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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