Industry Analysis Format Essays Of Elia

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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.

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:

  1. Supplier Power: The power of suppliers to drive up the prices of your inputs.
  2. Buyer Power: The power of your customers to drive down your prices.
  3. Competitive Rivalry: The strength of competition in the industry.
  4. The Threat of Substitution: The extent to which different products and services can be used in place of your own.
  5. 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:

Source: Slideshare 

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:

Source: Strategicplanet

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.

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In my last article, I covered how to predict earnings of a company and today I am going to write about how to do industry analysis.

 The Need for Industry Analysis 

Industry analysis is an essential responsibility for an equity research analyst.

As an equity research analyst, you need to analyze a particular industry, see its past trends, demand-supply mechanics, and future outlook.

The industry analysis report sheds light on the economic health of the company, underlining the understanding whether it will be beneficial for the stakeholders to invest in such a company and offering recommendations and/or corrective actions to take in case of any untoward developments in the company.

As an equity research analyst, you might work on industries like Oil and Gas, Metal, Information Technology, Automobile, Financial Services, Infrastructure, Pharmaceuticals and Consumer durables.

In some companies, there is a dedicated industry analyst who will work in the assigned industry and provide the analysis.

However, as an analyst, you should be aware of industry dynamics and hence, it is important to know how to do industry analysis.

How to do Industry Analysis?

An industry analysis is a complicated and time consuming process. If any of the dimensions are missed, the whole analysis becomes faulty. Therefore, in this section, I have highlighted all the necessary steps telling you how to do industry analysis. Use these steps and apply it in your analysis.

What are the steps? Here you go:

1. Review available reports

Read all the available but relevant industry reports and statistics to see whether it makes sense to dig deeper.

Some of the reports you will find already contain in-depth information that the need for new industry analysis is eliminated.

However, it is unwise to depend on existing analysis reports as the market is always volatile and industry factors change constantly.

Therefore, pick up a current report and envisage its relevancy in the current market.

2. Approach the correct industry

An industry has sub-parts. For example, if you look at the chemical industry, you will find sub-industries like Fertilizers, Pesticides, Paints and Varnishes, Organic chemicals.

Therefore, it is important to focus on the relevant industry. Without this, it will be impossible to draw an accurate industry analysis report. So, take up an industry and find out the sub-industries. Select the one which suits the company’s purpose. Moreover, it is worthwhile to look at the different market segments in a particular industry.

3. Demand & supply scenario

As any economist will know, demand and supply are the primary factors governing any market. Hence, it becomes relevant to look into the demand-supply scenario for a particular product or industry by studying its past trends and forecasting future outlook.

You can do comparative analysis with other companies competing, in the same manner, to find out the economic health of the company under consideration.

Future demand and supply forecasting help investors understand the viability of future investments in terms of profits and losses.

4. Competitive scenario

This is the most important step of any industry analysis. In this, you need to study the competitive scenario using Porter’s Five Forces Model.

The model acts as the framework for industry analysis. Michael Porter, a famous strategist, and author, first came up with this model. In this model, five parameters are analyzed to see the competitive landscape.

They are:

  1. Barriers to Entry
  2. Supplier Power
  3. Threat of Substitutes
  4. Buyer Power
  5. Degree of Rivalry

The Porter’s model is extensively used while analyzing any industry.

5. Recent developments

Any industry analysis report isn’t just about studying the particular industry on a micro-level.

The analyst needs to incorporate influencing factors at the macro-level. These macro-level factors include recent industrial developments, innovation in your industry analysis report, sector valuations and global comparative valuation.

6. Focus on industry dynamics

The industry analysis should be specific to a particular industry and thus, it is important to focus and understand the industry dynamics. Your industry analysis should be in-depth and to-the-point.

For example, if you are tracking the aluminum industry, you should know the per capita consumption in the country.

In India, the per capita consumption of aluminum is 1 Kg, in USA, it is 25 to 30 Kgs, in Japan, it is 15 Kgs and in Taiwan, it is 10 Kgs. Apart from the consumption, you should also know the production of aluminum worldwide.

The above six steps are important and you, as an analyst, should follow them.

The analysts in private equity, investments banks, equity research firms, investment research firms need this skill and if you know how to do industry analysis, you are ahead of 80% of the aspirants as this will not only impress your interviewer but also add immense value to you and the company hiring you.

How to Write an Industry Analysis?

In the last section, we learned how to do industry analysis and in this, we will see how to write one.

Writing is also a required skill as you need to present all the findings within a written report in a concise and clear manner.

Begin by writing a concise overview of the industry.

Mention historical data and the nature of the industry, including its growth potential.

State the influencing economical factors and most importantly, don’t forget mentioning the purpose of your industry analysis.

The concise overview of the industry should include its competitors and their operations.

You can write this in the next section. Write about similar products and services.

Now, with the overview aside, move on the detailed analytical presentation of the specific industry.

Highlight factors like geographical growth, consumer base, price fluctuations, past performances and income projections.

Use existing financial data and industry understanding to forecast industry growth for the next five or ten years. You can use statistical graph in this section.

The next sections should be about using Porter’s Five Forces model and a detailed write-up about its five factors, its use and repercussions in the industry. Don’t forget mentioning governmental regulations relevant to the industry.

Lastly, give long-term and short-term valuations impacting the industry such as any foreseeable problems impacting the business in a negative fashion and potential corrective measures. Wind up the industry analysis report with a very three or four line summarization.

Endnote

Have you ever thought of learning the skill of industry analysis and want to know how to write an industry report?

Share your thoughts and experience here.

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