Industry Analysis

1Why industry analysis matters

An industry is a group of firms offering the same or similar products for the same customer need (autos, insurance, steel). A business sector is a broader group of related industries (financial services: insurance, banking, rating, investment banking). An economic sector is a part of the economy contributing to national income (agriculture, manufacturing, utilities, services).

Questions to answer:

1. Which industry is the company in?
2. How much do economic cycles affect it?
3. What is its potential size?
4. How has it performed, and why?
5. How intense is competition, and how does that affect pricing power?
6. Which secular trends affect it, and are they causing value migration?
7. Are there regulatory headwinds or tailwinds?

Remember

• Industry ⊂ business sector; economic sector is the national-income view.

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2Defining the industry

Standard classifications include India's National Industry Classification (NIC), the Global Industry Classification Standard (GICS) and the US NAICS, but they may miss the substance. NIC puts entry-level and luxury car makers in one class, though their dynamics differ.

Example A cinema chain competes with TV and OTT streaming for audiences, and with theatre, live events and sport for time out of home. Too narrow a definition ("cinema exhibitors") misses competitors; too broad ("media and entertainment") mixes segments that are not comparable. If the business is driven by people's wish to go out, classify it as out-of-home entertainment; if by appetite for movie content, as entertainment media.

Example Standalone cameras now compete with phone cameras; defining cameras as a separate industry would ignore the biggest threat.

Classify a business with others that share its key drivers; this matters for choosing peers and valuation. GICS has four tiers: 11 sectors, 25 industry groups, 74 industries and 163 sub-industries.

Remember

• Define industries by common drivers, not labels.
• GICS: 11 / 25 / 74 / 163.

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3Industry cyclicality

• Defensive: demand has low income elasticity, so cycles barely matter; only secular trends do. Examples: food, agricultural inputs, healthcare.
• Semi-cyclical: sales rise in expansions and fall in recessions but keep a base level of demand. Example: consumer durables.
• Deep cyclical: extreme swings driven by economic or commodity cycles. Examples: capital goods, steel. Sales collapse in recessions as capex stops, then surge at the first signs of recovery on pent-up demand.

Remember

• Defensive: food, healthcare. Deep cyclical: capital goods, steel.

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4Market sizing and trend analysis

Under-penetrated industries have more room to grow; mature ones grow more slowly. Analysts estimate current and potential market size, which is hard with many unorganised or private players and many assumptions, so past trends help too.

• Top-down: start from macro data and work down (patients treated × average spend per patient = therapy market).
• Bottom-up: add up individual companies (each hospital's revenue from the therapy).

Example Three organised tyre makers earn ₹6,000, ₹8,000 and ₹10,000 crore (₹24,000 crore), and the unorganised sector is about 20% of sales. Organised = 80%, so the market ≈ 24,000 ÷ 0.8 = ₹30,000 crore.

Remember

• Top-down: macro → industry. Bottom-up: companies → industry.

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5Secular trends and their drivers

Secular trends are long-term shifts in production or consumption. Drivers:

1. Technology: horizontal drilling unlocked shale gas and lowered long-run hydrocarbon prices; digital cameras killed film, and phone cameras hit entry-level digital cameras; better batteries are driving EVs.
2. Rising incomes: people move to premium products.
3. Demographics: Japan's ageing population has reduced per capita beer consumption.
4. Culture and tastes: western influence raised demand for western clothing in Asia; changes can also be sudden (a pandemic).
5. Regulation and policy: GST made logistics more efficient and reduced demand for new commercial vehicles.

A new secular trend causes value migration and often an inflection in an industry's life cycle.

Remember

• Technology, income, demographics, culture, policy.

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6Value migration

Value migration is a lasting shift of advantage, and shareholder value, from some entities to others: those that adopt new technology or meet changing needs gain; laggards lose.

• Across geographies: shale gas moved value to US producers; globalisation helped low-cost China.
• Across industries: digital cameras crushed film, and Kodak went under.
• Across the value chain: fierce competition cut Indian telecom prices and telecom companies' value, but boosted digital content providers.
• Between companies: BlackBerry lost its edge with business users as new smartphone makers such as Apple offered similar services.

Spotting value migration early helps analysts invest ahead and exit losers.

Remember

• Four kinds: geography, industry, value chain, company.

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7The business life cycle

1. Pioneering: the concept is being proven; low adoption.
2. Growth: the concept works and adoption grows steeply.
3. Maturity: most potential customers already use it; few new ones.
4. Decline: new technology or tastes replace it.
5. Reinvention and revival (rare): a new use starts a fresh cycle.

Example Indian call taxis emerged around 2000, grew with phone penetration and incomes, then shrank sharply with app-based aggregators.

Each cycle displaces workers (who must reskill) and capacity. Not every secular trend displaces products: shale gas lowered oil prices without changing what is consumed. Secular trends show the long-term path; for the medium and short term, study cyclical trends.

Remember

• Pioneering → growth → maturity → decline → (revival).

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8Mapping the industry landscape

Industry landscaping studies all players and how they interact: competitors, customers, suppliers, regulators and emerging technologies, and what differentiates competitors. It shows how the industry will react to events: with low competition, firms can pass on cost increases and protect margins; with high competition, margins get squeezed. Established frameworks: Porter's five forces, PESTLE, the BCG matrix and SCP.

Remember

• Low competition → cost increases passed on.

9Porter's five forces: overview and rivalry

Michael Porter (1979) assesses industry attractiveness through five forces: three horizontal (threat of substitutes, threat of new entrants, rivalry among existing firms) and two vertical (bargaining power of suppliers and of buyers). Strong forces keep profits low in aviation, telecom, retail, textiles, sugar and power; weaker forces let education, FMCG, healthcare and IT earn high margins for long periods.

Warren Buffett: when brilliant management takes on a business with bad economics, the business's reputation survives intact; and if you are in a chronically leaking boat, changing boats beats patching leaks. Industry economics often matter more than management.

Rivalry is high when there are many players, products are undifferentiated, everyone competes the same way (price cuts, longer credit) and switching costs are low. High rivalry means lower pricing power and lower incomes; deep-pocketed players may price below cost to drive others out. Indian telecom, with price-sensitive prepaid users, is an example. Charlie Munger: if the only basis of competition is price, it is a self-defeating business. Firms can still do well through internal efficiency (less working capital, faster turnaround, lower cost of capital) and external differentiation (products, brands, positioning); Micromax won about 10% share in three years with special features at low prices.

Remember

• High rivalry → lower pricing power, lower incomes.

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10Substitutes, buyers and suppliers

Threat of substitutes: telegrams lost to SMS, cement pipes to steel and plastic, typewriters to computers, radios to phones. Kodak invented the digital camera but did not move to it, and went bankrupt. Some industries (power, healthcare, education) face little substitution. The threat is high when substitutes offer an equal or better experience and switching costs are low. Some substitutes take time (solar and LEDs need upfront spending).

Buyer power is high when competition is intense, products are standardised, and close substitutes with low switching costs exist. Big buyers, such as the government, have more power.

Supplier power: people rarely bargain with hospitals or schools but always with vegetable sellers. Indian sugar mills depend on government-set cane prices; OPEC has pricing power over oil. Supplier power is high when suppliers are few and buyers many, the input is critical, competition among suppliers is low and differentiated, there are no substitutes and switching costs are high.

Remember

• Standardised products and low switching costs → strong buyers.
• Few suppliers of critical inputs → strong suppliers.

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11Barriers to entry and attractive industries

Barriers to entry include licences, special skills, capital (oil and gas), distribution reach (banking) and brand loyalty (toothpaste, coffee). Buffett calls them a moat: economic castles protected by unbreachable moats, with pricing power. Barriers are high when there are many licences, patents and copyrights, large investments in specialised assets, and strong brands, distribution, execution skills or customer loyalty.

An attractive industry has: low competition, high entry barriers, weak supplier power, weak buyer power and few substitutes, giving strong pricing power and high margins.

Example Indian education: growing demand, weak student bargaining power, recession-resistant, many permissions needed to open an institute, few quality providers, staff salaries set by management, and substitutes that do not inspire confidence.

Remember

• Moat = high barriers to entry.

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12PESTLE analysis

PESTLE covers Political, Economic, Socio-cultural, Technological, Legal and Environmental factors (extended to STEEPLED with ethics and demographics). It is often used by a business choosing a country to set up in, and looks at the external environment.

• Political: stable policy, little corruption, bureaucracy or violence, press freedom, ease of doing business, sound public finances and infrastructure spending.
• Economic: GDP growth and its drivers, inflation and rates, trade, balance of payments, exchange rate stability, forex reserves, monetary and fiscal stability, dependence on imported resources such as oil, financial markets and taxation.
• Socio-cultural: age, education, skills, health, values and lifestyles. India's young population versus Japan's ageing one; nuclear families and working couples raise demand for day care, packaged food and restaurants; lifestyle diseases create new businesses.
• Technological: R&D, a tech-savvy population and infrastructure.
• Legal: a consistent, transparent legal system without arbitrary changes. The Vodafone retrospective tax case and cancelled telecom and mining licences unsettled investors.
• Environmental: clear policies on pollution, waste, mining, ecology and resettlement; unclear rules cause delays and costs.

Not every factor matters equally for every company.

Remember

• Forex reserves, RBI policy and resource dependence are economic factors.

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13The BCG matrix

The Boston Consulting Group matrix classifies a company's business segments by market growth and market share (cash generation):

• Stars: high growth, high share; generate growing cash (for example Cera Sanitaryware).
• Cash cows: low growth, high share; need little investment and produce steady cash (Navneet, Colgate).
• Question marks: high growth, low share; may grow with investment but can eat cash (Tata Nano failed; Bajaj Pulsar succeeded).
• Dogs: low growth, intense competition, little cash.

Remember

• Star: high/high. Cash cow: low growth, high share. Question mark: high growth, low share. Dog: low/low.

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14Structure, conduct, performance (SCP)

SCP extends Porter by adding financial performance.

• Structure: number of players, concentration, organised versus unorganised share, substitutes, supplier and buyer relationships, market size and growth, and backward or forward integration. Overlaps with Porter and SWOT.
• Conduct: behaviour such as pricing and innovation: seasonal (umbrellas) or year-round (FMCG, pharma); interest-rate sensitive (real estate, cars more than two-wheelers); commoditised (mining) or brand-driven (FMCG, white goods); skill needs; how customers choose; technology and policy dependence.
• Performance: returns such as RoE, RoIC and WACC; high returns on capital create wealth.

Remember

• Structure includes market size, growth and player relationships.

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15Industry KPIs, unit of pricing and constraints

KPIs differ by industry: revenue per employee suits a BPO (labour-driven, billed by headcount) but not capital-intensive manufacturing. Companies' annual reports and management discussion show which KPIs the industry uses. Two guides:

• Unit of pricing: simple for manufacturers (units sold), harder for services (a coffee chain really prices per customer visit, not per cup).
• Key constraints: demand-side (limited customers → track penetration), supply-side (limited capacity → track capacity utilisation) and regulatory (track the regulator's metrics). Constraints can change as the industry evolves.

Remember

• KPIs follow the unit of pricing and the binding constraint.

16KPIs for selected industries

Remember

• Telecom: ARPU and churn. Retail: same-store sales. Banks: NIM, NPA, CASA.

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17Regulation

Small regulatory changes can have large effects: FDI rules for multi-brand retail (back-end investment, local sourcing), environmental mine closures, cancelled telecom licences, and Companies Act amendments. Analysts must track the rules of the game.

Remember

• Regulation can change an industry overnight.

18Direct taxes

Taxes raise revenue but also encourage or discourage activities: Kerala's 2017 fat tax of 14.5% on junk food; lower or nil GST on essentials and higher GST on luxuries.

Direct taxes: the person liable is the person who bears the tax (income tax). Tax rules can differ from accounting: India allowed a 1.5 times deduction for certain scientific research, and interest owed to banks is deductible only when paid. Such differences create a deferred tax asset (pay more tax now, less later) or deferred tax liability (pay less now, more later).

Corporate income tax (as given in the workbook, for AY 2025-26):

• Income tax: 30% (25% if turnover was below ₹400 crore), or concessional regimes of 15% to 25% if certain deductions are given up.
• Minimum alternate tax (MAT): if normal tax is below 15% of book profit, pay 15% of book profit plus cess and surcharge; the excess is a MAT credit for future years.
• Surcharge: a tax on tax, kept entirely by the Centre (not shared with states): 7% for income of ₹1–10 crore, 12% above ₹10 crore, nil below ₹1 crore.
• Cess: 4% health and education cess on tax plus surcharge, usable only for its purpose.

Tax rates change often; check the current Finance Act before using them.

Remember

• Surcharge goes only to the Centre. Cess is earmarked.
• MAT 15% of book profit.

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19Indirect and other taxes

Indirect taxes: the seller pays the government but the consumer bears the tax.

• GST: charged on the invoice value at each sale; sellers deduct input tax credit for GST paid to suppliers, avoiding double taxation. The workbook gives rates of 0% to 28%, with most items at 18%. (GST slabs were rationalised in September 2025, so check current rates.)
• Excise duty (on production) and state VAT (on sale) now apply mainly to liquor, petrol and diesel, which are outside GST.
• Customs duty: on imports, varying by product.

Other taxes:

• Road tax: paid upfront on new vehicles; affects autos, auto ancillaries and motor insurers.
• Stamp duty: on registering documents, raising the cost of buying assets; affects real estate, brokers and AMCs.
• STT: on sale of securities; discourages short-term trading and affects brokers.

Remember

• Petrol, diesel and liquor: still excise and VAT, not GST.

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20Sources for industry analysis

Industry reports, journals and media; companies' annual reports, especially Management Discussion and Analysis; trade association publications; and relevant ministry websites.

Remember

• MD&A sections are a key industry source.