How to Do Industry Analysis?

 

1x1.trans 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 about how to do industry analysis.

 The Need for Industry Analysis 

Industry analysis is an essential responsibility for an equity research analyst.

As an equity research analyst, you need to analyze a particular industry, see its past trends, demand-supply mechanics and future outlook.

The industry analysis report sheds light on the economic health of the company, underlining the understanding whether it will be beneficial for the stakeholders to invest in such a company and offering recommendations and/or corrective actions to take in case of any untoward developments in the company.

As an equity research analyst, 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 be aware of industry dynamics and hence, it is important to know how to do industry analysis.

How to do Industry Analysis?

An industry analysis is a complicated and time consuming process. If any of the dimensions are missed, the whole analysis becomes faulty. Therefore, in this section, I have highlighted all the necessary steps telling you how to do industry analysis. Use these steps and apply it in your analysis.

What are the steps? Here you go:

1. Review available reports

Read all the available but relevant industry reports and statistics to see whether it makes sense to dig deeper.

Some of the reports you will find already contain in-depth information that the need for new industry analysis is eliminated.

However, it is unwise to depend on existing industry analysis reports as the market is always volatile and industry factors change constantly.

Therefore, pick up a current report and envisage its relevancy in the current market.

2. Approach the correct industry

An industry has sub-parts. For example, if you look at the chemical industry, you will find sub-industries like Fertilizers, Pesticides, Paints and Varnishes, Organic chemicals.

Therefore, it is important to focus on the relevant industry. Without this, it will be impossible to draw an accurate industry analysis report. So, take up an industry and find out the sub-industries. Select the one which suits the company’s purpose. Moreover, it is worthwhile to look at the different market segments in a particular industry.

3. Demand & supply scenario

As any economist will know, demand and supply are the primary factors governing any market. Hence, it becomes relevant to look into the demand-supply scenario for a particular product or industry by studying its past trends and forecasting future outlook.

You can do comparative analysis with other companyies competing in the same manner to find out the economic health of the company under consideration.

Future demand and supply forecasting helps investors understand the viability of future investments in terms of profits and losses.

4. Competitive scenario

This is the most important step of any industry analysis. In this, you need to study the competitive scenario using Porter’s Five Forces Model.

The model acts as the framework of industry analysis. 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:

  1. Barriers to Entry
  2. Supplier Power
  3. Threat of Substitutes
  4. Buyer Power
  5. Degree of Rivalry

The Porter’s model is extensively used while analyzing any industry.

5. Recent developments

Any industry analysis report isn’t just about studying the particular industry on a micro-level.

The analyst needs to incorporate influencing factors at the macro-level. These macro-level factors include recent industrial developments, innovation in your industry analysis report, sector valuations and global comparative valuation.

6. Focus on industry dynamics

The industry analysis should be specific to a particular industry and thus, it is important to focus and understand the industry dynamics. Your industry analysis should be in-depth and to-the-point.

For example, if you are tracking the aluminum industry, you should know the per capita consumption in the country.

In India, the per capita consumption of aluminum is 1 Kg, in USA, it is 25 to 30 Kgs, in Japan, it is 15 Kgs and in Taiwan, it is 10 Kgs. Apart from the consumption, you should also know the production of aluminum worldwide.

The above six 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 hiring you.

How to Write an Industry Analysis?

In the last section, we learned how to do industry analysis and in this, we will see how to write one.

Writing is also a required skill as you need to present all the findings within a written report in a concise and clear manner.

Begin by writing a concise overview of the industry.

Mention historical data and the nature of the industry, including its growth potential.

State the influencing economical factors and most importantly, don’t forget mentioning the purpose of your industry analysis.

The concise overview of the industry should include its competitors and their operations.

You can write this in the next section. Write about similar products and services.

Now, with the overview aside, move on the detailed analytical presentation of the specific industry.

Highlight factors like geographical growth, consumer base, price fluctuations, past performances and income projections.

Use existing financial data and industry understanding to forecast industry growth for the next five or ten years. You can use statistical graph in this section.

The next sections should be about using Porter’s Five Forces model and a detailed write-up about its five factors, its use and repercussions in the industry. Don’t forget mentioning governmental regulations relevant to the industry.

Lastly, give long-term and short-term valuations impacting the industry such as any foreseeable problems impacting the business in a negative fashion and potential corrective measures. Wind up the industry analysis report with a very three or four line summarization.

Endnote

Have you ever thought of learning the skill of industry analysis and want to know how to write an industry report?

Share your thoughts and experience here.

 

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1x1.trans How to Do Industry Analysis?

45 Responses to “How to Do Industry Analysis?”

Read below or add a comment...

  1. bi says:

    Hi, I have two questions!

    I am task to do an industry analysis for the global construction market.

    1) I am having troubles finding data for the global market :( Any recommendations?
    2) Where can I find an example of an industry report. Not just a website teaching me the steps.

    Thank you!

  2. kiran says:

    Australian Retail Industry and ecommerce industry Research. I need stats on total retail sales by Australian state comparing total ecommerce sales and total in store sales.
    Will somebody guide me how to proceed ?

  3. Zulfiqar says:

    Please let me know about the Financial Engineering. Whats it scope? and Its application.

    • Hi Zulfiqar,

      Financial Engineering is a combination of finance and mathematics. It’s also called quantitative finance/ mathematical finance.

      You’ll find its application in different fields- corporate finance, structured products (derivatives), risk management, investment banking, hedge funds and money management.

  4. Rancho says:

    Hi Avadhut,

    My Background -

    My Qualifications
    MBA Finance,
    CFA Level 1,
    NSE Level 2,

    Experience
    Loan admin @Commercial Mortgage servicing company(Mortgage servicing) – 1 year
    Finance Admin@ Manufacturing firm(Preparing balance sheets,audit,budgeting sales, inventory) – 1 year

    My Questions
    1) i would like get into a equity research firm as equity research analyst or any firm where i would work on price valuation of bonds and derivatives. How do you suggest i go for it and Please list specific skills for each of them?
    2) Most of the Financial Modelling courses i find teach company valuations, Financial statement projections… do you know any course where i can learn to model pricing of bonds and derivatives
    3) I find most of the equity research jobs ask for specific industry expertise, how do i develop knowledge about a specific industry

    Thanks

    • Avadhut says:

      Hi Rancho,

      1) Equity research firms are into equities, not into bonds or derivatives. No idea of skills required for the role.
      2) You should go for financial engineering programs. Check NISM programs.
      3) Read this post once again. Take any industry which you understand well…at least basic level. Then take 3-4 companies in that. Read Annual reports of these companies thoroughly – from first page to last page. You will understand the business model of these companies. Then look at the major players in the industry and see how do they run the business.

      Hope this helps.

  5. PRASENJIT SAHA says:

    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.

  6. Kelis Boothe says:

    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.

  7. ajay says:

    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

    • Avadhut says:

      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

  8. PRASENJIT SAHA says:

    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.

    • Avadhut says:

      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

      • PRASENJIT SAHA says:

        Thank you very much sir, You are really helpful.

      • PRASENJIT SAHA says:

        Hello Sir,

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

        Thank you.

        • Avadhut says:

          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)

  9. PRASENJIT SAHA says:

    Great Article, Really helpful for me.

    Thank you very much sir.

  10. 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??

  11. Ankit Gandhi says:

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

  12. K Syed Azeem Hussainy says:

    Hi Sir,

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

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