📌 Examples of Business Models
- Retail: Buy in bulk, sell at markup. Example: DMart.
- Subscription: Recurring payments for ongoing service. Example: Netflix, SaaS companies.
- Marketplace: Platform connecting buyers and sellers. Example: Amazon, Zomato.
- Freemium: Basic version free, paid upgrades. Example: LinkedIn Premium, Canva.
- Aggregator: Gathers services under one brand. Example: OYO Rooms, Ola.
🎯 Why Business Model Analysis Matters
- Helps understand the sustainability and competitiveness of the company.
- Reveals risk areas — dependence on few customers, high costs, lack of moat.
- Improves forecasting of revenue and profit trends.
- Provides insight into operational leverage and pricing power.
7.3: Pricing Power and Sustainability of This Power
Pricing power is a company’s ability to raise prices without significantly affecting demand. It shows the strength of the brand, product differentiation, and customer loyalty. Businesses with strong pricing power can protect or improve margins even during inflation or rising input costs.
💡 How Do You Know a Company Has Pricing Power?
- It raises prices but still maintains or grows sales volume.
- Its customers stay loyal despite premium pricing.
- Margins remain stable even when raw material costs increase.
- Revenue per unit rises faster than volume growth.
📊 Visual Comparison: High vs Low Pricing Power
🚀 High Pricing Power
- Apple (Tech)
- Nestlé, HUL (FMCG)
- Titan (Jewellery)
- Asian Paints (Decoratives)
- Maruti in Entry Segment (Brand Loyalty)
- Patented Pharma Products
⚠️ Low Pricing Power
- Commodity Chemicals
- Textile/Garment Exporters
- Generic Pharma Players
- Construction & Infra Contractors
- Agri-Products (Highly Price Sensitive)
- Paper Industry (Low Branding)
🔁 What Makes Pricing Power Sustainable?
- Strong Brand: Customers emotionally or habitually choose the company.
- Unique Product/Service: No close substitute in quality or features.
- Premium Experience: Smooth delivery, customer service, trust.
- Fewer Competitors: Monopoly or oligopoly conditions preserve margins.
🎯 What Should Analysts Look For?
- Stable or rising margins despite rising input costs.
- Repeated successful price hikes in company filings or investor calls.
- Premium valuation vs peers (often reflects embedded pricing power).
- Low customer churn and high repeat usage.
7.4: Competitive Advantages / Points of Differentiation
A company’s competitive advantage is what sets it apart from its competitors and allows it to perform better consistently. These advantages — also called moats — protect a business from threats and help maintain pricing power, profitability, and market share over time.
🛡 What Makes an Advantage “Competitive”?
- It’s not easily replicable by competitors.
- It helps the company retain customers and command premium pricing.
- It shows up in long-term margin strength and market dominance.
📊 Common Competitive Advantages
🏷 Brand Strength
Customers associate quality or trust with the name. Example: Apple, HUL, Amul.
⚙️ Cost Leadership
Lowest cost of production leads to pricing flexibility. Example: DMart, Indigo Airlines.
🔒 Intellectual Property
Patents, trademarks, and tech create legal barriers. Example: Pharma, Tesla.
🌐 Network Effect
More users make the product/service more valuable. Example: Google, WhatsApp, UPI platforms.
🚚 Distribution Reach
Faster, deeper, or more efficient access to customers. Example: Asian Paints, Britannia.
🧩 Customization / Niche Offering
Tailored products for specific needs. Example: L&T (infra), niche IT service firms.
🔁 How to Judge Sustainability
- Is it dependent on a single person or process? If yes, it’s fragile.
- Is the moat increasing over time or being eroded by tech/regulation?
- Are competitors catching up? If not, the edge may be sustainable.
🎯 Analyst Checklist
- Compare ROCE and margin trends with peers.
- Study brand value, patents, and exclusive contracts.
- Read management commentary on why customers choose them over others.
- Check entry barriers for new competitors in that space.
7.5: SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats)
SWOT analysis is a simple yet powerful strategic tool used to assess a company’s overall position in the market. It helps analysts evaluate internal capabilities and external opportunities or risks. By understanding a company’s strengths and weaknesses alongside the industry’s opportunities and threats, investors can make more informed decisions.
7.5.1 💪 Strengths
These are internal capabilities that give a company a competitive edge. Strengths help drive profitability, customer loyalty, and long-term sustainability.
- Brand Equity: HUL and Asian Paints enjoy top-of-mind brand recall in their segments.
- Cost Leadership: DMart’s efficient backend operations allow aggressive pricing.
- Distribution Reach: Britannia reaches deep rural markets efficiently.
- Strong R&D: Dr. Reddy’s and Sun Pharma lead in innovation and formulations.
7.5.2 ⚠️ Weaknesses
Weaknesses are internal limitations that can affect growth, profitability, or execution. These may expose the business to risk from competitors.
- High Leverage: Infrastructure or real estate firms with high debt loads.
- Limited Digital Presence: Traditional companies slow to adopt online channels.
- Product Dependency: A company overly reliant on one blockbuster product.
- Low Operating Margins: Thin profitability in sectors like textiles or agriculture exports.
7.5.3 🌱 Opportunities
These are external trends or untapped markets that the company can use to grow revenue and expand market share.
- Expanding Rural Demand: FMCG and auto sectors gaining traction in smaller towns.
- Regulatory Reforms: Production-linked incentives (PLI) schemes can boost sectors like electronics and solar.
- Export Potential: Apparel, chemicals, and engineering goods gaining global market share.
- New Segments: Fintech, EVs, and green energy offer strong long-term growth.
7.5.4 ⚡ Threats
Threats are external risks that could negatively affect a company’s performance. These may come from competitors, market changes, or policy shifts.
- Raw Material Inflation: Steel, cement, and packaging industries are exposed to global price shocks.
- Disruption by Startups: Legacy banks face threats from agile fintechs.
- Regulatory Risks: Changes in GST, FDI norms, or environmental compliance.
- Currency Volatility: Impacts exporters and sectors with import dependencies.
7.6: Quality of Management and Governance Structure
One of the most important factors in evaluating a company is the quality of its leadership and governance. Management decisions shape a company’s future, while governance ensures transparency, fairness, and protection of stakeholder interests.
7.6.1 🧠 Evaluating Management Competency
Competent management is key to navigating business cycles, driving innovation, and maintaining market leadership.
- Track Record: Has the team successfully scaled or turned around businesses before?
- Execution Capability: Can the management deliver on announced plans and projects?
- Capital Allocation: Do they reinvest wisely — in high-return areas or value-accretive acquisitions?
- Strategic Vision: Does the leadership show clear long-term thinking backed by action?
- Skin in the Game: Do promoters and key management own meaningful stakes?
7.6.2 ⚖️ Evaluating Corporate Governance
Governance ensures the company operates ethically and in the best interest of all stakeholders, especially minority shareholders.
- Board Independence: Presence of independent directors who can question decisions.
- Audit Quality: Transparent and regular financial disclosures with clean audit reports.
- Shareholder Rights: Equal treatment for all investors, fair dividend and buyback practices.
- Compliance: Adherence to SEBI, company law, and listing norms without frequent penalties.
- Red Flags: Frequent resignations of auditors, high related-party transactions, or opaque disclosures.
7.6.3 📈 Promoter Holdings
Promoter holding reflects the long-term commitment and involvement of the founding team or controlling group.
- High Holding: Often indicates strong confidence in business prospects.
- Low or Declining Holding: Could suggest dilution, exit planning, or lack of interest.
- Pledged Shares: A warning signal, especially if a large portion of promoter holding is pledged.
- Disclosures: Regularly track filings and bulk deal activity to monitor any changes.
7.7: Risks in the Business
Every business is exposed to certain risks that can impact its performance, valuation, and investor confidence. Identifying and understanding these risks is essential for evaluating the sustainability and predictability of a company’s future earnings.
⚠️ Types of Business Risks
🔁 Operational Risk
Risks related to day-to-day activities like plant shutdowns, system failures, poor execution, or labor issues.
📉 Financial Risk
Includes high debt, weak cash flows, or rising interest burdens affecting solvency and credit rating.
📦 Supply Chain Risk
Risks of raw material shortages, logistics disruptions, and price volatility.
📜 Regulatory Risk
Changes in laws, compliance norms, or sector-specific rules (e.g., price caps, license cancellations).
⚔️ Competitive Risk
Threat from new entrants, global players, or fast-moving startups with disruptive models.
🌍 Macro/Economic Risk
Interest rate hikes, inflation, foreign exchange swings, or recessionary trends affecting demand and cost.
🎯 Analyst Considerations
- Check company risk disclosures in annual reports and investor presentations.
- Review credit rating reports for sector-specific and company-level risk factors.
- Track business continuity plans and management commentary in times of crisis.
- Compare historical volatility in earnings and margins versus peers.
7.8: History of Credit Rating
Credit ratings reflect the creditworthiness of a company or its debt instruments. The history of these ratings provides insights into how the company has managed its financial obligations over time. Frequent upgrades or downgrades in credit rating can impact investor perception, borrowing cost, and stock valuation.
🔍 What Credit Ratings Indicate
- Higher Rating (e.g., AAA): Indicates strong ability to meet debt obligations, low default risk.
- Lower Rating (e.g., BB or below): Suggests financial stress or high probability of default.
- Outlook (Stable / Positive / Negative): Shows the direction in which the rating may move in the near future.
📊 Why Historical Ratings Matter to Analysts
- Reveals how the company’s financial risk has evolved over time.
- Shows responsiveness to external challenges (e.g., interest hikes, market shocks).
- Frequent downgrades may indicate management stress or poor capital structure.
- Consistent rating upgrades reflect strong governance, discipline, and growth management.
🏢 Agencies That Provide Ratings in India
- CRISIL (S&P Global)
- ICRA (Moody’s)
- CARE Ratings
- India Ratings & Research (Fitch)
- Brickwork Ratings, Acuité, and others
🎯 Analyst Checklist
- Review historical ratings and any changes in the last 2–3 years.
- Read rationale documents published by agencies — they explain what triggered the change.
- Track changes in outlook — a shift from “Stable” to “Negative” is a red flag.
- Compare credit ratings across peers in the same industry.
7.9: ESG Framework for Company Analysis
ESG stands for Environmental, Social, and Governance. It is a non-financial framework used to evaluate how responsibly a company operates. ESG factors are increasingly used by investors to identify long-term risks, reputation concerns, and ethical investing opportunities.
📊 What Does ESG Include?
- Environmental: Impact on climate, waste management, carbon emissions, use of renewable energy.
- Social: Labor practices, employee welfare, diversity, community engagement, customer satisfaction.
- Governance: Board independence, executive compensation, shareholder rights, audit quality, anti-corruption policies.
🌱 Why ESG Matters in Company Analysis
- Companies with strong ESG profiles often show better risk management and long-term value creation.
- Failure on ESG grounds can lead to regulatory fines, public backlash, or loss of investor confidence.
- Global funds increasingly allocate capital based on ESG scoring.
- SEBI has mandated BRSR (Business Responsibility and Sustainability Reporting) for top Indian companies.
📌 Real-World Examples
- Environmental: Tata Power’s move into solar, NTPC’s green transition.
- Social: Infosys’s focus on upskilling and diversity in the workforce.
- Governance: HDFC Bank’s independent board structure and transparent disclosures.
🎯 Analyst View
- Review the company’s annual BRSR or sustainability report.
- Track ESG scores from providers like MSCI, Refinitiv, or CRISIL.
- Look for patterns like repeated regulatory violations or employee disputes.
- ESG risk is long-term — it’s about reputation, compliance, and resilience.
7.10: Sources of Information for Analysis
Reliable information is essential for effective company analysis. A good analyst uses a combination of public documents, databases, direct interactions, and expert commentary to understand a company’s business, financials, and future strategy.
📄 Company Disclosures & Financial Reports
- Annual Reports: Most detailed source — includes business overview, MD&A, financials, risks, and auditor’s report.
- Quarterly Results: For tracking operational performance and margin trends.
- Investor Presentations: Management commentary on strategy, updates, and segment plans.
- Shareholding Patterns: Track promoter, FII, DII, and public holding each quarter.
📈 Exchanges, SEBI, and MCA Filings
- Stock Exchange Filings (BSE/NSE): Corporate announcements, board decisions, dividends, and disclosures.
- SEBI: Regulations, insider trading reports, and mandatory governance updates.
- MCA (Ministry of Corporate Affairs): For accessing company registration info, filings, and director details.
🔍 Rating & Research Reports
- CRISIL, ICRA, CARE Ratings: Credit rating reports provide risk perspective and funding profile.
- Brokerage & Equity Research: SWOT, peer comparison, valuation insights, and forecasts.
- Business Channels & Portals: Moneycontrol, Screener, Bloomberg, Reuters — for news flow and financial summaries.
👥 Management Interaction & Ground Checks
- Attend earnings calls or analyst meets for forward-looking statements.
- Interact with employees, suppliers, dealers for on-ground insights.
- Monitor conference transcripts, industry webinars, and AGMs for tone and future strategy.
