· Some points which struck me recently while listening to a friend:
Regulation
o
Industry
Specific: Wherever there are specific statutes or regulators for an
industry, understanding this is essential as also the dynamics. Some regulators
are even handed(eg telecom, natural gas) while others leave much to be desired.
Is there any possibility that your industry will be on the wrong side of these
rulings Foreign regulation also
matters as in FDA inspection of factories
o
Competition
Law: Some industries like cement, tyres, shipping etc are perceived to
be cartelistic, and therefore at risk of penalties from the Competition
Commission.
o
Export/Import
related-There have been export bans and/or pricing floors imposed on
various commodities such as basmati rice, onions, sugar, iron ore. Similarly, import tariffs have been raised on
commodities supposedly dumped from China such as tiles, steel. Having an idea
of the trade policy and the lobbying power of the industries(suppliers vs
importers)
·
Banking/Finance
regulations:
o
Foreign
investment: Wherever there are foreign investments limits on shareholding
and sectors and these are eased, the demand pool goes up therefore helping the
stock price. Examples are industries where FDI limit raised from 49% to 75% or
even to 100%-the stock prices goes up anticipating higher demand from FIIs/FPIs
o
Prudential
Norm/Banking Regulation: When it becomes difficult for certain
industries to raise more funds(say real estate, gems) from banks, they need to
tap the bond market or expensive sources, and hence the stock price might fall.
Same holds for regulations affecting troubled loan resolution(eg CDR,
SARFAESI).
·
Taxation
o
Indirect-
some industries face ‘sin taxes’ such as tobacco, alcohol. This
is a real risk for those companies
o
Direct-some
benefit from tax holidays or weighted deductions on research, while some are
tax free(eg SEZs, agriculture).
·
Customers
o
Pull vs
Push: Is there a lockin of revenues or orders as evident via customer
contracts and cash/carry, or is it a push driven credit dependent business
o
B2B or
B2C: Is the company largely in B2B or B2C? If B2B, expect the margins
to be lower unless it is a hidden champion. Just ask insurers who suffer from
losses in group health insurance but who still continue it for revenues
o
‘Sophistication’:
Are the customers aware or do they think they are aware of the
business? People may not understand paints or hardware (one reason why hardware
shops mint money), but they ‘get’ FMCG and hence may not continue brands.
o
Value
Migration: Is there a demographic migration from basic to luxury? Or do
people migrate from products(eg scooters to bikes)? Implications
·
Competition/Industry
o
Market
share of top few players: If the HHI index is below 50 or if the top few
players do not exceed 50%, there is a sign of unorganized sector
o
Profit
pool of industry and trends: Is the industry overall
profitable or loss making(like airlines, ecommerce)? How has this trend changed
in the last few periods?
o
Ecommerce/Online
Impact: Is ecommerce favourable(say +ve for logistics, packaging,
impulse purchases, advertising but –ve for brick and mortar)? Is there any
industry where competitive advantage is negated via ecommerce distribution network
access(eg ability to launch smartphones without dealer network, this has hit
Samsung/Nokia/Apple)
o
Growth
and import competition: Is
there a China threat? Are they getting bulk of the incremental demand(eg
replacement tyres growth eaten up by China market)
o
Demand
supply gap-presently and 5yrs: Do you have visibility on
new capacities? Can there be a scenario
where the industry becomes surplus in capacity domestically or globally due to
undergoing investments?
·
Suppliers:
o
Where
the key suppliers are organized or have pricing power,
expect your profits to be squeezed. Ask any customer of petrochemical firms in
India
o
Statutory
regulation on terms of trade-Whether it be quantity
allocation(like natural gas priority allocation to power and fertilizers),
price controls(coal, railway) or any statutory restriction on terms of trade,
this has an impact.
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