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How to Do Industry Analysis?

 

Industry Analysis How to Do Industry Analysis?

Industry Analysis

 

In my last article, I covered how to predict earnings of a company and today I am going to write on industry analysis.

As an equity research analyst, you need to analyze a particular industry, see the past trends, demand-supply mechanics and future outlook. You might work on industries like Oil and Gas, Metal, Information Technology, Automobile, Financial Services, Infrastructure, Pharmaceuticals and Consumer durables.

In some companies, there is a dedicated industry analyst who will work on the assigned industry and provide the analysis. However, as an analyst you should know the industry dynamics and hence it is important to know how to do industry analysis.

Steps in industry analysis:

1. Read the available industry reports and statistics, see whether it makes sense to dig deeper.

2. There are sub-parts in industries. For example, if you look at chemical industry, you will find sub-industries like Fertilizers, Pesticides, Paints and Varnishes, Organic chemicals. It is important to focus on the relevant industry. Also look at the different market segments in a particular industry.

3.  Look at the demand-supply scenario for a particular product/ industry by studying the past trends and forecasting future outlook.

4. Study the competitive scenario: There is a framework of industry analysis. It is called “Porter’s five forces” model.  Michael Porter, a famous strategist and author, first came up with this model. In this model, five parameters are analyzed to see the competitive landscape. They are

a) Barriers to entry,

b) Supplier Power,

c)Threat of substitutes,

d) Buyer power, and

e) Degree of rivalry

This model is used extensively while analyzing any industry.

5. Study and include recent developments, innovation in your industry analysis report.

6. Look at sector valuations and global comparative valuations.

7. The analysis should be specific to a particular industry and so it is important to focus and understand the industry dynamics.

8. Your industry analysis should be in-depth and to-the-point. For example, if you are tracking aluminum industry, you should know per capita consumption in the country. In India, per capita consumption of aluminum is 1 Kg, in US it is 25 to 30 Kgs, in Japan it is 15 Kgs, in Taiwan it is 10 Kgs. Apart from the consumption, you should also know the production of aluminum worldwide.

The above steps are important and you, as an analyst, should follow them. The analysts in private equity, investments banks, equity research firms, investment research firms need this skill and if you know how to do industry analysis, you are ahead of 80% of the aspirants as this will not only impress your interviewer, but also add immense value to you and the company you are working for.

Have you ever thought of learning this industry analysis skill and want to know how to write an industry report? Share your thoughts and experience here.

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28 Responses to “How to Do Industry Analysis?”

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  1. PRASENJIT SAHA says:
    May 10, 2013 at 12:47 pm

    Hello sir, I have finished with the financial analysis of the companies ( Sunpharma, SPARC, Wyeth, Ajanta Pharma, Natco) like ratios and balance sheet analysis.

    So what is the next step should I follow that I can give a call on this companies.

    Reply
  2. Kelis Boothe says:
    April 30, 2013 at 9:28 pm

    Avadhut

    Great article, I am currently doing a research internship and would like to do an industry analysis of gaming & lottery industry. Can you please guide me as to how to proceed. Your advice will be greatly appreciated.

    Reply
  3. ajay says:
    April 16, 2013 at 10:29 am

    Hi Avadhut,

    I am currently doing my summer internship. I want to perform an industry analysis on “Online Confectionery Gifting worldwide” to estimate the business potential and take a decision about launching a new website.
    Can you please guide me through this.

    Regards
    Ajay

    Reply
    • Avadhut says:
      April 17, 2013 at 2:44 pm

      Hi Ajay,
      You need to do market research for that. If you don’t have the resources, find a report by research agencies.

      Regards,
      Avadhut

      Reply
  4. PRASENJIT SAHA says:
    April 1, 2013 at 11:47 am

    Hello Sir, I am doing my summer internship in equity research. I have taken up the pharma sector, So if you can kindly guide how should I proceed and what should be my ultimate goal(the final output) that will be getting. I would be really thankful if you can guide me as I am unable to understand what should I do as I am not getting much of cooperation from my mentor.

    Reply
    • Avadhut says:
      April 1, 2013 at 12:50 pm

      Hi Prasenjit,

      If you have taken Pharma industry for analysis, then your goal should be to find out top 3-5 companies for investment.

      First of all use Porter’s 5-forces model on Pharma industry. You can also visit this link for more information.

      Use your own parameters to select the best companies.

      Hope this helps.

      Regards,
      Avadhut

      Reply
      • PRASENJIT SAHA says:
        April 1, 2013 at 2:19 pm

        Thank you very much sir, You are really helpful.

        Reply
      • PRASENJIT SAHA says:
        April 2, 2013 at 12:39 pm

        Hello Sir,

        I would request you guide me, like what parameters should i select for selecting the best companies.??

        Thank you.

        Reply
        • Avadhut says:
          April 3, 2013 at 4:21 pm

          Hi Prasenjit,

          Here are some important parameters that you can use:

          Financial Parameters for stock selection:

          •CAGR % in Sales and Profit
          •Your view about investing in this sector
          •Gross Profit % over last 8-10 years
          •Operating Profit % over last 8-10 years
          •Whether Operating Cash Flow > Net Profit
          •Operating Cash Flow = Net Income + Noncash Expenses + Changes in Working Capital
          •Debt-Equity Ratio –Lower the better
          •Current Ratio – Better than 1.5 preferable
          •Dividend Payout ratio
          •Altman Z-Score
          •Capital Turnover Ratio for last 10 years
          •Return on Equity and Return on Capital (ROE & ROCE) for last 8-10 years, higher ratios (15%+) shows management’s capital allocation skills.
          •Return on equity (%) = Earnings / Shareholders’ funds
          •Return on capital employed (%) = Operating profit / Shareholders’ funds + debt (and similar)

          Reply
  5. PRASENJIT SAHA says:
    March 15, 2013 at 12:09 pm

    Great Article, Really helpful for me.

    Thank you very much sir.

    Reply
  6. Anand Prashad says:
    November 10, 2012 at 11:30 pm

    Thanks for Such valuable information..on Industry analysis..really..can u please explain a practical example of industry analysis while we do fundamental analysis of a particular stock??

    Reply
  7. Ankit Gandhi says:
    March 22, 2011 at 11:23 am

    Thanks for making understand by taking famous concept of Michel Porter, i am also looking forward to some practical example of industry analysis.

    Reply
  8. K Syed Azeem Hussainy says:
    February 21, 2011 at 4:35 pm

    Hi Sir,

    Thanks for your valuable inputs, it has been really helpful. i hope you will keep up this good work

    Reply

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