Understanding Industry Dynamics

Implications for Investment

 What is the need for Industry analysis?

A company will find it difficult to succeed if the industry
dynamics are unfavorable
Understanding the stage of the industry
Stage will define risk and expected return of investment
Understanding the structure of industry
Bargaining power of the stakeholders of the industry
Understanding profitability drivers of the industry
What is the nature of the demand?
What affects the profitability of companies with in industry
Factors that affect all the players
Understand the role of value migration
Identify who is the loser and who is the winner
Identify potential winners
Companies with differentiated business model
Companies with significant moat
Companies with pricing power

What is value migration?

Shifting of value creating forces

Value migrate from outdated business model to newly created
business design

Three types of value flow?

Value flows from one industry to the other

Value flows from one company to other
Value flows with in business

Three stages of value migration?

That satisfy better customer need

Value inflow stage

Value stability stage
Value outflow stage

Tyres Industry
An Example

 What

is the stage of the industry?

Growing

What

industry

is the structure of the industry?

Most

likely monopolistic
Some player may have pricing power
What
The

is the nature of the demand?

demand is derived from demand for automobile

(Derived Demand)
Source of demand is cyclical in nature
Two types of demand: OEM and replacement
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Costing Aspects of the Industry

Raw-material

Cost = 70% of cost of product and

50% of sales
Raw-material

Major

cost is the driver of the industry

Raw-material

Nylon

tyre cord: 55%.

Natural rubber: 15%.
Rubber chemical: 13%.
Carbon black: 9%.
Synthetic rubber: 8%
Major
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costs are petroleum derivative

Impact of Cost Increase

Can

this industry pass on the cost

Depends

on demand situation
Depends on capacity level in industry
Depends price of imported tyres
Custom

duty structure
Policy on dumping especially on refurbished tyres
Generic

substitute

Refurbished

tyres with better technology

Industry Segmentation
Trucks,

buses, and tractor

Higher

value

Cars
Higher

Two

visibility More advertisement spend

wheeler

Low

value and high volume

Cycles
Specialty

tyres
Export market
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Which company is in which segment?

Structural Changes in Industry

Industry

in consolidating
Radialisation of tyres
Backward linkages
Availability of cheap re-furbished tyres
Export market is expanding
Composition between OEM vis--vis
replacement market
Sign of recovery in automobile industry
Which company is in sweat spot?
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Who can be potential winner

Which
Who

Who

segment is likely to expand more?

is present in that segment?

has the excess capacity?

Who is least leveraged?
Who enjoy the highest gross profit margin?
Who has the potential to address the need of
higher radialisation?
Who is diversified?
Who exports?
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