SECURITY ANALYSIS &

PORTFOLIO
MANAGEMENT
DR. HEMANT MANUJ

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INDUSTRY ANALYSIS

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 SESSION FLOW – INDUSTRY ANALYSIS
 Overview

 Key factors to be considered

 Data and trend analysis

Courage. Heart 3
 INDUSTRY ANALYSIS
 Varying performance of different industries
 Sensitivity to economic growth
 Sales – based on elasticity of demand
 FMCG vs steel
 Operating leverage – higher for more capital intensive industries
 Financial leverage – higher for certain sectors
 Banks, infrastructure utilities

Courage. Heart 4
 INDUSTRY STRUCTURE – DETERMINANTS OF COMPETITIVE ADVANTAGE
1. Barriers to entry Porter’s 5 forces
• Time & cost of entry
 Banking, Airports • Specialist knowledge
• Economies of scale
Threat of
• No. of customers
• Cost advantages New • Size of a typical order
2. Intensity of existing competition • Technology protection entry • Price sensitivity
• Barriers to entry • Ability to substitute
 Airlines
• Cost of shifting

3. Pressure from substitute products Competitive

 Computers – mobile phones
4. Competitive (bargaining) power of
buyers
 Automobile components, FMCG
5. Competitive (bargaining) power of
suppliers
Rivalry
Supplier • No. of competitors Buyer
Power • Quality differences Power
• Cost of shifting
• Customer loyalty
• No. of suppliers
• Size of suppliers
Threat of
• Uniqueness of service
• Ability to substitute Substituti
• Cost of shifting on • Substitute performance
• Cost of shifting

Courage. Heart
 Sugar 5
 INDUSTRY ANALYSIS
 Any industry analysis should :
 Be supported by facts
 Clearly suggest whether an industry is likely to fall or prosper in future

 Two part appraisal process:

1. Assessment of past performance value
1. Based solely on the past track record
2. Assumes that past growth rate would continue in future
3. Gives individual weights to profitability, stability, and growth
2. Modification of past performance value
1. Senior analyst lays down the framework and principles
2. Junior analyst collates the data and applies the laid down principles

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 DEFINING AN INDUSTRY
 Basis of industry classification  U.S. industry classification
 Dimensions – Products, End usage,  North American Industry
o Are all steel products used for same purpose ? Classification System (NAICS) code
 Homogeneity within the industry
o Are all software firms alike?
 Size – How small can an industry be?  Collection and analysis data from any
o Graphite electrodes – only two companies, HEG
source, e.g. CMIE, requires use of
and Graphite India
industry codes

 Industry classification codes

 RBI – Basic Statistical return (BSR) code
 National Industry Classification (NIC) – 2004
 Registrar of Companies (ROC)
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 SOURCES OF DATA
 Secondary data sources
 All Industry Associations – CII, FICCI, etc
 Specific Industry Associations – Automotive Tyre Manufacturers’ Association (ATMA)
 Government and regulatory bodies
 Independent Research Agencies – CMIE, Rating agencies
 Broker research, media reports
 Company annual reports

 Primary data sources

 Company and industry meetings, conference calls
 Sales and supply chain partners

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TYRE INDUSTRY

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 FIRST CUT IMPRESSION
 What is the initial impression – would you look at this for picking a stock ?
 Not in the front line of stocks
 Unlike FMCG, IT, Pharma, Steel

 The “famous” investors rarely talk of this !

 Question – Is value found in popular industries / stocks only?

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 INDUSTRY STRUCTURE

Tyre Industry

Products Customer

2 wheeler Passenger cars

OEMs Replacement

Commercial
vehicles Tractors

Others

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 SOURCES OF DATA
 Secondary sources
 CMIE industry and company reports
 Tyre industry association : http://atmaindia.org/production-export-trend/

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 KEY FACTORS
 What are the key determinants of the performance of companies in the industry ?
 Key factors in tyre industry

Sr No. Factor Remarks

1 Competitive structure
2 Revenue - Vehicle sales
3 Raw material – Rubber price
4 Raw material – Carbon black, steel
wire, chemicals, power, water
5 Imports
Number and size of players
Consolidation happening?
OEM, replacement demand
Domestic, imported
Diversified sources
Domestic, imported
Tariffs, other restrictions, exchange rates
Long/ short term contracts

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 KEY FACTORS
 Key factors in tyre industry

Sr No. Factor Remarks

6 Capital expenditure Technology or demand led
7 Regulations, technology BS-VI advancement, GST impact, Transport
policy changes

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INDUSTRY STRUCTURE
 Industry structure (FY18)
 Industry size
 Turnover = Rs. 57,000 cr (US$8.7 bn)
(source: ATMA)
 0.3% of GDP
 4 companies hold 67 % of the market share
 Demand :
 OEM: 35% (volume), 45% (value)
 Replacement: 65% (volume), 55% (value)

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PERFORMANCE

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 TREND ANALYSIS
 What has been the historical trend and the current status of key parameters?
Parameter Question to ask Implication Score
(on 10)
Asset Has sales been growing consistently? • Growth in market size
turnover Are assets growing in line with sales? • Correlation with economic growth
Why? • Prudence in capital expenditure
• Controllable vs exogenous factors
• Linkage to economy and other industries
Margin What is the trend in operating margin, net • Input costs – material, labour
margin? Why? • Output prices – Industry structure –
concentrated/ fragmented – pricing power
• Working capital management
Capital What is the trend in the cost of debt? • Availability and cost of funds in the economy
costs Change in capital structure? • Risk premium for the industry

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 TREND ANALYSIS

Parameter Question to ask Implication Score

(on 10)
Structural Are there signs of structural (as against • Impact of technology on cost, quality
factors cyclical) change in the industry? • Innovation in production, delivery systems
• Alternate products being introduced for
similar end-use

Cyclical Are the sales impacted by current • Economic cycles – mainly investment
factors economic or industrial cycle? related
• Industrial factors – monsoon, elections
Internation Are there significant exports or imports of • Global competitiveness
al trade the products ? • Tariff and non-tariff barriers

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 FINANCIAL COMPANY

Parameter Question to ask Implication Score

(on 10)
Margin What is the trend in the net interest • Ability to pass on increase in cost of funds
margin (NIM) and the loan spread* ? • Competitive pressure

What is the CASA ratio?

Growth in What is the trend? • Correlation with economic growth
income • Ability to gain market share
• Reach, distribution of products
Funded vs How is the proportion of fee income over • Ability to provide universal service
fee time? • Franchise value
income What are the components of fee income? •

 NIM = (Lending rate * Loan amount – Borrowing rate * Borrowed amount)/ Loan amount
 Spread = Lending rate – Borrowing rate

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 FINANCIAL COMPANY

Parameter Question to ask Implication Score

(on 10)
Loan What is the current status and the past • Ability to underwrite good loans
quality trend of non performing assets (NPAs)? • Ability to predict delinquencies and exit
from the same
Capital Is the bank optimally capitalised? • Buffer for future growth
adequacy • Ability to absorb unexpected losses
Provisioni Is it well reasoned, consistent, and
ng policy transparent?

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 MEDIA REPORTS
 Tyre makers will invest around Rs 20,000 cr over the next three years as the industry is
optimistic that demand would grow by 7-9% during FY19-23 (Business Standard, April
27, 2019)
 Pre-buying of BSVI vehicles expected in H2FY20

 Rolling with the punches: Slowdown in auto sales drags tyre industry (www.business-
standard.com, May 16, 2019)

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