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Industry Analysis
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Fundamental Analysis
Tarjan
Top Down Approach
Tarjan
Industry Analysis
If we think about Maruti Udyog.
WHAT BUSINESS IS IT IN?
That lead us to the industry it operates in.
Tarjan
Industry AnalysisIndustry
What are the sub-sectors of a particular industry?
What are the key revenue drivers in the industry?
What are the key concerns affecting the industry?
Other factors:
How many players are there in the industry?
What are the prospects of the particular industry in the overall economy?
How dynamic and volatile is the industry? Tarjan
Industry AnalysisIf the company in
question is Infosys, what industry does it belong
to?
Technology, isn't it ?However,
technology is to broad a category.
Technology
Hardware
IT Service
s
IT Product
s
Defining the Sub-sectors
Tarjan
Industry Analysis
Technology
Hardware
IT products
IT services
Companies that make products like laptops etc.
Companies that make software products.
Company that make provides project management –IT
development and support – to their clients.
NOTEThere could be companies like Infosys ,who operates in
multiple sub-sector . We then need to understand, where its revenues primarily come from.
In case ,of Infosys about 95% of it revenues come from IT services ,thus
We can analyze it is in IT services company. Tarjan
We shall discuss the process by taking a sample company from the Oil & Gas industry.
Industry Analysis
The company is in question is Shiv Vani.It’s a leading player in oil exploration, specially onshore exploration.
The first question to ask here is : What is the onshore exploration industry?
Industry Analysis
Onshore exploration is the industry where drilling is done on onshore. i.e. on
land
The next question that comes to mind is, is there any other way of oil exploration or drilling?
Yes, companies that carry out oil exploration in the sea,
under sea beds, comes in the category of offshore drilling.
Tarjan
So, we can say oil exploration essentially has two sub-sectors:
Industry Analysis
Oil explorati
on
Offshore
OnshoreShiv Vani
Falls into this.
Tarjan
Industry AnalysisIndustry
The next important step is to understand how a company makes money in the industry.
Specially, what are the key factors driving revenues?
What are the sub-sectors of a particular industry?
What are the key revenue drivers in the industry?
What are the key concerns affecting the industry?
Other factors:
How many players are there in the industry?
What are the prospects of the particular industry in the overall economy?
How dynamic and volatile is the industry? Tarjan
Let’s look at the drivers of the onshore oil exploration business.
Industry AnalysisKey Revenue Drivers
How dose oil exploration works?
Companies either own or rent oil rigs.They then take on oil exploration contracts for clients, which use these oil rigs.
The daily cost of hiring or renting out an oil rig, is called ‘the day rate’.
Tarjan
Now, number of days of use will be easy to calculate. This leaves the more important day rate for analysis.
Depending on how the day rate varies, the revenue earned will fluctuate.
Industry AnalysisKey Revenue Drivers
Total Revenue: Day rate X No. of days of use
So, what do you think will the day rate depend on?
Tarjan
An idea of the current rates, coupled with historical trends is enough to make an information guess about the future.
Industry AnalysisKey Revenue Drivers
The day rate would depend on the demand for rigs, which depends upon the demand for oil
exploration, led in turn by the global demand for oil and oil prices.
Oil Exploration
High demand= High day rateLow demand = Low day rate
How do we project the day rate?
Tarjan
Industry Analysis
What are the sub-sectors of a particular industry?
What are the key revenue drivers in the industry?
What are the key concerns affecting the industry?
Other factors:
How many players are there in the industry?
What are the prospects of the particular industry in the overall economy?
How dynamic and volatile is the industry?
Industry
Tarjan
Industry Analysiskey concerns affecting the industry
Tarjan
What are the sub-sectors of a particular industry?
What are the key revenue drivers in the industry?
What are the key concerns affecting the industry?
Other factors:
How many players are there in the industry?
What are the prospects of the particular industry in the overall economy?
How dynamic and volatile is the industry?
Industry AnalysisIndustry
Tarjan
Industry AnalysisNumber of players in the industry
This determines the: Competition and
The nature of operating margins that the industry works with.
A classical example is the telecom industry.
With new players coming in, the operating margins have been decreasing year after year.
Tarjan
Industry AnalysisNumber of players in the industry
For our example – Shiv Vani, which is in the Oil an gas exploration industry.
Requires a very large capital investment.
Only large players like ONGC or Reliance have entered the
industry.
Hence, entry barriers are high, and competition is relatively low. Tarjan
What are the sub-sectors of a particular industry?
What are the key revenue drivers in the industry?
What are the key concerns affecting the industry?
Other factors:
How many players are there in the industry?
What are the prospects of the particular industry in the overall economy?
How dynamic and volatile is the industry?
Industry
Industry Analysis
Tarjan
Shiv Vani operates in the oil exploration industry.
- onshore exploration.
We are now aware of what the industry is about and how a company makes money in such an industry.
Industry AnalysisProspects of the Industry in the
Economy.
Let us now look at the future prospects of the industry.
Hence we need to know how the industry has developed over the years, and he future
trends.Tarjan
Industry AnalysisProspects of the Industry in the
Economy. The graph below suggests, that there is a huge gap in the amount of oil produced by India, compared to the amount of oil consumed in India.
This in turn implies that imports have been increasing with each passing year, putting a strain on the economy.
Tarjan
Industry AnalysisProspects of the Industry in the
Economy. We know that an increase in local production is needed.
Does the country actually have these reserves for exploration?
Sedimentary basins in IndiaOne can see that only a small portion of the potential oil basins has been commercially
taped till date.
Yes, there is a huge area that can be potentially tapped by companies.
Tarjan
The Indian Government has also recognized the need for more oil exploration.
Hence, under the New Exploration Licensing Policy(NELP),the number of blocks have increased. That means more blocks are being brought under exploration.
The budget for oil exploration has also increased three-fold in the 11th five year plan.
Industry AnalysisProspects of the Industry in the Economy
These facts show that there is tremendous opportunity for growth for oil exploration.
Tarjan
What are the sub-sectors of a particular industry?
What are the key revenue drivers in the industry?
What are the key concerns affecting the industry?
Other factors:
How many players are there in the industry?
What are the prospects of the particular industry in the overall economy?
How dynamic and volatile is the industry?
Industry
Industry Analysis
Tarjan
An industry where products change often, changing the dynamics of the market tends to have volatile stock movements.
For example, a company like Apple saw the stock move up a lot in anticipation of the iPad.
Industry AnalysisHow dynamic and volatile is the industry
Tarjan
Taking the case of Shiv Vani .
In India, the oil prices administered .Hence the profitability of oil companies is not only a function of their operating efficiency, but also on whether the government will increase oil price.
Once oil prices are decontrolled, this industry can be analyzed like any other industry.
Industry AnalysisHow dynamic and volatile is the industry
Tarjan
What are the sub-sectors of a particular industry?
What are the key revenue drivers in the industry?
What are the key concerns affecting the industry?
Other factors:
How many players are there in the industry?
What are the prospects of the particular industry in the overall economy?
How dynamic and volatile is the industry?
Industry
Industry Analysis
Tarjan
