How to write industry reports or industry analysis in your equity research report?
In this chapter, I will explain the importance of providing a snapshot of the industry in which the organization is functioning.
I will also explain various frameworks such as Porter’s five forces model and PESTLE analysis and shows how to use them while writing equity research reports.
In the earlier chapter we learnt how to provide information about the company we are writing the equity research report on and what all things to include.
Now we will go to the next part where we will talk about the industry in which the company functions.
Taking the earlier example of Cipla, which is a leading Indian Pharmaceutical company, an important segment of the equity research report will be a brief on the Indian Pharmaceutical industry.
The company which we are covering under the report is a subset of the industry and its performance will be quite directly related to the industry’s performance. So most good analysts always add a brief on the industry in their equity reports.
This part is utmost important when you are creating an industry report.
It should give the reader a quick snapshot of the industry.
Things to include are a brief overview, intelligence on the current scenario, latest happenings; new entrants in the industry, any change in government regulations which might affect the industry, drivers and challenges to the industry.
If you see the above example , here see how the analyst has first given an introduction about the Indian Pharmaceutical industry.
He talks about how many players there are in the Indian Pharmaceutical industry, and also tells us how many are large units and how many are small units.
He also talks about the share of imports which would give the reader a clear picture of the industry.
Then he talks about the growth so far of the industry, followed by drivers of growth.
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He gives information on the recent key M&A activities in the industry and finally ends with predicted growth of the industry.
It is also very important to give a brief on the challenges that the industry is facing or can face going forward.
This is very important as these challenges will also affect the future performance of the company under the report.
If you see the above example, you'll notice that how the analyst has brought out the various challenges that the Indian Pharmaceutical industry currently faces or can face going ahead.
He has talked about how changes made by the changes made by the US regulator FDA can impact the revenues of Indian Pharmaceutical companies.
He also talks about how the changes in the Indian government regulations can negatively impact the M&A scenario in the Indian Pharmaceutical industry.
Then he also talks about other authorities and how they impact the industry.
So where will you get all this information about the industry? First thing to do is to see if there is any industry association for the industry. These associations generally have good information about the industry on their websites.
Another source is to look at annual reports or quarterly reports of key industry players. These reports generally provide very good information about the industry in which the company functions in.
Else you can browse the web for information about the industry or conduct quick interviews with key industry experts who generally have good information on the industries.
Below is another example of an industry overview. This is for the US IT industry focusing on the enterprise resource planning application market.
Here have a look at how the analyst has combined intelligence on the industry as well as the company he is writing the report on.
The analyst has also given a quick comparison on the market size and revenue growth rates which will help a reader gauge the actual growth of the industry.
Notice again how the analyst talks about the growth of the industry. But here he has given specific information on the key players in this industry.
A. Porters 5 Forces Model
Another important technique or framework that you can use for this industry overview segment is the Porter’s 5 forces model.
Porter’s Model is actually a business strategy tool that helps in analyzing the attractiveness in an industry structure. It lets you access current strength of your competitive position and the strength of the position that you are planning to attain.
Porter’s model of competitive forces assumes that there are five competitive forces that identify the competitive power in a business situation. These five competitive forces identified by the Michael Porter are:
- Supplier Power: The power of suppliers to drive up the prices of your inputs.
- Buyer Power: The power of your customers to drive down your prices.
- Competitive Rivalry: The strength of competition in the industry.
- The Threat of Substitution: The extent to which different products and services can be used in place of your own.
- The Threat of New Entry: The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down).
This model tells you how attractive or unattractive the particular industry is based on the 5 forces.
Below is an example of Porter’s five force model being used to describe the Indian Pharmaceutical industry:
Here are some other sources where you can look up information on Porter’s 5 force model:
B. PESTLE Analysis
Another interesting tool that you can use is the PESTLE analysis.
The PESTLE analysis is a useful tool for understanding market growth or decline, and as such the position, potential and direction for a business.
PESTLE in its expanded form denotes P for Political, E for Economic, S for Social, T for Technological, L for Legal and E for Environmental.
It gives a bird’s eye view of the whole environment from many different angles that one wants to check and keep a track of while contemplating on a certain idea/plan.
Below given is an example of a PESTLE analysis done on the Indian Pharmaceutical industry:
Some sources where you can get more info on PESTLE analysis are:
I hope now you have understood how to write the industry overview segment in an equity research report.
Once again I’d like to reiterate that this is very important when you are writing an industry report, segment report or a sector report.