Industry Analysis

Chapter 7

Security Analysis

2

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

Porter’s five forces

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Benefits of Industry Analysis Studies show different industries perform differently over time

Past performance is not an indicator of future…

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Who says fundamentals don’t work in Pakistan?

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Who says fundamentals don’t work in Pakistan?

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Stock Market & Economic Cycle

Financial Stocks perform well

Consumer Durables perform well

Capital Goods perform well

Basic Industries perform well

Consumer Staples perform

well

These are relative performances

7

Demand Supply Analysis

Pakistani Cement Industry

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Supply (mt) Demand (mt) Prices (Rs/bag)

D/S (mt) Price (Rs/ bag)

8

Thank you Mr. Porter!

Industry Competitors

Rivalry among Existing Firms

Suppliers Buyers

Substitutes

Potential Entrants

Threat of New Entrants

Bargaining Power of Buyers

Threat of Substitute Products or Services

Bargaining Power of Suppliers

Earning Drivers of Key Industries

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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

11

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

12

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

14

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

15

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

16

Thank you