Industry Analysis

Chapter 7
Security Analysis

Industry Analysis
Why Do Industry Analysis
Top Down Approach
Identify the relevant variables

Economic Cycles
Industry Life Cycle
Demand Supply Analysis
Pricing Power
Earning Drivers
Structure of Industry
Concentration and Herfindahl Indices

Porters five forces

Benefits of Industry Analysis

Studies show different industries perform differently over time

Past performance is not an indicator of future

Who says fundamentals dont work in Pakistan?

Who says fundamentals dont work in Pakistan?

Stock Market & Economic Cycle

These are relative performances

Demand Supply Analysis

Thank you Mr. Porter!

Potential Entrants
Threat of New Entrants

Bargaining Power of Suppliers

Industry
Competitors

Suppliers
Rivalry among
Existing Firms

Bargaining Power of Buyers

Buyers

Threat of Substitute Products or Services

Substitutes
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Earning Drivers of Key

Industries

Earning Drivers
Understand the business model first!
10% of items derive 90% of the value
Identify these 10% items (the Earning Drivers)
Focus on important issues

Nature of Earning Drivers

Economic variables
Industry Specific variables
Government Regulations
Industry Structure

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Looking at Key Industries

Autos
Purchasing Power, Affordability, Disposable Income, Interest Rates
Government policies > Import duties, Indigenization etc
Rupee/ Yen parity

Banking

Monetary policy, money supply, interest rates

Asset allocation Loans vs Investments, further break down of loans & inv.
Asset quality
Cost structures
Cost of deposits > asset allocation > return on funds > spreads

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Looking at Key Industries (contd.)

Cement
International vs Domestic prices
PSDP, Construction activity > domestic demand
Input costs > especially energy requirements

Fertilizer
Farm economics, support prices, previous crops, affordability
Input costs > gas prices

Gas Distribution
Asset base, because of fixed RoA formula, prices do not matter
T&D losses or UFG
Interest Rates
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Looking at Key Industries (contd.)

Oil & Gas Exploration
International oil prices
Reserve size > exploration activity > success ratio > reserve replacement
Interest rates (cash balances > other income)

Oil Refining
International Oil prices
Product mix, plant sophistication
Government regulation

Oil Marketing

POL consumption pattern

International oil prices > inventory gains/ losses
Fixed margins on regulated product
Product mix
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Looking at Key Industries (contd.)

Power Generation (IPPs)
Nothing matters!
Power Purchase Agreement
For new IPPs, things might be different

Telecom
Teledensity
ARPUs > Avg revenue per user
Composition of call traffic

Textiles

Cotton crop > cotton prices

Government regulations > bail out plans etc
Composition of sales > local vs exports
Rupee/ Dollar parity
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Looking at Key Industries (contd.)

Synthetics (PSF)

Blending ratio > international trend and local scenario

Cotton crop and cotton prices
International oil prices > input costs
International demand supply

FMCGs
Disposable income of consumer
Brand recognition/ acceptability

Recap on type of industries

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Thank you

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