Business+Analysis Working Aug+2007

FMCG
Tea Others - cleaning, home care etc
Competitive landscape Details

(and identification of
competitive advantage)
List of companies (by size) with Top 5 companies account for 80 % of
names - By sales industry ( 2500 Cr)
1. Tata Tea - 41 %
2. HLL - not broken out separately
3. Goodricke group - 9 %
4. Jayshree tea - 9 %
5. Tata coffee - 8 %
6. Williamson tea - 8 %
Profitability pool analysis - Poor profitability in industry due to

ranking by ROE movement of consumption to loose tea
(and commodity nature of product)
1. Tata Tea - 3 %
2. Goodricke group - -7 %
3. Jayshree tea - -4%
4. Tata coffee - 0 %
5. Williamson tea - 36 %
Market share stability analysis Complete data not available

However Tata tea seems to gaining
share
FMCG
Pricing stability Pricing seems to be poor and has

dropped from 1999 by 4-5 %
Industry structure type Dominated by a few key players like Tata

tea, HLL, nestle and some smaller player.
However key segment is the loose ,
unorganised tea market which has done
well in the past few years
Key Industry products or

segments
Segment and company mapping
Identification of companies
possessing competitive
advantage (sequence from
strongest to weakest)
Economic model Details

Return on capital : 1.Trend for the last 10 years. ROE has dropped from 20 % + to below High , above 20 % for most
2. What is the normative return. Is it 10 %
cyclical ?
FMCG
Dupont analysis 1. Asset turnover ratio = Sales / total 1. Asset turns have come down from 1.3
assets ( Asset efficiency) to 0.8
2. NPM. 2. Margins have dropped from 10 % + to
3. Return on asset = NPM* Asset TO 5-6 % in 2005 due to poor pricing
ratio 3. ROA is poor due to 1 and 2
4. Total asset / Equity ( indication of 4. Debt equity has held steady at around
debt levels) 0.5:1
5. ROE = Total asset/ equity * Return 5. ROE is dropping due to the above
on asset reasons
FA Intensity 1. Asset light model ? High FA TO in the industry. Mainly due

2. High on intangible asset ( R&D / to outsourcing of manufacturing to third
Customer relations / Brand / patent ) party suppliers
WCAP Intensity 1. Which component of WCAP is high - High Ratio as payables is on credit.
inventory / recievables and why Recievable are mostly around 1 week.
Main WCAP component is the inventory.
Capital intensive ? 1. Capital intensity high due obsolence No. high Asset TO
Margin intensive ? Does the business have high margins. Low margins for most. NP < 10 %. Not
Are the margins defensible ? cyclical. Structural reduction happening
RM as % of sales and implication

FMCG
Key Industry ratios and

statistics
Business units
Business model
Key Demand Drivers : 1. Consumed regularly as bevarage 1. Rural demand
1. Why would there be a 2. In decline, being overshadowed by 2. Demand in specific segments
continued demand for the coffee (check this assumption) 3. Down trading happening
product / service
Key supply drivers supply side factors which impact the 1. Tea crop (volumes) - global production 1. Price of LAB / Oils
economics of the business 2. Global pricing determined by
1. Does the supplier power effect the international demand
pricing
2. Is the business RM sensitive ?
Shareholder Value creation Important Drivers which which would 1. Strong brands
drivers enhance the long term value 2. Distribution infrastructure
3. NPD pipeline and ability to launch
successful new products
4. Innovation capability
Degree / nature of change 1. Does the underlying need for the Was low. Currently business model is
product remain the same changing due to local players. Price
2. Can the need be met with senstivity increasing
substitute products ?
FMCG
Predictability of business 1. Does the product/ service have long High. However growth is low in the main
life cycle categories due to high penetration
2. Does it satisfy some recurring need
3. Has the business model changed
drastically several times ?
Cyclical nature ? Is the business subject economic cycle Low

or exempt from it . Is it in a state of
perptual decline ?
Ability to increase price ahead of 1. Is the business able to increase 1. Poor for unbranded. Depends on Was high. Has got impacted due to local
inflation (Pricing power) price easily ? This is a strong indicator demand / supply situation players and intense competition
of CA 2. Moderate for the branded. However between major players. Food / Some
demand growth is low and moving segments still have moderate pricing
towards unbranded and hence poor power
pricing power
Some sort of monoploy or 1. Is consolidation happening ? None Multiple co.s . Multiple local companies
Oligopoly 2. 80 % market share controlled by
how may firms ?
Does the company have a Yes . Due to FMCG nature of product Yes.
recurring revenue stream
Does the business have 1. What has been the trend in the last 1. Brands are present. Poor pricing / The business has franchise/ brands.
franchise / brands or is it few years Franchise levels Commoditisation has now started
commodity
Does the industry enjoy high No. Growth is negative due to migration Low growth in general category. Growth
growth rates ? For how long to coffee only in niche categories now
FMCG
Key industry variable which 1. Distribution depth / No.

drive the performance 2. Ad spend / Brands
3. Net margins
Source of competitive Strong competitive advantages create

advantage entry barriers for incumbents,
preventing entry of competition and
enables incumbents to earn high
returns
Customer advantage Factors - 1. Habit forming and High 1. Habit forming, but low differentiation. 1.Habit forming and differentiation
resulting in moat (customer Differentiation - No. 1 Although companies are moderately created through branding and product
captivity) 2. Experience goods (brand effect, successfully in branding part of the differentiation
Higher durability than production trademarks) - No. 2 market 2.Brand effect strong in several
advantage factors 3. High switching cost (Lock-in) - No. 3 categories such as cold drinks, soaps,
(for ex : change of business software detergents, oils etc
by a co. such as SAP ERP etc)
4. High search cost ( where it is
diffcult, expensive and risk for custom
to look for alternative ) like case of
doctor or lawyer
4. Network effect (related to switching
cost - network effect increases
switching cost)
Presence of Network Presence of network effect increases

economics - customer switching cost for the customer
advantage
Radial factor network
or combitorial a) Scale economics due to network NA NA
economics effects
b) Barriers to entry due to network
effect
Network taxonomy 1. Transaction based (like ebay) NA NA
2. Community based (like Fools)
3. Complementary products (VHS+
players)
Network profits based on 1. Commerce transaction NA NA
2. advertising
3. Subscription
4. Data
5. Incubation (Like windows network
effects taken to MS office or Explorer
FMCG
Production advantage factors A. Process economies (resulting in A. Not much process economies A.
- resulting in moat (cost based lower cost of production for 2. Complexity and process fit present in
advantages). Weaker than incumbent) certain categores such as food
customer based advantages 1.indivisbility of value chain B. Scale economies in distribution,
expect in case of patents or 2. Complexity and fit of processes Purchasing, Advertising. Helps in
government regulation (like 3. Rate of change in process costs building brand and reducing COGS
licenses ) 4. Protection through copyright /
Patent / License / Lease
- Scale economies very relevant 5. Resource uniqueness such as acess
for local market - both geo and to raw material or manpower etc
product based ( ex: operating
system is a specific local product
market). Scale economies more
sustainable and provide B. Scale Economies ( In conjuction B. Scale economies exist for b. Scale economies very crucial and with
competitive edge if the ratio of with demand captivity result in very Distribution / Advertising and moderately customer based advantages add to
fixed cost / Variable cost for the sustainable competitive advantages ) for production in farms competitive advantage through
market is high. For ex: high 1.Distribution 1. Distribution - strong distribution
distribution expense (wide 2. Purchasing network
distribution network), product 3. Advertising 2. Purchasing efficiency
investment ( R&D and 4. R&D 3. Information based economies through
technology) etc. Growing markets advertising
will reduce this ratio can weaken
the edge of the incumbent
Distinctive capability Distinctive capability analysis applied

analysis to specific market (product or
geographic create the customer based
or production based advantages
Architecture Relationships with all stakeholder / Strong know how from parent / IP
systems / process / Knowledge base / transfers
- analyse the architecture v/s the
target market
Strategic assets Distribution network / plant / license 1. Distribution network for retail Strategic assets in the form of
monopoly / natural reserve /Patents / 2. Tea gardens distribution network
Media Properties/ Network effects / 3. Brands
Switching costs
- analyse with target market
FMCG
Innovation R&D / Innovation history /NPD None Moderate innovations. Higher in past.
- Disruptive innovations ? Low currently
- Sustaining innovations ?
Cost Low Cost position Important in the industry Costs structure are on higher side.
Financial strength Strong Balance sheet NA Companies are financially strong. Strong
cash flows and low debt
Reputation Brands / trademarks Important in the industry Strong brands for every user segment
Porter's model : 5 factor

for industry
attractiveness
Industry attractiveness sumarry Low industry returns due to low entry
and reasons for low high returns barriers, commodity nature of product
and lower pricing strenght of brands and
unorganized sector. Also falling demand
and shift of tea drinking to coffee
(substitute) has resulted in falling
returns. High rivarly and presence of
substitute and falling demand has
reduced returns in the industry
ENTRY BARRIER - No. 1 Factor 1. The Brand pull should create Entry barriers exist in the form of scale, Entry barriers are high due to
deciding industry profitability prevent the customer from switching branding and distribution strenght. distribution and Brands
to competitor due to price. Else a However unorganised market has made
know brand will not translate to a impact on growth and pricing
profitable franchise
2. Strategic assets above can also
create entry barrier thus maintaining a
profitable franchise
Asset specificity High, especially for backward integrated

companies having their tea gardens
Economies of Scale Important - in production, distribution Distribution economies of scale.

and marketing Purchasing economies of scale
FMCG
Proprietary Product difference Low Minimal
Brand Identity Moderate Strong brand differences
Switching cost Low Low
Capital Requirement High only if integrated backwards to tea High, due brand building and
gardens Distribution infrasturcture
Distribution strength High High. Getting eroded in local areas
Cost Advantage Important Low
Government Policy Low None
Expected Retaliation moderate High
Production scale important
Anticipated payoff for new Low. Check for unbranded

entrant
Precommitment contracts Low
Learning curve barriers Moderate
Network effect advantages of None

incumbents
FMCG
No. of competitors - Monopoly / High competition

ologopoly or intense competition
(concentration ratio )
RIVALRY DETERMINANT Rivarly is high now due to poor growth Rivalry is high now. Local competition is
and unorganised sector intense. Due to high intangible
investment in brands and distribution,
the profitability of the industry is weak
now
Industry growth Low for organised sector Low now
Fixed cost / value added ?? Low
Intermittent overcapacity High High now as these product involve low

tech
Product difference Low Medium. Quality -> but reducing now.
Differentiation is mainly through
Distribution and brands
Informational complexity Low Low
Exit Barrier moderate. Low for unorganised Medium . Business is not capital
Demand variability Low
SUPPLIER POWER Low as tea is a commodity Supplier power is low
Differentiation of input Low Low

Switching cost of supplier Low Low
Presence of substitute Yes, from other tea gardens Yes
Supplier Concentration Low No
Imp of volume to supplier High High

Cost relative to total purchase High Low
Threat of forward v/s Backward Low Low

integration
BUYER POWER Low as the final consumer is the final Buyer power on individual basis is low
buyer
FMCG
Buyer conc. v/s firm Low Buyer conc. Is low and dispersed
concentration
Buyer volume Low Buyer volume is low
Buyer switching cost Low Buyer switching cost is low
Buyer information High, mostly priced based other than Good, although not critical
brand and taste
Ability to integrate backward None No
Substitute product Coffee Brand substitution high especially in

soaps/ detergents / oral care. Less in
foods
Price sensitivity Yes High and hence subsititution of brands

happen
Price / Total Purchase Low Low
Product difference High Medium to low now

Buyer propensity to Subsititute Low, new generation moving toward High
coffee
Intangible assets 1. Brands - requiring high ad spends 1. Brands important in industry . Do

for maintenance brands give excess returns in india (to
2. Patents / Knowledge asset- check ??)
requiring high R&D expenses 2. No patents
3. Distribution infrastructure - S&D 3. Distribution infrastructure is similar to
expenses ? FMCG companies. No longer a key
4.Customer relationships/ contracts / differentiator for the top companies
agreements
5. Media property / License / Some
sort of monopoly
6. Network effects / Switching costs /
Customer lockins
Valuation model
FMCG
Valuation approach 1. P/E

2. Cash flow
High PE
Low PE for the industry
Avg PE for the industry
Valuation drivers
Avg ROC numbers of industry
Avg Growth for industry

Avg CAP assumptions
Maintanance capex
(approximate) as % of sales / Dep
as % of sales
AUTO AND ANCILLARIES
Automobiles - cars / HCV Auto components Batteries
Competitive landscape
List of companies (by size) with 1. Tata motors - 50 % 1.MICO - 12.7 % 1. Exide - 80 % OEM and 65 % after
names - By sales 2.Maruti udyog - 30 % 2.Bharat Forge - 6.7 % sales
3.Ashok leyland - 12.5 % 3.Exide Industries - 5.9 %
4.Eicher motor - 3 % 4.SRF - 5.5 %
5. Force motors - 2 % 5.Sundram Fasteners - 4.4 %
Total industry sales - 41195 6.SKF India Ltd. - 3.9 %
7.Wheels India - 3.6 %
8.Amtek Auto - 3.5 %
9.Rico Auto - 2.8 %
Profitability pool analysis - 1. Eicher - 50.5 % 1. Bharat forge - 28 %

ranking by ROE 2. Tata - 19.8 % 2. Rico auto - 15 %
3. Maruti - 13.2 % 3. MICO - 12 %
4. Ashok - 12.9 % 4. SRF india - 10 %
5. Force - -10% 5. Exide - 8 %
6. SRF/ Amtek - 7 %
7. Sundaram fastner - 4 %
8. Wheels india - 2 %
Market share stability analysis

Pricing stability
Industry structure type Not too fragmented. Top 3 companies Very fragmented. But each company
account for 90 % of industry works in its own niche product. Easily
40+ no. of companies. Top 10
companies account for only 50 %
industry

segments
Economic model
Return on capital : Cyclical in nature High.Being driven by export demand
Has improved from < 10 % to 20 % + in and increase in the knowldege
the last few years . Mainly due to component of business. Improvement in
improved asset utilisation and margins asset turns have improved ROC. Interest
improvement expenses have improved margins. OPM
are stable
Dupont analysis 1. Asset TO has doubled to 2.9 from 1. Asset turns have improved from 1.3
1999 to 2006. TO has doubled, but the to 1.8. And hence has driven the
asset being used are the same efficiency
2. Margins have also doubled from 3 % 2. NPM has gone up by 3-4 % (doubling).
to 6 %. 6 % NPM appear sustainable The Profit margins look sustainable in 4-
3. To doubling of NPM and asset TO, the 7 % range
ROA has gone up 4 times from 4.5 % to 3.Return on asset has improved from 5-
18 % + 6 % range to 10% +. More 10 %
4. Debt levels have gone down due to sustainable ?
total asset to equity dropping from 1.8 4. Debt level (total asset / equity) has
to 1.3 seen some drop but not too much (2 to
5. ROE has gone from 10 % range to 20 1.7)
% due to above factors (point 1-4) 5. ROE is above 10 % and on avg above
13-14 % . The industry can be assumed
to be creating value as a whole
FA Intensity Moderate TO ratio. Generally > 2.
WCAP Intensity
Capital intensive ? Yes. The Ratios have improved from < 1

to almost 2 times TO ratios. Asset
efficiency has improved the ROC
Margin intensive ? Very low margins currently. Low 14-17 % Avg OPM. NPM has increased
margins causing poor return on capital. from 3-4 % to 8-9 %. Major
Margins are cyclical in nature improvement achieved through debt
reduction


statistics
Business units
Business model
Key Demand Drivers : 1. Consumer demand for cars. Depends 1. Driven by demand for commerical 1. Driven by OEM sales of cars, two
1. Why would there be a on general affluence level. and cars wheelers, and Tractors
continued demand for the 2. Commercial vehicle demand depends 2. Some parts also driven by industrial 2. Replacement demand
product / service on industrial activity demand 3. Industrial demand
3. Availability of finance
Key supply drivers 1. Steel prices 1. Steel prices 1. Price of key raw material - Lead and
Plastics ( both together account for
around 75 % of RM cost )
Shareholder Value creation 1. Strong brands 1. Patents / Technology skills 1. Patent / Technology
drivers 2. Enduring low cost position 2. Strong R&D capability 2. Strong R&D and new products
3. NPD pipeline and ability to launch 3. Ability to develop new products to 3. Distribution for aftersales
successful new products meet the demands of the auto industry 4. Relationship with OEM customers
Degree / nature of change Moderate.Smaller life cycle of a product. High. Smaller product life due to 1. Low driven mainly by changes in the
Changes in technology continous improvement in technology technology
and change in car models
Predictability of business high. Due car buying by consumer and High especially if long term contracts High. Low level of change
Commercial vehicle for Goods are being signed. Auto component
movement companies are moving to higher end
items improving the predictability of the
business
Cyclical nature ? Moderate for cars. High for commercial Business is cyclical in nature as the end 1. OEM business is cyclical
vehicle demand comes from automobiles. 2. After sales follows OEM with lag, but
However india is move into the global is less cyclical
supply chain and hence will have lower
Ability to increase price ahead of Poor volatility
1. Poor for the OEM except for long term1. Poor for the OEM except for long term
inflation (Pricing power) contract. Depends more if technology is contract and inbuilt escalation clauses.
able to drive costs low Depends more if technology is able to
2. Much higher for the spare parts drive costs low
business 2. Much higher for the spare parts
business. Though lower than other auto
components
Some sort of monoploy or Low in india. High competitive intensity Multiple companies. Very high market share enjoyed by
Oligopoly especially in mid segment Exide
Does the company have a Yes. High value purchase with long cycle Yes. However from limited customer Yes - From OEM contracts and retail
recurring revenue stream sales
Does the business have Franchise / branding is strong in india 1. No brands. Franchise is more 1. No brands. Franchise is more
franchise / brands or is it production (cost driven) in OEM production (cost driven) in OEM
commodity 2. For service market brands and pricing 2. For service market brands and pricing
power is present (moderate) power is present (moderate). Exide is a
strong brand.
Overall batteries have stronger brand
value than other auto component
Does the industry enjoy high Commerical vehicles is cyclical. Cars / Yes. Trend towards good growth due 1. High currently. Driven by OEM
growth rates ? For how long personal vehicle have a much steadier change in global dynamics 2. Later to be driven by Replacement
trend market
Key industry variable which 1. Brands 1. R&D 1. R&D

drive the performance 2. Cost of manufacturing 2. Long term contracts 2. Long term contracts
3. Cost of mfg ( Cost competitiveness) 3. Cost of mfg ( Cost competitiveness)
4. Ability to deliver on quality and 4. Ability to deliver on quality and
service levels service levels
5. Distribution and dealer relationship.
Relationship with OEM customer (Market
share in each )
Source of competitive
advantage
Customer advantage Factors - 1.High differentiation among products 1. Switching cost / Locking exist 1. Moderate differentiation due to
resulting in moat (customer 2. Brand effect is strong moderately due to technology transfers brands
captivity) 3. Moderate lockins due long purchase and long term contracts
Higher durability than production cycle
advantage factors
Presence of Network
economics - customer
advantage
or combitorial None None
economics
Network taxonomy None None
Network profits based on None Economies of scale in advertising,

manufacturing and OEM relationship
Production advantage factors A. A. A.

- resulting in moat (cost based 1. Value chain indivisbility is very high 1. Value chain indivisibility is high 1. Value chain indivisibility has impact
advantages). Weaker than 2. Complexity and process fit is high 2. Complexity and process fit high due on cost. Lead procurement process and
customer based advantages 3. Process cost reduction happens due to technology component manufacturing costs have impact
expect in case of patents or to learning curve 3. Process cost drops may happen on 2. Complexity and process fit has
government regulation (like 4. Patents may exist in some unique learning curve moderate impact
licenses ) cases. Less so in india 4.Patent may exist and provide 3. Moderate benefits through patent or
competitive edge R&D knowhow
- Scale economies very relevant 5. Low cost manpower a plus for indian
for local market - both geo and industry
sustainable and provide B. Scale economies in production/ B. Scale economies exist for purchasing, B. Scale economies important for
competitive edge if the ratio of Purchasing/ Ad/ R&D distribution (for retail) and R&D distribution, purchasing , Ads and R&D
fixed cost / Variable cost for the
market is high. For ex: high
distribution expense (wide
distribution network), product
investment ( R&D and
technology) etc. Growing markets
Distinctive capability
analysis
Architecture 1. Relationship with suppliers is 1. Relation with OEM

important 2. System / process to apply technology
2. Process/ knowledge base important to for lower cost production of the Auto
keep cost of production low components
3. Internal process important for car
companies
Strategic assets 1. Distribution network is important - 1.Patents

dealers are important 2. Switching cost of OEM , though not
too high
Innovation Important - but technology is mainly 1. Sustaining innovation

imported
Cost Important Very important. Main trend driving

outsourcing from india
Financial strength Very important as Auto companies have Important as auto companies globalise
large scale
Reputation Very importan as Auto purchase Important only in retail

depends on brands and reputation

for industry
attractiveness
Industry attractiveness sumarry Industry has good returns as demand High entry barriers, muted rivalry due to Returns are high for exide which has
and reasons for low high returns has been high, early entrats who lesser no. of competitior in each product control on the market. However buyer
developed scale have been able able to segment and improvement in scale due power from OEM reduces returns
create barriers and keep returns high. to export and local market has resulted somewhat. Rivarly is less due to high
Key variables are entry barriers and in an attractive industry returns, market share of exide. Supplier power
rivarly. In event of drop in demand, especially for the larger companies. and substitutes do not have high impact
rivalry could increase resulting drop in Rivalry is not intense. Supplier power is
returns very low. Buyer power has resulted in
lowering of returns a bit.
ENTRY BARRIER - No. 1 Factor Entry barriers are high and hence maruti high entry barriers due to High entry barrier due to dominance of
deciding industry profitability and other first movers have a higher 1. Economies of scale exide in the OEM and after sales market
advantage. 2. Customer relationship and contracts
3. Tech knowhow and R&D assets
Asset specificity High. An automobile plan is capital high Moderate

intensive
Economies of Scale High for manufacturing/ Purchasing/ 1. Purchasing / Manufacturing and 1.Purchasing / Manufacturing /
Marketing etc marketing economies of scale Distribution and Advertising economies
of scale
Proprietary Product difference Moderate. New technology is being 1. High due to employement of 1. Moderate. Branding and quality
added. But it gets copied quickly technology / R&D spend create a meaningfull difference.
Brand Identity High 1. Medium to low (if supplying OE 1. Strong. Gives pricing power in
vendors) replacement market
Switching cost moderate. New buyers have tendency to 1. High for the OE Low
stick to their brand.
Capital Requirement High for the industry High to achieve global scale economies ??
Distribution strength Critical 1.Not critical as many supplier are Critical, especially for the replacement
located close to OE market
2. Important only if the company is a
domestic retail player
Cost Advantage High 1. Critical component between players ??
due technology difference, Advantages
of scale
Government Policy Moderate 1. Low impact NA
Expected Retaliation High high, especially in the lower end of ??

spares market
Production scale High High for achieving cost effciences Important, especially for the OEM
market where price is very critical
Anticipated payoff for new ?? Low as capacity / Technology / ??

entrant Customer relationship needs to be
establised
Precommitment contracts No Yes. Extremely critical Important for the OEM market. Gives
volumes, but lower margins
Learning curve barriers High High ??
Network effect advantages of None None None

incumbents
No. of competitors - Monopoly / Low concentration ratio for all segments 1. Intense competition due to a no. of High market share with exide
ologopoly or intense competition except entry level small companies
(concentration ratio ) 2. Some companies building scale to
global levels - would result in lower
RIVALRY DETERMINANT Rivarly is high due to high fixed competition
Low rivalry among major competitor as Low, due to dominance of exide
investments. Muted currently due to most of the autocomponent companies
good demand growth operate in different product lines
Industry growth High High in india due to high exports Moderate
Fixed cost / value added High High ??
Intermittent overcapacity Moderate currently low for specific product due to Not very critical
shift in global model
Product difference Moderate High due to technology input and Moderate. Driven more by the brand
Manufacturing processes and OEM relationship
Informational complexity Moderate High due to R&D Moderate.
Exit Barrier High High ??

Demand variability High Low Low. Reduced by replacement market
SUPPLIER POWER Low Low. Main supplier are steel/ metals Low, due to commodity nature of the
company where the cost depends on the inputs
commodity cycle
Differentiation of input Low Low Low

Switching cost of supplier Moderate Medium - Only if some special RM type Low
is required
Presence of substitute High None Yes
Supplier Concentration Low Low No
Imp of volume to supplier High Low ??

Cost relative to total purchase High High ??
Threat of forward v/s Backward Low Low Low

integration
BUYER POWER Low High high for OEM resulting in lower margins,
Low for Replacement market resulting in
higher margins
Buyer conc. v/s firm Low High High for OEM, low for the replacement
concentration market
Buyer volume Low 1. OE buyer is high from a company and High for OEM, low for the replacement
hence high impact market
2. Retail is low individual volume and
retail does not add to a large
component of business
Buyer switching cost Low 1. High as lot of companies invest in Low
developing their vendors
Buyer information High 1. High as key vendors are important for High for OEM, low for the replacement
the auto makers in their total cost market
structure
Ability to integrate backward None 1. Low. Most top auto companies are Low
trying to out source as much as possible
Substitute product Public transport - not really a key factor Low None, except for brand substitution
Price sensitivity High High
Price / Total Purchase Low Low

Product difference High. Taken care through vendor Moderate
selection process
Switching cost High Low
Buyer propensity to Subsititute Low if quality and cost is maintained Low
Intangible assets 1. Brands are critical. Pricing strength is 1.Brands not too critical and do not add 1. Brands - important in after sales
moderate due to brands. Depends more to pricing power market
on the product quality / review 2. R&D / Patents required from process 2. R&D and knowhow important for new
2. R&D spends high for cost cutting / point of view for indian vendors to products and to improve quality and to
new technology. More from the achieve low cost of production reduce cost
production advantage standpoint than 3. Distribution critical for Spares supply 3. Distribution infra important for after
from a consumer standpoint in the after's market only sales markets
4. Customer relationships very 4. Customer relationship important for
important for the OEM market and can OEM relationships
result in moderate lockins
5. Technology tie-ups are also important
Valuation model
Valuation approach 1. P/E 1. P/E 1. PE

2. Cash flow 2.DCF 2. DCF - normalised a small extent
High PE
Valuation drivers

Avg CAP assumptions
Maintanance capex
as % of sales
ANCILLARIES Technology
Tyres Hardware BPO
List of companies (by size) with
names - By sales
Profitability pool analysis -

ranking by ROE

Tyres Hardware BPO
Pricing stability
Industry structure type

segments
Economic model
Return on capital : Poor. In the region of 7 - 12 % . OPM
drop has resulted in drop to 7 %. Asset
efficiency is steady
Tyres Hardware BPO
Dupont analysis 1. In the region of 1.7 - 2. Good ratio

2.In the range of 1-3 % with reduction in
the recent years. Extremely poor
margins
3. Low - 4-5 % due to very low NPM
4.In the range of 1.8 - 2. moderate debt
which has reduced recently
5. In the region of 7-10 %. Reduced in
the recent years due to drop in margins
FA Intensity
WCAP Intensity
Capital intensive ?
Margin intensive ? Very low margins for the last 6 years

inspite of boom in the auto industry
RM as % of sales and implication In the range of 7 - 12 %. Reduction to 7

% in the recent years . This has resulted
in further drop in NPM and depressed
ROE
Tyres Hardware BPO

statistics
Business units
Business model
Key Demand Drivers : 1. Driven by OEM sales of cars, two 1. Offshoring of services
1. Why would there be a wheelers, and Tractors
continued demand for the 2. Replacement demand
product / service
Key supply drivers 1. Price of key raw material - rubber 1. Educated mapower at reasonable
cost
2. Continous skill enhancement of
employees
3. Exchange rate - rupee / dollar
Shareholder Value creation

drivers
Degree / nature of change

Tyres Hardware BPO
Predictability of business
Cyclical nature ?
Ability to increase price ahead of 1. Poor for the OEM except for long term 1. Extremely lower for computers
inflation (Pricing power) contract. Depends more if technology is 2. Higher for other computer equipment
able to drive costs low with lower standardisation such as PDA/
2. Much higher for the spare parts routers / etc. more based on feature
business but much lower than other 3. Pricing power is present only in the
auto components. Also re-treading plays first few months during new model
an important role too introduction. None later- has to be
reduced
Some sort of monoploy or None ?? None

Oligopoly
Does the company have a Yes - From OEM contracts and retail ?? Yes, but only after long term contract is
recurring revenue stream sales signed
Does the business have 1. No brands. Franchise is more Brand power results in moderate Weak to moderate brand.No
franchise / brands or is it production (cost driven) in OEM pricing. Not very attractive customer franchise.Lock in due to Switching costs
commodity 2. For service market brands and pricing franchises
power is present (moderate)
Does the industry enjoy high Yes - From OEM contracts and retail Yes, due increasing penetration by Yes, very high due to increased
growth rates ? For how long sales computers outsourcing
Tyres Hardware BPO
Key industry variable which

drive the performance
advantage
Customer advantage Factors - 1. Moderate differentiation due to 1. Moderate brand effect. 1. Lock or high switching cost mainly
resulting in moat (customer brands Commoditisation happening now with a vendor company due to built in
captivity) 2. From some electronic products such knowledge sharing with the vendor
Higher durability than production as consumer electronics brand effect is
advantage factors increasing for the high end
Presence of Network
advantage
or combitorial None None None
economics
Network taxonomy None Network effect for some consumer None

electronics (but not in india)
Network profits based on None None None

Tyres Hardware BPO
Production advantage factors A. A. Process economies due to A. Process economies

- resulting in moat (cost based 1.Indivisibility of value has impact on 1. Value chain fit and process cost 1. Complexity and fit of process is
advantages). Weaker than manufacturing costs reduction over time critical for BPO kind of operations. More
customer based advantages 2. Process fit not too complex for the high end than the vanilla call
expect in case of patents or centre business
government regulation (like 2. Process cost reduction over time is
licenses ) critical
3. Acess to quality manpower in india is
- Scale economies very relevant imp
for local market - both geo and
sustainable and provide B. Scales economies in manufacturing, B. Scale economies in B. Scale economies in
competitive edge if the ratio of distribution, purchasing , R&D and 1. Production 1. manpower availability
fixed cost / Variable cost for the moderately in R&D 2. Distribution which is critical for 2. Sales and marketing
market is high. For ex: high electronics
distribution expense (wide 3. Purchasing of components
distribution network), product 4. Advtg
investment ( R&D and 4. R&D for new products (non existent in
technology) etc. Growing markets india)
analysis
Architecture
Strategic assets
Tyres Hardware BPO
Innovation
Cost
Financial strength
Reputation

for industry
attractiveness
Industry attractiveness sumarry Extremely attractive returns due to high
and reasons for low high returns demand and high value add for the
customer. Entry barrier have now
become high as the larger firms have
become big. Rivalry is not destructive
due to high growth. Buyer power is not
very high and supplier power /
Substitute does not impact. Very returns
in the industry currently as it is a
sunrise industry
ENTRY BARRIER - No. 1 Factor 1. Entry barriers exist for

deciding industry profitability - economies of scale
- Strong customer relationships
- learning curve barriers can be created
Asset specificity Low
Economies of Scale High. High volume helps in recruitment

and meeting new demand and
deployment. Also training costs / Fixed
costs can averaged out
Tyres Hardware BPO
Proprietary Product difference None
Brand Identity Low
Switching cost High
Capital Requirement Moderate to low. Customer contacts are

critical
Distribution strength None
Cost Advantage High
Government Policy Low
Expected Retaliation Moderate to low
Production scale NA
Anticipated payoff for new Good

entrant
Precommitment contracts Highly critical in this industry
Learning curve barriers High
Network effect advantages of None

incumbents
Tyres Hardware BPO
No. of competitors - Monopoly / Multiple players

RIVALRY DETERMINANT Industry growth is high. The industry is

in growth mode and hence has lower
level of internal competition
Industry growth High
Fixed cost / value added Low
Intermittent overcapacity None
Product difference Low
Informational complexity Moderate
Exit Barrier Low

SUPPLIER POWER None
Differentiation of input None

Switching cost of supplier None
Presence of substitute None
Supplier Concentration None
Imp of volume to supplier None

Cost relative to total purchase None
Threat of forward v/s Backward None

integration
BUYER POWER High, especially for smaller companies
Tyres Hardware BPO
Buyer conc. v/s firm High for each firm. For some very high
concentration
Buyer volume High for new firms
Buyer switching cost Moderate
Buyer information High
Ability to integrate backward Moderate
Substitute product No product substitute in medium term.

Vendors can be substituted. Long term
new technologies can make some
services obsolete
Price sensitivity NA
Price / Total Purchase NA

Product difference NA
Switching cost NA
Buyer propensity to Subsititute NA
Intangible assets 1. Brand have moderate impact 1. Brand not resulting in too much 1. Customer relationship important.
3. Distribution infrastructure important pricing power. Indian brands not so Similar to IT services
for after sales market powerful. 2. Knowledgement management critical
4. Customer relationship important for 2. Low for indian vendors
OEM market 3. Distribution critical . Service
infrastrucuture is important
4. Customer relationship important for
Corporate customers / Dealer
relationship important for retail
Valuation model
Tyres Hardware BPO
Valuation approach
High PE
Valuation drivers

Avg CAP assumptions
Maintanance capex
as % of sales
Technology Financial instituiton
IT services BANKS Rating agency
List of companies (by size) with Large no. of companies. However top 8 Industry is fragemented. Top 16 players 1. Crisil -
names - By sales companies account for 80 % and top 4 account for 80 %. Total no. of banks is 2. ICRA -
for 70 % (cognizant is not listed 50 +
1. TCS - 22 % 1. SBI - 25%
2. Infosys - 19 % 2. ICICI bank - 10 %
3. Wipro - 17 % 3. Punjab national bank - 7 %
4. Satyam - 10 % 4. Canara bank - 6 %
5. HCL - 5 % 5. BOB - 5 %
6. Iflex - 2 % 6. BOI - 5 %
7. Union bank of india - 4 %
8. HDFC bank - 3 %
9. Indian overseas bank - 3 %
10. Oriental bank of commerce - 3 %
Profitability pool analysis - Very profitable industry. However only Most banks have ROE in the range of
ranking by ROE the top vendors or specialist are highly 17-22 % . Almost 90 % + banks have
profitable. A number to tier II and III double digit ROE in last few years
vendors are losing money
1. TCS - 65 %
2. Infosys - 22 %
3. Wipro - 29 %
4. Satyam - 26 %
5. HCL / Iflex - 8 %
6. Patni - 10 %
Market share stability analysis NA Cannot analyse. However accquisition

mergers should reduce the no. of
players.
Pricing stability Pricing is better for Top tier and Competition has made pricing of credit High, due to oligpoly between the 3
specialist companies. For Tier II and III competitive. However it decided more companies
companies pricing is squeezed due to by interest rates
reliance on key customers
Industry structure type Fragmented. But consolidating at the Very fragmented. Should consolidate oligopoly between three companies
Top and to specialist vendors through M&A 1. CRISIL
2. CARE
3. ICRA
Key Industry products or 1. Retail lending 1. Ratings

segments 2. Corporate lending 2. Market research
3. Treasury operations
4. Fee based incomes
Identification of companies 1. SBI 1. CRISIL

possessing competitive 2. ICICI 2. CARE/ICRA
Economic model
Return on capital : 1.Very high return on capital Retun on capital depends on economic 1. Very high to strong competitive
2. Trend for last 10 years towards high cycle. High in last few years due to advantage ( > 50 %)
ROCE and low debts reducing int rates. Better for private and
3. No cyclicality as the industry is in a some psu due better lending and risk
growth phase management processes
Dupont analysis 1. Asset turnover not too high. Between Not entirely relevant. 1. High Asset TO ration - 2-3 times of FA
1-1.5. Main asset is building ROA is a more important no. any bank 2. NPM 15-20 %
2. High NPM. Between 17-20 %. Fairly with ROA > 1.5 % will have good ROE as 3. ROA is high. 30-40 % range
steady due to GDM banks have leverage of 9-10 times 4. Low to no debt
3. High ROA. 20% + 5. High ROE in the range of 40% +
4. Very low debt. Most companies are
cash rich
5. Persitently high ROE, in excess of 20
%
FA Intensity High FA TO as business requires only Not relevant : FA is mainly branches and 1. Asset light model. 2-3 time FA
Building and IT infrastructure IT / ATM infra turnover
WCAP Intensity Very Low WCAP - Main WCAP is Debtors, Not relevant : 1. WCAP needs are close to 0
no inventory, Low creditors. Tier 1
companies have debtors days of 30
days. Tier 2 has 60-90 days of Debtors
Capital intensive ? Low capital intensity Very capital intensive. Operates with 1. Low intensity of capital. 3-4 times TO
high level of leverage ( 10:1) ratios
Margin intensive ? High margins due to GDM model. To go Low margins (NII and other income). 1. High margins - 15-20 % NPM
down over long term due to competition ROE is good due to high leverage.
RM as % of sales and implication Salary cost. Currently under pressure Cost of funds. Depends on interest rate. 1. High margins - 30-40 % OPM
due to labor shortage Does not impact as long as the bank can
manage the asset liability durations
Key Industry ratios and 1. Interest rates and yield curve

statistics 2. GDP performance
3. NPA
Business units
Business model
Key Demand Drivers : 1. Low cost proposition for same 1. Credit offtake - Industrial / rural / 1. Debt raising by companies
1. Why would there be a services Consumer through consumer loan 2. No. of companies looking at raising
continued demand for the 2. Labour / skill shortage in long run 2. Continual demand of the product - debt and getting rated
product / service although alternate channels such as
capital markets are now relevant
Key supply drivers 1. Educated mapower at reasonable Demand deposit / Time deposit and cost None
cost of deposit
2. Continous skill enhancement of
employees
Shareholder Value creation 1. Branding 1. Ability to improve loan portfolio with

drivers 2. Strong sales capabilities low risk profile and source fund at low to
3. Service solution / innovation competitive rates
capabilities 2. Other income streams as Fee based
income , treasury income, Distribution
income
Degree / nature of change High degree of change - due to Medium - competition from alternate Low level of change
technology changes / high competition sources of finances such as capital
markets / Consumer finance companies
for consumer loans / HFC for housing
loans / Project finance & WCAP finance
from FI
Predictability of business Predicability is low due fast technology Medium - Change due to disaggregation Highly predictable
changes. Clock speed for the Business is of channel / Change due to IT / Price
high. Changes in the environment every shopping
2-3 years
Cyclical nature ? Not yet as the model is moving to Cyclical based on economy . Low now Not cyclical
offshore due to Retail loans / Retail business
which depends on the growing affluence
Ability to increase price ahead of Very moderate. More demand supply 1. Not very high due low differentiation 1. Very high for the main rating agency
inflation (Pricing power) gap driven. Commoditisation at lower levels for retail services like crisil / ICRA etc
end and moving up the value chain 2. Other income dependent more on
other non core services such as cash
management/ asset management -
depend on brand / infra and other
factors
3. Pricing depends more on the cost of
RM ( interest rate of money )
4. margins mainly a play of the yield
Some sort of monoploy or None at all - close to perfect None at all Restricted competition due to three
Oligopoly competition. main firms - CRISIL , ICRA and …
Does the company have a Yes Yes, high recurrence of reveneues Yes , if new debt is issued. Companies
recurring revenue stream like crisil have developed new revenue
streams like Risk assesment, Advisory
services, Equity research etc
Does the business have Weak to moderate brand.No Moderate branding - Not resulting in a Branding / Franchise very powerful and
franchise / brands or is it franchise.Lock in due to Switching costs franchise gives good pricing power
commodity
Does the industry enjoy high High growth currently due model shifts. High growth currently as banking not No, moderate in the current line of
growth rates ? For how long Looks likely for the next few years too developed in india business.
Key industry variable which 1. No. of new accounts 1. Net interest income 1. No of new customer added
drive the performance 2. % repeat business 2. NPA 2. Margins
3. Utlisation levels 3. Credit / deposit ratios 3. Other income - other value added
4. Margins 4. Non interest cost/ operational income service other than rating services
5. Geographic split of business 5. Level of treasury income
6. Split of business by vertical ( and 6. Return on equity
performance in the vertical ) 7.No. of branches / Infra
8. CAR
advantage
Customer advantage Factors - 1.Lock in exist due process knowledge 1. Moderate differentiation due to 1. High brand effect
resulting in moat (customer of customer and long term contracts branding and distribution network / size 2. High lockin (High switching cost)
captivity) 2. Brand effect exist, but is only 2. Brand effect is high
Higher durability than production moderate 3. Moderate lockin for retail customer
advantage factors
Presence of Network
advantage
or combitorial None Scale economies come due to bigger none
economics network
Network taxonomy None None none
Network profits based on None Network profits are based on economies none
of scale as banks with large network can
expand their retail business and also
access low cost deposits
Production advantage factors A. A. High customer advantage due to

- resulting in moat (cost based 1. Value complexity is not too high 1. Value chain is reasonable level of government regulation . Rating is
advantages). Weaker than unless IPR is being created complexity and fit of process, which generally done by a set of fixed co.s -
customer based advantages 2. Copyright may exist for a few results in lower costs and better service CRISIL, CARE and ICRA
expect in case of patents or knowledge assets. Not much for IT for customer
government regulation (like services industry 2. No copyright or patent protection
licenses ) exists
B. Scale economies critical for
- Scale economies very relevant distribution (financial products,
for local market - both geo and services), purchasing (raising deposits/
product based ( ex: operating funds), and advertising
sustainable and provide B. Scale economies not too high other B. Scale economies in securing low cost No significant process economies
competitive edge if the ratio of than staffing deposit
fixed cost / Variable cost for the Scale economies in fee based income
market is high. For ex: high from retail
distribution expense (wide Scale economies in Advertising
analysis
Architecture 1.Domain specific IPR and knowledge Crucial architecture factors : - Systems / knowledge base of company
base Relationship with depoitors / Risk details / industry expertise
2.Employee relationship and management processes / Knowldege
recrutiment / retention capability base / Employees
3.Experience / knowledge base of IT
project execution
Strategic assets 1. Domain specific IPO and Knowledge Distribution network. Though does not Brand / Toll gate like monopoly of the
base offer very high CA rating agency as any company wanting
2. Key employees groups with to access capital market have to get
knowledge assets rated
3. Moderate switching costs
Innovation Weak to none Low None
Cost Currently low cost position. Imp - Depends on access to low cost Not critical
Endurability ? deposit / Credit management and Risk
management processes
Financial strength High . V Imp . CAR decide the growth Not critical
1. Relevance in outsourcing capability of the bank
2. Relevance in Acquisitions
Reputation Moderate to low. India brand stronger Brand / strenght important for accessing V imp. Any company wanting to access
than individual company brands low cost deposit capital market has to get rated by these
companies - like a toll gate

for industry
attractiveness
Industry attractiveness sumarry Extremely attractive returns due to high Returns high currently due to growth in Very high returns due very high entry
and reasons for low high returns demand and high value add for the the industry. Entry barrier and exit barriers, low rivarly due to limited
customer. Entry barrier have now barrier also high. Rivarly is high, but has competition. No buyer power, supplier
become high as the larger firms have not impacted returns. However a very power or substitutes
become big. Rivalry is not destructive fragmented industry and slowdown can
due to high growth. Buyer power is not impact returns for smaller players.
very high and supplier power / Buyer, supplier and substitutes not very
Substitute does not impact. Very returns crucial
in the industry currently as it is a
sunrise industry
ENTRY BARRIER - No. 1 Factor - Barriers due to economies at low end - Barrier to entry is due to RBI license 1. Entry barrier very high due to
deciding industry profitability work - Economies of scale important for powerful brand (Franchise)
- Barriers due to vertical based Distribution (retail), advertising and for
competency (BCM / Insurance ) : getting low cost deposit
Depends on individuals - Switching cost moderate especially as
- Companies can enter although the consumers generally stay with the bank
industry is now consolidating
Asset specificity Low Low Low. Limited to building etc
Economies of Scale Economies important at low end - High Low

epecially for outsourcing
Proprietary Product difference None - IPR / knowledge base for vertical Low high. Credit rating work done by an
is the only differentiator agency will not have enough credibility
if done by a new agency
Brand Identity Specific for verticals Medium High
Switching cost High Medium High
Capital Requirement Low Capital requirement is high and Low

essential
Distribution strength NA Important in the retail Low
Cost Advantage High - but applicable to all Imp for all banks Low
Government Policy NA Critical as banking license is controlled Low. Can have an impact if government
by RBI decides to create a new agency and
gives it credibility
Expected Retaliation High High. Extremely fragmented and Not likely to happen in the ratings
competitive industry business. Other streams of work have
higher competition
Production scale NA Not applicale Low
Anticipated payoff for new High Moderate Low

entrant
Precommitment contracts High None high. Being leveraged for new streams
of revenue
Learning curve barriers High Medium High
Network effect advantages of None High. Higher no. of branches is critical in Low
incumbents the industry
No. of competitors - Monopoly / Intense competition Intense competition now Limited number of companies
RIVALRY DETERMINANT Medium rivalry. However firms in the Intense competition now Low due to limited no. of companies
industry due to low exit barriers do not
engage in destructive competition.
Expected to increase with growth in the
US companies in india
Industry growth High High Medium. New streams of revenue

developing
Fixed cost / value added Low High Low
Intermittent overcapacity Low NA Low
Product difference Low Low Low
Informational complexity Medium to Low Low High
Exit Barrier Low High Low

Demand variability Low High to medium Low
SUPPLIER POWER None - Input is manpower Supplier is essential deposit holder who Not relevant, except for people with
provides low cost deposit. 1. Branch right financial background
infrastructure 2.Brand image imp for low
cost deposits
Differentiation of input None None NA
Switching cost of supplier None None NA
Presence of substitute None None NA
Supplier Concentration None None NA
Imp of volume to supplier None None NA

Cost relative to total purchase None None NA
Threat of forward v/s Backward None None NA

integration
BUYER POWER % Sales contributed by Top 5 account. Imp in wholesale a/c. Retail not critical Not too high
High for smaller companies
Buyer conc. v/s firm Varies for companies. Tier II companies Low Low
concentration have higher Buyer conc
Buyer volume High for Tier II companies Low Low
Buyer switching cost High for buyers Low to medium High
Buyer information High High NA
Ability to integrate backward Low. The reverse is happening None Not possible !!
Substitute product Substitution is feasible with another 1.Capital markets for Industry None
vendor. However switching costs are 2. ECB markets
high. Hence repeat business is key
variable
Price sensitivity High for low end work High
Price / Total Purchase High High

Product difference Low Low
Switching cost Medium Low

Buyer propensity to Subsititute High High
Intangible assets 1.Customer relationships important 1.Brand critical on the deposit side 1. Brand very important and locked in
2. Knowledgement management 2. Distribution infra important for by the three main agencies - crisil,
important. deposit side / for retail sector for other CARE, ICRA
3.Branding important more from products such as insurance , mutuals 2. Customer relationship critical for
recruitement point of view. Branding etc. Distribution also important for retail having clients for the ratings business
becoming critical for the top vendors business 3. Distribution now through the NET to
4.Research for creating IP for high end is 3. Customer relationship important for provide research services
gaining importance corporate business.
4.Risk management systems important
for keeping NPA low and for treasury
income
Valuation model
Valuation approach 1. DCF 1.Price to Book - private market value is 1. DCF

2 to max of 3
High PE
Valuation drivers 1.ROA 1. Cash flow
3. ROE 2. No. of clients
4. Yield on earning assets 3. Non ratings revenue stream and
5. Cost of funding (from equity, term growth
deposits, Loans etc)
6. Net interest margins (NIM)
7. NPA
8. Provision for loan losses
9. Non-interest income and expenses
10. Reserve for loan losses and net
charge offs
11. Capital adequacy ratios
12. Debt leverage / liquidity
13. Loan books to deposit ratio - tell
how much more lending the bank can
do without more equity

Avg CAP assumptions 8-10 years
Maintanance capex Low ..< 5%

as % of sales
COMMODITY
Cement steel Metals
List of companies (by size) with 1.Grasim Industries - 22% 1. SAIL - 37 % 1. Hindalco - 36 %
names - By sales 2. ACC - 15 % 2. TISCO - 20 % 2. Sterlite - 24 %
3. Ultratech Cement - 11 % 3. JSW steel - 8 % 3. NALCO - 15 %
4. Gujarat Ambuja Cements - 10 % 4. Ispat industry - 6% 4. NMDC - 12 %
5. Jaiprakash Associates(Div) - 10 % 5. Jindal steel - 4% 5. Sesa Goa - 5 %
6. India Cements - 6 % 6. Jindal saw - 4 %
7. Birla Corporation - 4 % 7. Bhushan - 4 %
Total industry - 30000 cr total industry - 75000 cr
Profitability pool analysis - 1. ACC - 22 % 1. SAIL - 20 % 1. Hindalco - 4.4 %

ranking by ROE 2. Guj ambuja - 11 % 2. TISCO - 32 % 2. Sterlite - 0.2%
3. Birla cement - 11 % 3. JSW steel - 90 % 3. NALCO - 16.3 %
4. Grasim - 5 % 4. Ispat industry - -81% 4. NMDC - 80 %
5. Ultra tech cement (L&T) - 2 % 5. Jindal steel - 2 5. Sesa Goa - 50%
6. Jaiprakash associate - 31 % (?) 6. Jindal saw - 2 % A lot of variation in profitability. Need to
7. India cement - -7% 7. Bhushan - 5 % analyse specifics. Is it due to cyclicality
of industry ?
Market share stability analysis Market share changes show Market share lossed by SAIL/ TISCO and Aluminum - NALCO - 53 %, Hindalco - 48
consolidation happening in the industry being captured by smaller players %
1.ACC maintained mkt share at 18.5 % 1. SAIL has lost 2% to 59.5 % Copper - Hindalco - 55% , sterlite - 45%
2. Grasim has maintained at 15 % 2. TISCO has lost around 1.2 to 22.4 %
3. Gujarat ambuja has gained 4 % to 16 3. ISPAT industry gained highest share
% to 8.9 % (up 7 %)
4. Jaiprakash associate has gained 3 % 4. JSW steel has gained 3.4 % market
to 6.6 % share to 6 %
5. All smaller players like shree cement, Smaller players stable. More
madras cement, dalmia cement losing consolidation not very probable
market share losing share and would
either be bought out or close
COMMODITY
Cement steel Metals
Pricing stability Pricing has increased by only 3 % in the Very high price swing . Almost 80 %
last 6 years. NPM increases must be due price increase from 2002 to 2005. Price
to cost cuts. However price swings are increase the main cause of high
high ( - 7 % to + 20 %) profitability
Industry structure type Currently a lot of companies. Top 4 Kind of a duoploly with 74 % industry Industry is mainly duopoly for
companies comprise of 55 % of industry. between SAIL and TISCO and top 3 Aluminium and copper. As a result
A lot a poor profitablity regional players. companies 82 % of industry. Not too pricing seems to much more stable
Consolidation likely in the next much left to consolidate
downturn cycle

segments
Economic model
Return on capital : 1. Poor return on capital. Less than 10 % 1. Poor return on capital. Less than 10 % 1. Good return on capital. > 16 % for
over complete business cycle over complete business cycle the last 5-6 years
2. A few companies with cost advantage 2. A few companies with cost advantage 2. Cyclical to an extent. But it is has
can have 15 % plus ROC over business can have 15 % plus ROC over business been between 13 % and 25 % during
cycle cycle the cycle
COMMODITY
Cement steel Metals
Dupont analysis 1. Not much of an improvement in asset 1. High improvement in Asset TO. As the 1. Asset TO ratio has improved from 0.8
TO ratios for the industry. Small industry is cyclical, any upturn has high to 1.1. On an average between 0.7 and
improvement from 0.8 to 0.9. Industry tendency to increase the TO ratios as 1
not becoming any more efficient operating leverage is high 2. NPM between 15 - 18 % during the
2. Margins have expanded from 1-2 % to 2. NPM has gone to 10% + from -ve cycle
almost 10 %. Margins do not look margins due to high commodity nature 3. ROA is also cyclical, fluctuating
sustainable ( to analye as margins may of the industry between 12 % in 2000 to low of 9 % in
have come through cost cutting and not 3. Return on asset depends on 1 and 2 2003 and current high of 20 %
price hikes ) has turned +ve due to upturn in the 4. Average DE ratio of 0.3 to 1
3.ROA have gone from 1-2 % to 9 %. cycle 5. ROE is cyclical and fluctuates
again ROA is not too good 4.Debt levels down from 2.3:1 to 1.6:1 . between 16 % to 27 % with the ROA
4.Debt levels have dropped marginally. But still high
Ratio has come down from 2.7 to 2.2 5. ROE very cyclical. gone up during
5. ROE is poor (< 10 %). has improved upturn. Can come down drastically
only in the last 2 years to improvement during downturn. Not a high amount of
in margins. not sustainable and purely value creation in the industry
dependent on demand supply gap. Also
the poor ROE is due to the smaller
players
FA Intensity Low FA TO ratio. Typical FA TO ratios Low FA TO ratio. Typical FA TO ratios Asset heavy model with Asset TO
are : are : generally < 1
WCAP Intensity Low WCAP intensity for Co. like GACL , Low WCAP intensity
others have poor WCAP ratios
Capital intensive ? Highly capital intensive in nature . Major Highly capital intensive in nature . Major Highly capital intensive in nature . Major
capital investments : Plant, Distribution capital investments : Plant, Distribution capital investments : Plant, Distribution
network (sales / purchasing office ), network (sales / purchasing office ), network (sales / purchasing office ),
distributors etc distributors etc distributors etc
Margin intensive ? Poor margins during Demand supply Poor margins during Demand supply High margins, typically 15%. Looks
mismatch. In excess supply scenario the mismatch. In excess supply scenario the mainly due to the duopoly nature of the
margins come under pressure. margins come under pressure. industry for AL and copper
RM as % of sales and implication 28 % plus for TIER one companies. 28 % plus for TIER one companies.
Other companies which are not low cost Other companies which are not low cost
producer have lower OPM producer have lower OPM
COMMODITY
Cement steel Metals

statistics
Business units
Business model
Key Demand Drivers : 1. Demand supply mismatch due to 1. Demand supply mismatch due to
1. Why would there be a excess supply can put pressure on excess supply can put pressure on
continued demand for the margin margin
product / service 2. Infrastructure growth / Housing 2. Infrastructure growth / Housing
Construction demand especially in Construction demand especially in
higher urbanisation areas higher urbanisation areas
3. Performance of downstream
companies such as Cars, White goods
Key supply drivers 1. Price of coal/ limestone 1. Price of iron ore
2. Energy price such as oil / coal etc
Shareholder Value creation 1. Enduring low cost position 1. Enduring low cost position
drivers
Degree / nature of change 1. Low. Strongly dependent on business 1. Low. Strongly dependent on business
cycle and demand supply gaps cycle and demand supply gaps
2. Industry consolidation would help in
improving returns and reduce
competition
COMMODITY
Cement steel Metals
Predictability of business 1. Medium 1. Medium
Cyclical nature ? 1. high 1. high
Ability to increase price ahead of 1. Only if there is supply shortfall, else 1. Only if there is supply shortfall, else 1. Only if there is supply shortfall, else
inflation (Pricing power) poor poor poor
Some sort of monoploy or 1. None 1. None ??

Oligopoly 2. Consolidation would result in better
pricing power
Does the company have a Yes. Yes. ??

Does the business have Commodity with poor brand / franchise Commodity with poor brand / franchise Commodity with poor brand / franchise
franchise / brands or is it value value value
commodity
Does the industry enjoy high Medium growth rates especially in india. Highly cyclical industry Cyclical
growth rates ? For how long However growth would add value only if
there is industry consolidation
COMMODITY
Cement steel Metals
Key industry variable which 1.Most important is production cost for 1. Demand supply mismatch 1. Demand supply mismatch
drive the performance company 2. Global demand and pricing 2. Global demand and pricing
2. Cement pricing depending on 3. Production cost (cost of goods sold as 3. Production cost (cost of goods sold as
demand supply scenario % of sales) % of sales)
3. Demand supply mismatch in the local
/ regional market of the company as the
product is transportation cost sensitive
4. Medium term demand supply
situation (no. depends on the new
plants coming up)
advantage
Customer advantage Factors - Low customer advantage except for None None
resulting in moat (customer moderate brand effect
captivity)
Higher durability than production
advantage factors
Presence of Network None None

advantage
or combitorial none none None
economics
Network taxonomy none none None
Network profits based on none none None

COMMODITY
Cement steel Metals
Production advantage factors A. A. A. Process economies - very critical

- resulting in moat (cost based 1.Value chain indivisibility / complexity 1.Value chain indivisibility / complexity 1. Value chain indivisibility is important
advantages). Weaker than and process is important to derieve a and process is important to derieve a 2. Process complexity and fit has critical
customer based advantages sustainable cost advantage (ex: GACL) sustainable cost advantage (ex: TISCO) important for some metals such as Al
expect in case of patents or 2.Process cost reduction happens 2.Process cost reduction happens 3. Process cost reduction happens over
government regulation (like through learning curve through learning curve time
licenses ) 3.Access to limestone and other raw 3.Access to coal, iron ore and other raw 5. Resource access such as ore / power
material such as low cost captive power material such as low cost captive power has high important
- Scale economies very relevant can give moderate cost advantage can give moderate cost advantage
sustainable and provide B. Scale economies in purchasing, B. Scale economies in purchasing, B. Scale economies important for
competitive edge if the ratio of distribution(logistics) distribution(logistics) production and purchase of raw material
analysis
Architecture 1. Process capabilities can help achieve 1. Process capabilities can help achieve 1. Process capabilities can help achieve
low cost position. Difficult to sustain low cost position. Difficult to sustain low cost position. Difficult to sustain
Strategic assets 1. Strong distribution network in specific 1. Strong distribution network in specific 1. Strong distribution network in specific
market . May not be easy to replicate market . May not be easy to replicate market . May not be easy to replicate
2. Tie up of RM from specific source . 2. Tie up of RM from specific source . 2. Tie up of RM from specific source .
Ownership of mines resulting in low cost Ownership of mines resulting in low cost Ownership of mines resulting in low cost
RM can add to low cost position RM can add to low cost position RM can add to low cost position
3. Presence of plant close to key
market. Can be replicated though
COMMODITY
Cement steel Metals
Innovation None. None. Would be limited to new None. Would be limited to new
processes / practises processes / practises
Cost Very critical factor Very critical factor Very critical factor
Financial strength Critical for continous capital investment Critical for continous capital investment Critical for continous capital investment
into the Business into the Business into the Business
Reputation Low Low Low

for industry
attractiveness
Industry attractiveness sumarry Cyclical and low returns during Cyclical and low returns during
and reasons for low high returns downturns. Fragmented industry which downturns. Fragmented industry which
is slowly consolidating. As a result of is slowly consolidating. As a result of
scale, entry barriers are going up. Still scale, entry barriers are going up.
local economies of scale exist. Returns Returns also drop due intense rivalry
also drop due intense rivalry and high and high competition. Low impact of
competition. Low impact of supplier, buyer power and substitutes. Suppliers
buyer power and substitutes have moderate influence due to coal
and ore pricing
ENTRY BARRIER - No. 1 Factor Entry barriers are not too high till Entry barriers are not too high till
deciding industry profitability consolidation happens. Also some consolidation happens. Companies can
companies can supply to local markets supply to Global markets
Asset specificity High High
Economies of Scale High High

COMMODITY
Cement steel Metals
Proprietary Product difference None None
Brand Identity None None
Switching cost None None
Capital Requirement High High
Distribution strength Medium Medium
Cost Advantage Low - only for some Low - only for some
Government Policy Low Low
Expected Retaliation High High
Production scale High High
Anticipated payoff for new Moderate Low

entrant
Precommitment contracts Low Low
Learning curve barriers Moderate Moderate
Network effect advantages of None None

incumbents
COMMODITY
Cement steel Metals
No. of competitors - Monopoly / High. 60 % capacity with top 6. Too High. Too many players such mini
ologopoly or intense competition many players mills , Integrated steel plant etc
RIVALRY DETERMINANT high competitive intensity causes poor high competitive intensity causes poor
profitability of industry. Fragmented profitability of industry. Fragmented
industry - now consolidating industry - now consolidating
Industry growth Medium. Dependent on demand supply Medium. Dependent on demand supply
gap gap
Fixed cost / value added High (upto 5 usd per tonne ) High
Intermittent overcapacity High High
Exit Barrier High High

Demand variability High High
SUPPLIER POWER Medium Medium - Ore suppliers / Coal / Lime is

controlled by government or few
suppliers and can have impact on the
prices
Differentiation of input Low Low
Presence of substitute None. Cost escalation of RM has impact None. Cost escalation of RM has impact
on Margins on Margins
Supplier Concentration Medium - For coal and fuel Medium - For coal and fuel and iron ore
Imp of volume to supplier Low Moderate

Cost relative to total purchase High High
Threat of forward v/s Backward None None

integration
BUYER POWER Low Low
COMMODITY
Cement steel Metals
Buyer conc. v/s firm Low Low

concentration
Buyer volume Low Low
Buyer switching cost Low Low
Buyer information Medium Medium
Ability to integrate backward None None
Substitute product None high. Product may not be substituted

but brands can be easily. Also
substitution by alternate material such
plastics is driving the long term trend
line downwards
Price / Total Purchase High High

Product difference None Low
Switching cost None None

Buyer propensity to Subsititute None High
Intangible assets 1. Brands important , but do not give 1.Brands also do not give pricing power 1.Brands also do not give pricing power
pricing strenght 2. Process innovations / improvements 2. Process innovations / improvements
2. R&D / Process based research for for cost reductions for cost reductions
reducting the costs
3.Distribution important for retail
sales.But no longer a key differentiator
Valuation model
COMMODITY
Cement steel Metals
Valuation approach 1. Price to book 1. Price to book 1. Price to book

2. DCF ( based on normalised earnings ) 2. DCF ( based on normalised earnings ) 2. DCF ( based on normalised earnings )
3. Reproduction costs 3. Reproduction costs 3. Reproduction costs
High PE
Valuation drivers

Avg CAP assumptions
Maintanance capex
as % of sales
Media
Media - Broadcasting Media - Production Publishing ( including papers )
List of companies (by size) with Fragmented industry with multiple Fragmented industry with multiple Only 3 listed companies ( bennet &
names - By sales players in various niches. players in various niches. coleman is not listed )
1. Zee - 28 % 1. Zee - 28 % 1. Jagaran prakash
2. HTMT - 18 % 2. HTMT - 18 % 2. Deccan chronicle
3. Adlabs - 3 % 3. Balaji tele - 8 % 3. Mid-day
4. UDTV - 5 %
5. NDTV - 5 %
6. TV today - 5 %
7. Sandesh - 4 %
8. TV 18 - 4 %
9. Saregama - 3 %
10. Adlabs - 3 %
Profitability pool analysis - 1. Zee - -7 % 1. Zee - -7 % Good ROE

ranking by ROE 2. HTMT - -6 % 2. HTMT - -6 % 1. Jagaran prakash - 13 %
3. Adlabs - 9 % 3. Balaji tele - 14 % 2. Deccan chronicle - 11 %
4. UTV - -8 % 3. Mid-day - -5%
5. NDTV - -20 %
6. TV today - 0 %
7. Sandesh - -11 %
8. TV 18 - 15%
9. Saregama - 11 %
10. Adlabs - 9 %
Market share stability analysis Data not available Data not available Data not available
Media
Pricing stability Not relevant Not relevant
Industry structure type Fragmented industry Fragmented industry

1. Broadcasting - Zee is the only listed 1. Broadcasting - Zee is the only listed
co co
2. Several content generation 2. Several content generation
companies - Balaji telefilm, companies - Balaji telefilm,
UTV,saregama UTV,saregama
3. Channel - TV18, NDTV, TV today etc 3. Channel - TV18, NDTV, TV today etc
segments
Economic model
Return on capital : Poor ROE trends. Constant drop in ROE 1. Good ROC for publishing business -
due to competitive nature of the 15 %
industry. ROE has been below 10 % on 2. Very high for digital (BPO) publishing
avg. however several specific content business
companies may have double digit ROE
Media
Dupont analysis 1. Low Asset turns . Less than 0.5

2. Double digit margins which have
however come down to single digits
3. Low ROA due to poor margins and
asset turns
4. Low debts. Ratio is 0.3:1 or lesser
5. Dropping ROE due to competitive
pressures over the last few years
( fragmentation of media)
FA Intensity Low FA intensity. Main requirement for

Publishing business would be Land/
building and printing machines
WCAP Intensity Low WCAP Ratio : High inventory due to

skewed sales around june and carry
forward of inevntory. High recievable
due to skewed sales
Capital intensive ? Moderate. Mainly WCAP and inventory

holding / obsolence cost
Margin intensive ? Net margins in 10-15 % range

Media
Key Industry ratios and 1. GDP growth, industry performance

statistics 2. Ad spending
3. Cost per thousand - cost / thousand
for reaching the consumer for
distribution
4. Ratings for broadcast networks
5. Upfront sales of ads
Cable/ satelllite
1. Average revenue per user (ARPU)
2. Churn
3. Penetration levels
4. NEt subscriber additions
5. Subscriber acquisitions
Business units
Business model
Key Demand Drivers : 1. Demand depends on the specific 1. Demand depends on the specific
1. Why would there be a product. A hit film , or popular soap will product. A hit film , or popular soap will
continued demand for the have high demand have high demand
product / service 2. Channel fragmentation / media 2. Channel fragmentation / media
fragmentation and other new forms of fragmentation and other new forms of
entertainment impacting demand entertainment impacting demand
Key supply drivers None None 1. Cost of paper / ink

2. Obsolence cost / wastage of books
Shareholder Value creation 1. Tight management of WCAP

drivers (Distribution channel)
2. Demand forecasting
Degree / nature of change

Media
Predictability of business
Cyclical nature ?
Ability to increase price ahead of 1.Very product dependent - revenue 1.Very product dependent - revenue 1. High once the monopoly is
inflation (Pricing power) based on hits based on hits established, pricing power is good.
2. Secondary stream like DVD / games 2. Secondary stream like DVD / games 2. For standard publishing, margins are
in US give better pricing if the film / in US give better pricing if the film / cost driven
show has been a hit (low in india due to show has been a hit (low in india due to
piracy) piracy)
3. Only exception is a company like 3. Only exception is a company like
disney which can price on brand name. disney which can price on brand name.
None such in india. None such in india.
Some sort of monoploy or None None Yes. Especially for the dominant paper.
Oligopoly Being threatened by alternate sources
such as TV / Internet
Does the company have a None , in india None , in india Yes.

Does the business have 1. Brand / franchise has limited power 1. Brand/ franchise very high for
franchise / brands or is it for initial appeal. Each product succeeds newspaper. Very good pricing if the
commodity based on it own strenght paper is dominant
2. For regular publishing pricing power
is weak and Franchise value low
Does the industry enjoy high Moderate Moderate. In synch with increase in no. Moderate . Slightly higher than economy
growth rates ? For how long of channel
Media
Key industry variable which

drive the performance
advantage
Customer advantage Factors - 1. Differentiation through programming Moderate brand effect (for disney in US, 1. Habit in case of papers. High
resulting in moat (customer 2. Brand effect is also moderate. but low in india) differentiation for select publications
captivity) Depends on the programming 2. Brand critical in publishing. Regular
Higher durability than production book publishing does not have brand
advantage factors effect.
Presence of Network
advantage
economics
Network profits based on None None

Media
Production advantage factors A. A. Process economies are very A. Limited to copyright

- resulting in moat (cost based 4.Process economies through license in moderate
advantages). Weaker than the past ( doordarshan in india , and 4. Moderate resource uniqueness
customer based advantages NBC/ABC etc in US) through talent
expect in case of patents or 5. Resource uniqueness through
government regulation (like programming talent
licenses )
- Scale economies very relevant

sustainable and provide B. Scale economies on B. Moderate scale economies for B.Scale is important for distribution,
competitive edge if the ratio of 1. Distribution production purchasing (content and raw material)
fixed cost / Variable cost for the 2. Purchase and Ad
market is high. For ex: high 3. Advertising
distribution expense (wide 4. Production of multiple programs and
distribution network), product distribution to a large audience
analysis
Architecture Some importance of talent
Strategic assets 1. Media license Media properties, talent

2. Media properties in the right to films/
serials
Media
Innovation None None
Cost None
Financial strength Important NA
Reputation Important NA

for industry
attractiveness
Industry attractiveness sumarry Not very high returns to moderate to High entry barriers in papers and
and reasons for low high returns low entry barriers. High competition moderate to high rivalry. So established
exist. Buyers especially Ad providers papers returns are high.supplier, buyer
and cable operators have some amount power and substitutes do not make too
of power and take away some of the much impact. For other publishing entry
returns barriers are not too high. Rivalry is high.
Also returns impacted by buyers such as
goverment or bulk buyers
ENTRY BARRIER - No. 1 Factor Moderate entry barriers due to scale, 1. Very high entry barrier in case of
deciding industry profitability licensing requirement. However a large newspaper / magazine if it is no. 1 due
number of new players are able to get in to buyer / advertiser behaviour
in niche segments 2. Low entry barrier for other publishing
companies
Economies of Scale High for production. Fixed investment 1. Matters for distribution / sourcing of
are high and once done , will come Raw material / in generating content
down as volume goes up
Media
Proprietary Product difference None 1. high but Depends on title. The

publishing company does not have a
brand
2. Very in case of newspapers /
Brand Identity High. But depends on programming magazines
1. high for papers.
Switching cost Low 1. Buyer would not switch brands
Capital Requirement High Low
Distribution strength Critical. But not done by networks Moderate importance

themselves
Cost Advantage None Low
Government Policy High. Licensing is critical Low
Expected Retaliation High High in case of paper business where

the no. 1 paper is very dominant and
has network effects
Production scale None High
Anticipated payoff for new Low High

entrant
Precommitment contracts None with customer. Done annually with Low

advertisers
Learning curve barriers High High
Network effect advantages of None High

incumbents
Media
No. of competitors - Monopoly / High competition Oligopoly, but in some cases, single
ologopoly or intense competition paper dominates a local market
RIVALRY DETERMINANT High level of competition due to fixed High for regular publishing as it is
nature of investment commodity nature and fragmented
Industry growth Moderate Low
Fixed cost / value added High High
Intermittent overcapacity NA NA
Product difference Moderate High
Informational complexity Low High
Exit Barrier Moderate High

Demand variability
SUPPLIER POWER Moderate Low except if the publisher is printing

exclusive writer content
Differentiation of input High

Switching cost of supplier Moderate
Presence of substitute High
Supplier Concentration Low
Imp of volume to supplier High

Cost relative to total purchase High
Threat of forward v/s Backward Low

integration
BUYER POWER Buyers are cable opertors, Ad providers Low
and consumer. Cable operators have
influence
Media

concentration
Buyer switching cost Low for smaller channels Low
Buyer information High High
Ability to integrate backward None NA
Substitute product Other entertainment options Internet, news channels. However

impact still low in india
Price / Total Purchase NA Low

Product difference NA High

Buyer propensity to Subsititute High Low in old generation, high in current
Intangible assets 1. Brand strength - mainly through 1.Brands have limited pricing power. 1.Brand - such as vikas / macmillan for
programming now Know brands can get good openigs for textbooks . Not so much for other books
2. Distribution infrastructure through their films / serials. Branding of films / 2. Distribution infrastructure - S&D
cable and transmission towers for characters like disney does not happen expenses
terrestial channels 2. Customer relationship with broadcast 3. Marketing / Procurement infra -
3. Customer relationship with channels sourcing books / striking book deals etc
advertisers and programming co.
4. License /media property for broadcast
right
Valuation model
Media
Valuation approach 1. DCF

2. PE
High PE
Valuation drivers 1. Revenue, Operating expenses,
operating cash flows, earnings quality
2. Balance sheet strength
3. ARPU
4. EBDTIA - for new companies which do
not have +ve cash flows

Avg CAP assumptions
Maintanance capex
as % of sales
Projects Petrochemicals
ENGG PROJECTS ( A/C, Electrical , Gas Integrated petroleum companies
const )
List of companies (by size) with 1. L&T Four companies in the buisness Fairly consolidated industry. Top 5
names - By sales 2. BHEL 1. GAIL - national player - 75 % account for 85 % of industry (513200
3. ABB 2. Petronet LNG - 19 % Cr)
3. Guj Gas - 3 % 1. IOC - 33 %
4. Indraprastha gas - 3 % 2. Reliance - 16 %
3. HPCL - 14 %
4. BPCL -13 %
5. ONGC - 9 %
Profitability pool analysis - Very profitable industry Profitability impacted due to

ranking by ROE 1. GAIL - 10 % govermental controls on pricing
2. Guj Gas - 11 % 1. IOC - 4 %
3. Indraprashta gas - 18 % 2. Reliance - 8.5% (not impacted as it is
4. Petronet LNG diversified and not under government
control)
3. HPCL - -9 %
4. BPCL - -23%
5. ONGC - 16 %
Market share stability analysis Exact numbers not available. GAIL is Data not available
largest. Other companies are city
specific and enjoy a level of monopoly
const )
Pricing stability 1. Pricing is fixed based on project. RM Data not available Data not available. Pricing controlled by
prices fluctuates during contract and government and driven by crude costs
have to be managed to manage margins
Industry structure type Mainly controlled by GAIL. Reliance now Mainly government sector gaints.
forming a nationwide network using Competition from reliance in refinery,
their gas finds in godavari basic. and marketing
Local monopolies like Guj gas in surat, Additional competition from the global
baroda or in delhi by indraprashta gas majors in E&P. private players now in
retail such as Essar etc.
Key Industry products or 1. Power, Oil and gas, and other 1. Consumer 1. Fuels
segments industry 2. Industrial retail 2. Naptha
2. Electrical projects, power project, 3. Bulk 3. Distillates
Refigration project, construction project,
Segment and company mapping refinery etc.
Identification of companies 1. Reliance due to scale and

possessing competitive management
advantage (sequence from 2. IOC - due to backward intergration
strongest to weakest) and marketing network
3. HPCL/BPCL - due to mktg network and
refinery in good locations
Economic model
Return on capital : 1. Cyclical - varies depending on the High. Generally in 15-20 % Good ROE . General in 15-20 % range -
economic activity only for reliance. Government pricing
2. Normative return difficult to calculate. impacting the other companies
Has varied from single digit to 30%+ in
recent past
const )
Dupont analysis 1. Asset TO = 1.2- 2 times 1. Asset TO is 1.8-2 with increases in 1. Asset TO is 1.8-2 with increases in
2. Low single digit - 3-7 % last few years last few years
3. 10-14 % 2. NPM fairly stable (with improvements 2. NPM impacted for government
4. 0.8 - 0.3 also) companies due to subsidy for petrol and
5. 10- 25 % 3. Working Cap/ Sales is low other products. Industry average steady
All the return ratios are cyclical and 4. Low Debt to equity due to gas and private sector
depend on business cycle 5. ROE is good. From 12-20% + 3. ROA has improved to 15 % due to rise
in petroleum prices
4. reduction in Debt . ratio has come
down from 0.7 :1 to 0.4 : 1
FA Intensity High FA Moderate TO ratios. Fixed costs in terms High. Capital intensive industry with
of gas pipelines. Low level of large investments in
obsolesence - refinery
- crackers
- E&P
WCAP Intensity Low WCAP TO : Projects have lead times High. Business requires low WCAP to High now mainly due to rise in inventory
where the procurement has to be done negative WCAP costs. Debtors and other Wcap
and payment is by percentage components still stable
completion. Also as projects are long
term in nature , WCAP depends on
project management
Capital intensive ? Low capital intensity .skills
Working capital Yes. Fixed asset intensive. Wcap Yes
management is crucial intensity is low or -ve
Margin intensive ? Not high Margin. Competitive business Not high. Margins are 10% plus variable. Depends on govt policy
subject to bidding
RM as % of sales and implication Low teens margins. NP margins are 5-7 1. Depends on GRM - which depends on
% range also crude price
2. Mktg margins depends on govt
pricing of fuels and SKO
const )
Key Industry ratios and Gas pricing GRM
statistics Pricing for govt controlled products
Crude cost
Refining capacity
Business units 1. Retail 1. Refinery

2. Bulk 2. Retails
3. Transmission 3. LPG/Gas
4. Aviation
5. E&P
Business model
Key Demand Drivers : 1. Industrial economy performance 1. Industrial performance 1.Basic demand for petro products
1. Why would there be a 2. Commerical business performance for 2. Switching to Gas as source of energy
continued demand for the A/c business ( Price of oil / regulation is key factor)
product / service 3. Retail demand
4. Conversion of Auto to CNG
Key supply drivers 1. RM costs such as steel, copper, 1. New Gas finds 1. Crude price
cement etc 2. Import availability ( LNG vs NG vs
CNG )
Shareholder Value creation 1.Ability to manage RM costs 1. Ability to tie long term contracts with 1. Capacity utilisation at refinery
drivers 2. Ability to control project costs customers ( with price variability ) 2. Gross refining margins - this in turn
3. High Capital turns as the margins are 2. Access to low cost supply depends on crude prices.
low 3. Strong balance sheet to build 3. Marketing infra with refinery helps in
4. Project order book distribution infrastructure maintaining margins
Degree / nature of change Major level of change as gas sector 1. Low

being opened up. Threat of new 2. Check on how much new capacity is
licenses. Impact of Reliance needs to be expected . Expansion in refinery
analysed. Impact of GAIL and National capacity could impact the refining
grid margins in the future.
const )
Predictability of business Good predicability of revenue stream. Low. However margins are not
Retail customer has highest predicable due to Crude volatility and
predictability. Industrial is next in government pricing policy
predicability. Transmission is lowest.
Cyclical nature ? Business is not very cyclical. Depends Yes. Depends on economy growth and
on the manufacturing business cycle. crude prices
Also depends on gas prices
Ability to increase price ahead of 1.Pricing power is low and subject to Till date not high. Prices are subject to Refining margins are dependent on the
inflation (Pricing power) bidding. annual contracts. However changing as price of crude. However for some
2.Margins depend on the project input price is being decontrolled companies it depend on the retail price
duration / rm costs of product which is controlled by the
government. Hence poor pricing.
Some sort of monoploy or None. Competitive bidding Monopolistic in nature till date. Duopoly None
Oligopoly due to reliance (GAIL/Reliance). Local
areas to may have monopolies
Does the company have a None. Competitive bidding Yes. As contracts are signed for mid to Only from contract (Ex reliance ) or if
recurring revenue stream long term the refinery has downstream
distribution. Retail business has high
repetitive revenue
Does the business have No . The business is mainly a No franchise power. Only production
franchise / brands or is it commodity. Value add is through a driven advantages. Companies trying to
commodity strategic asset such as pipeline / Tech build brand for retail network
knowhow/ License for a certain area.
Does the industry enjoy high High, due to big investments in power, Yes. The industry has high growth for Moderate growth due to good growth of
growth rates ? For how long cement and other infrastructure projects next 5-7 years till the gas infrastructure the economy
is setup in india
const )
Key industry variable which 1.Demand growth 1. Government policy
drive the performance 2. Supply assurance and cost of supply 2. Capacity utilisation
3. License and Distribution 3. Product cost
infrastructure 4. Economies of scale
5. Production technologies
advantage
Customer advantage Factors - 1. Brand has moderate impact at the 1.Lockin due to infrastructure in place 1. Brand effect is low. Relevant if fuel
resulting in moat (customer bidding stage and long term contracts. This results in outlets are owned by company
captivity) switching costs which may be high
advantage factors
Presence of Network None

advantage
or combitorial None None none
economics
Network taxonomy None None none
Network profits based on None None none

const )
Production advantage factors A. A. A.
- resulting in moat (cost based 1. High indivisibility of value chain due 1. Value chain indivisibility is important 1.Value chain indivisibility is critical and
advantages). Weaker than to long term nature of projects in terms of procurement process, complexity process fit can add to cost
customer based advantages 2. Complexity and fit of process is distribution, marketing and sales etc advantage
expect in case of patents or critical for low cost and on time delivery 2. Cost advantage realised due to 2. Cost advantage can be achieved
government regulation (like 3. Moderate rate of change in process learning curve through learning curve
licenses ) cost 3. License /Lease / rights can create 3.Access to petroleum at cost effective
4. Protection through patents and R&D entry barriers price. Not so critical in india as most
- Scale economies very relevant assets 4.Access to gas a low prices such companies import oil
for local market - both geo and company owned wells is critical
sustainable and provide B. Scale economies in B. Scale critical in distribution, B. Scale economies critical in
competitive edge if the ratio of 1. Production purchasing and R&D. Scale economies production, distribution and purchasing
fixed cost / Variable cost for the 2. Purchasing of RM are useful in tying up purchasing
market is high. For ex: high 3. Sales and mkt contracts and in distribution
distribution expense (wide 4. R&D
analysis
Architecture 1. Relationship with key customers such 1. Procurement contracts / relationship 1.Procurement contract / supply
as power companies for power projects, with supplier crucial in profitability contracts with marketing companies (if
or cements companies ec 2. Process knowldege to run the gas relevant)
2. Engineering, project management infra is important. Not a key 2. Relationship with government
knowledge base and experience differentiator 3. Ability to setup and run refineries
with high scale - resulting in economies
of scale
Strategic assets 1. Patents Patents on gas technology, Gas 1. Distribution network very critical
2. Knowledge assets pipelines, Switching cost , Gas license 2. Plant - especially for of high scale
3. Experience of delivering similar 3. Access to oil properties on special
projects terms
const )
Innovation Sustaining innovation especially in None Low
process
Cost Important as project margins are very Important - if own supplies and own important
low infrastructure.
Financial strength Very important as some project involve high high

financial risks too
Reputation Brand is important for recognition in the critical for institutional buyer Moderate. Companies attempting to
industry build retail brands

for industry
attractiveness
Industry attractiveness sumarry Barriers are high for new players. High entry barrier and monopoly due to Moderate entry barriers and moderate
and reasons for low high returns However due to cyclical nature of licensing has resulted in high returns. rivalry should keep the returns above
demand and industry, rivalry is high. However supplier power is high, buyers average. However government
Also buyers have high involvement and especially bulk customer can negotiate intervention has destroyed margins.
due projects nature the margins and and there are substitutes available. Also buyer power, supplier power and
returns are low during demand These have reduced the returns a bit, substitutes have low impact
downturns. but still the returns are above average
ENTRY BARRIER - No. 1 Factor Barrier to entry is high for new players. High entry barrier exist. Would change Moderate entry barriers based on
deciding industry profitability However high competition among based on the policy / regulatory economies of scale
exisiting players and international decisions
players. Scale and experience, exisiting
relationship with customer create entry
barriers for existing players
Asset specificity High High High
Economies of Scale High as the scale of projects is large high economies of scale due to the Gas High. Larger refineries with latest
infrastructure which has to be defined technologies can have higher GRM
(gross refining margins)
const )
Proprietary Product difference Low. Project execution skills and None Low to none
knowledge is more critical
Brand Identity Low to moderate None none- relevant only if the refining
business has associated marketing
Switching cost V high during project. Low for new High infrastructure
Low to none
project
Capital Requirement High High High
Distribution strength Low High Critical
Cost Advantage High Medium to low . Depends on Medium to low. Depends on economies
procurement contracts and the cost of scale
structures
Government Policy High for domestic market Imp. The policy / license decisions would Imp as petro product pricing at retail
have high impact level is still controlled by the
government
Expected Retaliation High due to bidding nature of projects Current low. In the future new entrants Competition between existing
may increase the competitive impact competitors
Production scale High NA Critical
Anticipated payoff for new Moderate Low Low

entrant
Precommitment contracts Low High Critical from buying and selling side(if
marketing infra is absent)
Learning curve barriers High high Moderate
Network effect advantages of Low High None

incumbents
const )
No. of competitors - Monopoly / High competition Monopoly changing to duopoly. Increase moderate competition
ologopoly or intense competition in competition happening.
RIVALRY DETERMINANT High rivalry due to cyclical growth, high Currently low due to local licenses moderate as the industry has been a
exit barriers and intermittent over ( monopoly ). At national level low due controlled one
capacity to monopoly with GAIL. Will reduce in
future with other companies /
competition
Industry growth Moderate to high - cyclical High moderate - cyclical
Fixed cost / value added Low Moderate value addition High
Intermittent overcapacity High Till date none Currently low
Product difference Low Low. As area monopolies exist Low to none
Informational complexity High CHK Low to none
Exit Barrier High High High

Demand variability High Low Low
SUPPLIER POWER Low. RM prices are decided by Supplier power is high. The impact to Low as crude can be sourced from a
commodity prices reduce as new sources would be variety of locations sources
available
Differentiation of input Low Minimal none

Switching cost of supplier Low High as sourcing contracts are signed. low
Integrated gas co. such as GAIL will not
have any issues
Presence of substitute Low Other sources of energy. Currently none
move towards gas is high globally
Supplier Concentration Low to moderate Currently high. Limited to GAIL / CAIRNS low
etc. Situation to ease in the future
Imp of volume to supplier Low to moderate Moderate to high ??
Cost relative to total purchase High High high
Threat of forward v/s Backward None High as some supplier are themselves Moderate
integration integrated companies. Like Reliance /
BUYER POWER High especially large projects GAIL
Buyer power strong for bulk customer None - except if the refinery is stand-
alone and supplies through a marketing
company
const )
Buyer conc. v/s firm high to moderate Buyer conc is low low
concentration
Buyer volume High Buyer volume to total sales volume is low

low
Buyer switching cost Low Buyer switching cost (retail) is high. At low
Bulk customer switching is more
Buyer information High probable
High for bulk customer. Low for retail low
Ability to integrate backward Low to moderate Low none
Substitute product Inhouse projects for commodity/ low end effected by other forms of energy None for the product and indsutry
work sources. More important between
different forms of gas. Gas v/s oil v/s
coal are the subsitutions. Price of each
plays an important role
Price sensitivity High High high
Price / Total Purchase High High high

Product difference Low for commodity work Low low
Switching cost Low initially High V high

Buyer propensity to Subsititute Low for complex projects Low Low to none
Intangible assets 1.Brands are not too important 1. Patents for processes and new 1.Patent / Knowledge asset for
2. Knowledge assets in the form of usages. Not much in india achieving low cost production
technical expertise for specific projects 2. Local / regional monoply for gas 2. Customer relationships need to be
is critical. Project management skills distribution. This is weaking now with developed by stand-alone refinery to
crucial for large projects CAS for pipeline sharing at national level market their product
3. Patents may exist in the some cases 3. Customer relationship important for
for unique process / design - not seen in wholesale business (industrial customer)
india 4. Moderate Switching costs / Lockin
4. Customer relationship for repeat exist once the customer has signed up
business the supplier
Valuation model
const )
Valuation approach DCF 1. Earning based measures - P/E DCF, asset replacement value
2. Asset based measures
High PE 50 12-14 12-14

Low PE for the industry 10 8-9 5-6
Avg PE for the industry 15-20 10-12 8-10
Valuation drivers 1. Open orders position 1. Asset replacement value
2. Inventory/ Debtors position 2. Government pricing and policy (GRM)
3. RM costs 3. Crude pricing
4. Net margins 4. Capacity for refining
5. Demand for petro products
Avg ROC numbers of industry 10-15 % 15%+ Variable
Avg Growth for industry 10-12 % 8-10% 6-7% (linked to GDP)

Avg CAP assumptions currently 10 years None by mkt None by mkt. Mkt pricing below
replacement cost
Maintanance capex
as % of sales
Tourism
Petrochemicals (excluding lubes) Lubricants Hotels
List of companies (by size) with Multiple products 1. Indian hotels - 28 %
names - By sales 1.Reliance+ IPCL (through IPCL) - 70 % 2. EIH limited - 20 %
2. Ruchi soya - 7 % 3. Hotel leela - 9 %
3. Supreme petrochem - 6 % 4. Asian hotel - 9 %
4. Castrol - 5 % 5. ITC hotel - 6 %
5. Tamilnadu petro - 4 % 6. Taj GVK hotel - 5 %
Total industry - 23700 Cr 7. Bharat hotel - 5 %
Total industry - 3500 Cr
Profitability pool analysis - Profitability of industry is poor except 1. Indian hotels - -1.5%
ranking by ROE for reliance, castrol, and narmada 2. EIH limited - 13 %
chematur 3. Hotel leela - 7 %
1. Reliance - 19% 4. Asian hotel - 1.7 %
2. Castrol - 29 % 5. ITC hotel - 2.7%
3. Narmada chematur - 27 % 6. Taj GVK hotel - 27 %
4. Lanxess ABS - 4 % 7. Bharat hotel - -12 %
Total industry - 3500 Cr
Market share stability analysis Reliance+IPCL control 70% of market.

Other Petroleum majors are expanding
in petrochemicals like IOC
Tourism
Pricing stability Driven by crude/ input cost and demand Highly dependent of the volume of
/ supply condition business travel and the room capacity.
As the business takes time to add new
capacity especially in key metro
markets, pricing strong in times of high
demand
Industry structure type emerging and growing industry. Not Multiple companies. High compeition. To
controlled by government check if consolidation happening

segments
Identification of companies Reliance

Economic model
Return on capital : Poor ROE for most companies except 1. Normative return on capital is high . 1. Poor for the last few years ( due to
the 3 companies noted above 20 % range over supply and low demand )
2. Ten year Returns - Drop from 15 % +
to low tens ( 4-5 % ) .Mainly due to poor
demand and excess supply
Tourism
Dupont analysis 1. Asset TO has improved from 1 to 2.5. 1. Very low Asset TO ratio (<0.5)
The improvement is driven by reliance 2. Highly variable NPM , from 17 % to 5
2. NPM has improved from 4 % to 8 % % depending on the business cycle
again mainly due to reliance 3. Highly variable ROA due to cyclical
3. Asset to equity or debt to equity has business
improved 1.5:1 to 0.5 :1 4. Asset / Equity is < 2. Moderate to low
4. ROE improvement for industry from debt levels
5-9 % from 2003 to 30 % + in 2006 5. Low ROE . Typically < 10 %. Depends
on margins (business upcycle)
FA Intensity High. Capital intensive business with 1. FA intensity low for castrol. Other Co. Low. High capital investment. Model
investment in plant and euquipment have FA TO in 0.8 - 1.5 . shifting to managed property to improve
2. FA are typically lube blending plants. ROA
WCAP Intensity WCAP intensity Low for castrol. ??
Capital intensive ? High. Capital intensive business with Yes

investment in plant and euquipment
Margin intensive ? Moderate. < 10 %. Cyclical in nature Poor margins in this business. Except for Low to moderate margins ( depends on
companies with strong brands / occupancy levels )
Distribution infra
RM as % of sales and implication Operating margins in 25 % range.

However low NPM due to high
depreciation costs (High asset intensity)
and interest component due to debt
Tourism
Key Industry ratios and Demand supply

statistics Capacity scenario
Pricing
Business units
Business model
Key Demand Drivers : 1. Petrochemicals are used in wide 1. Industrial demand 1. Business travel - Related to economy
1. Why would there be a variety of industry and essential to 2. Automotive demand - No. of old performance
continued demand for the economy vehicles 2. Liesure travel - Related to income
product / service levels
3. Inbound tourist levels
Key supply drivers 1. Crude price and RM prices which are 1. Price of petroleum / oil 1. Room capacity (available stock)
derieved from crude 2. Depends on location too
Shareholder Value creation 1. Demand - supply condition (capacity) 1. Brand 1. Shareholder value improvement can
drivers 2. Costs of product 2. Distribution infrastructure be done through managed property
3. R&D and research on product model to reduce asset intensity
4. Economies of scale 2. Better brands / Targeted hotels can
be used to improve occupancy rates
Degree / nature of change 1. Low, mainly dependent on capacity 1. Low to medium 1. Low
scenario and demand - supply
Tourism
Predictability of business High. However margins are not 1.High 1. High although Cyclical in nature
predicable due to Crude volatility
Cyclical nature ? Yes. Depends on economy growth and 1.Auto segment has low cyclicality Yes
crude prices 2. Industrial segment depends on
industrial activity
Ability to increase price ahead of Not very high. Mostly commodity 1. Low No. Depends on the demand supply gap
inflation (Pricing power) product wherein the margins are highly at any point of time
dependent on the crude pricing
Some sort of monoploy or 1. Reliance may have some pricing 1. Intense competition due to large no. None. Except in some heritage
Oligopoly power in its products. 60-70 % mkt of players property / Key locations
share held in reliance some key
products
Does the company have a Yes Yes Yes.
Does the business have More of commodity Weak Franchise. Strong brands , but Brands . But not very profitable
franchise / brands or is it high price senstivity ( pricing strenght franchise due to high fixed costs .
commodity some times ??)
Does the industry enjoy high Yes Low growth rates in the last few years. Not very high growth due to cyclical
growth rates ? For how long Also a lot unorganised companies nature
Tourism
Key industry variable which 1. Capacity utilisation 1. ARR ( average room rent)
drive the performance 2. Product cost 2. Occupancy rates - depending on
3. Economies of scale business / tourism levels
3. Net margins (costs)
4. Asset turns
advantage
Customer advantage Factors - 1. Low customer related moats. Small 1. Experience good - brand effect results
resulting in moat (customer moat due to following factor in premium pricing
captivity) - specialised relationship with specific
Higher durability than production customer due to special product
advantage factors developed for them
- in case the supplier has high mkt
share, customer may not have much
choice
- long term contracts

advantage
economics

Tourism
Production advantage factors A. 1. Value chain indivisbility not too high

- resulting in moat (cost based 1.Value chain indivisibility is critical and 4. License / lease of key properties can
advantages). Weaker than complexity process fit can add to cost have impact on pricing and profits (for
customer based advantages advantage ex Taj properites)
expect in case of patents or 2. Cost advantage can be achieved
government regulation (like through learning curve
licenses ) 3.Access to petroleum based RM.
Vertically integrated companies at an
- Scale economies very relevant advantage (like reliance). Companies
for local market - both geo and have to import product
product based ( ex: operating 4. Access to technology and latest
system is a specific local product research (not a big factor though)
sustainable and provide B. Scale economies critical in B. Scale economies have importance in
competitive edge if the ratio of production, distribution and purchasing purchasing and advertising
analysis
Architecture 1. Customer and supply contracts Service orientation of personnel. Not a

2. Process knowledge to reduce product very big differentiator
cost
3. Vertically intergrated companies with
access to RM at favorable prices have a
cost advantage
Strategic assets 1. Scale economies are important Key properties which can duplicated.
2. Technincal knowhow also important Such Taj at Gateway etc. May not add
too much to overall profitability if
demand is weak
Tourism
Innovation Low to moderate None
Cost V Important Not very important as they have high

fixed costs
Financial strength Moderate Important to expand no. of properties
Reputation Moderate Brand important. However does not

seem to translate to a profitable
franchise as the pricing power is
dependent on the demand supply gap

for industry
attractiveness
Industry attractiveness sumarry Good returns in the industry as the Entry barriers are low except in metros
and reasons for low high returns industry is dominated by reliance. Also and business segment. Also as demand
entry barriers in specific product groups fluctuates and fixed costs are very high,
by specific companies and moderated the competitive intensity is very high
competition in each segment. Buyer and hence returns are cyclical. Supplier
power is high is several cases, supplier buyer and substitutes are absent. Buyer
power is low as the RM is general a power has some impact, but not a major
commodity and the substitutes are impact on returns
absent in most cases
ENTRY BARRIER - No. 1 Factor Moderate entry barriers mainly due to Entry barriers are low. Subject to
deciding industry profitability - economies of scale and resultant cost availability to land in some key areas.
advantage
Economies of Scale High Economies to scale are local in nature.

Tourism
Proprietary Product difference Low to none Medium. Ex : Taj manages to have

percieved differences
Brand Identity Low to moderate Strong
Distribution strength Moderate Low
Cost Advantage High Pricing ability is weak due to

commodity nature and high fixed costs
Government Policy Low Low
Production scale Important NA
Anticipated payoff for new ?? Low

entrant
Precommitment contracts High from both buy and sell side due Applicable for corporate customers
pricing variability
Learning curve barriers Moderate Moderate to low
Network effect advantages of None NA

incumbents
Tourism
No. of competitors - Monopoly / Duopoly in some product groups High

RIVALRY DETERMINANT Moderate to high rivalry. Not high High rivalry and price based competiton.
competitive intensity Due to high fixed costs this industry
resembles the airline industry in some
aspects
Industry growth Moderate Low
Intermittent overcapacity Moderate High
Exit Barrier Moderate High

Demand variability Low High
SUPPLIER POWER Supplier power is moderate. In some None

product group there are limited no. of
RM suppliers. Also threat of forward
integration exists
Differentiation of input none None
Switching cost of supplier Low None
Presence of substitute None None
Supplier Concentration Low to moderate None
Imp of volume to supplier Low to moderate None

Cost relative to total purchase High None
Threat of forward v/s Backward High None

integration
BUYER POWER Low to moderate Corporate market is price sensitive and
able to negotiate price
Tourism
Buyer conc. v/s firm Low Medium to Low. Corporate buyers have
concentration leverage
Buyer volume Moderate Medium to Low. Corporate buyers have

leverage
Ability to integrate backward none None
Substitute product Low as each petrochemical has specifc None in india . Possibility of competition
usages from budget hotels
Price sensitivity Moderate
Price / Total Purchase Low to moderate

Product difference Low
Switching cost Low

Buyer propensity to Subsititute Low
Intangible assets 1. Customer relationship / contracts and 1. Brands - requiring high spend to 1. Brands are important and provide
agreement are a few intagible assets maintain visibility for retail . relative pricing power (better pricing
2. Process and learning curve 2. R&D assets in terms of developing than other hotels - but not necessarily
advantages new types of lubes adequate pricing )
3. In some products R&D and special 3. Distribution infrastructure for retail 2.Customer relationship important (not
technology. Not critical in most products 4. Customer relationhip with OEM need critical ) for corporate customer for
to be maintained. Pricing power is poor business travellers
for big customers such as state
agencies / OEM etc
Valuation model
Tourism
Valuation approach DCF 1. Price to book

2. DCF ( based on normalised earnings )
3. Reproduction costs
High PE 12-14
Low PE for the industry 8-9
Avg PE for the industry 10-12
Valuation drivers 1. Cost of Product / production
(domestic v/s International )
2. Demand supply scenarios
3. Capacity utilisation
4. ROE / Other fin factors
5.
Avg ROC numbers of industry 12% +
Avg Growth for industry 1.5 times GDP

Avg CAP assumptions None by mkt
Maintanance capex
as % of sales
Tourism Shipping Engg. And Industrial Mach
Travel and tourism services Power , capital goods etc
List of companies (by size) with 1. Shipping corp of india - 46 % The industry is mix of several
names - By sales 2. GESCO - 32 % subsectors such as power, engg goods
3. Varun shipping - 13 % etc
4. Mercator line - 9 % BHEL - 21 %
Total industry size : 7123 Siemens - 8 %
Total indian industry is only 4 listed co. ABB - 8 %
However foreign competition is imp Sulzon - 7 %
Crompton greaves - 6 %
KOEL - 3 %
KEC infra - 3 %
Areva T&D - 3 %
Cummins - 3 %
Thermax - 3 %
Laxmi machine works - 3%
Profitability pool analysis - 1. Varun shipping - 73 % Most companies earning above cost
ranking by ROE 2. Maercator lines - 56 % capital. Also cyclical industry and hence
3. GESCO - 43 % current ROE is good
4. Shipping corporation of india - 26 % BHEL - 4 %
Siemens - 17 %
ABB - 27 %
Sulzon - 85 %
Crompton greaves - 24 %
KOEL - 0 %
KEC infra - 34 %
Areva T&D - 49 %
Cummins - 13 %
Thermax - 29 %
Market share stability analysis BHEL accounts for 65% of power sector
and has highest market share. Other
companies especially foreign companies
are expanding
Pricing stability Pricing highly dependent on world trade

volumes and shipping capacity
(dependent strongly on demand supply)
Industry structure type Kind of duopoly in india . Need to check Fragmented. But the larger players have
impact of foreign competition much more pricing and scale based
advantages for large projects
Key Industry products or 1. Power sector

segments 2. Industry
3. Transport - trains
Economic model
Return on capital : 1. Avg 10 % + with increase in the last 2 1. Last 3-4 years have been high due to
years due to hardening shipping rates high demand growth
2. Cyclical and depends on trade 2. Generally over 13-15% for the entire
volumes and new ships being cycle. Higher for larger companies
introduced
Dupont analysis 1. Asset TO < 1. Indicates high asset

intensity. Mainly in the form of Fixed
asset - ships / Offshore vessels
2. NPM are 10 % + with improvement
lately. NPM drives the ROE as the
business is asset intensive
3. Return on asset < 10 % due to low
Asset TO. NPM would drive this ratio
which in turn depends on trade volume
and capacity
4. Total asset / Equity is < 0.5 indicating
moderate debt level
5. ROE is 12 % + and improved lately
due to rising NPM
FA Intensity 1. High on FA 1. No. High WCAP requirement, due to

debtors and inventory position
2. Yes - R&D, customer relationship /
brands / patents and technology are key
elements in this industry
WCAP Intensity High - due to projects (EPC) nature of

sales. Inventory can also be high in
some sectors
Capital intensive ? 1. High capital requirement. Obsolence Not high

not high. However single hull ships
would require phasing out
Margin intensive ? Yes. Atleast 11% + Yes. Margins are atleast 6-7% or higher.
Margins seem to be sustainable.
However during downturns margins and
cash flows can be strained

Key Industry ratios and 1. Order book ( as % of sales)

statistics 2. Net margins
Business units
Business model
Key Demand Drivers : 1. International trade 1. Infrastrcuture development - power,
1. Why would there be a 2. Oil shipments roads and industry
continued demand for the
product / service
Key supply drivers 1.Cost of vessel (which depends on steel 1. Cost of RM such as steel, metals
and other RM prices) 2. Business is RM sensitive as the
pricing is long term during RM pricing
can change
Shareholder Value creation 1. Tight supply scenario ( new capacity 1. Growth/ demand for capital goods
drivers requires 2-3 years to come online due infrastructure requirement
2. Higher proportion of double hull 2. Cost leadership/ technology leading
vessel to growth in international markets and
3. High capacity utilisation better ROC in domestic market
4. High margins
Degree / nature of change Low change. Business is cyclical 1.Low level of change in basic demand,
however technology for capital goods is
evolving
Predictability of business Low change. Business is cyclical High, especially companies which have
accquired scale
Cyclical nature ? Yes Yes
Ability to increase price ahead of No pricing strenght can be seen. Moderate, depends on technical
inflation (Pricing power) However pricing depends on demand capabiliies, financial strenght
supply ( FA can move to any area of
demand !!). Global trade volume and
capacity are the drivers
Some sort of monoploy or None. A large number of companies None BHEL has a very strong position in
Oligopoly power sector
Does the company have a A recurring revenue stream from retail Yes Yes partly from services (after sales)
recurring revenue stream channel or from corporate contracts ,but not big
Does the business have None. Although larger fleets add to Moderate franchise driven by scale,
franchise / brands or is it scale economies and better service technology and accumulated knowledge
commodity and skills
Does the industry enjoy high High, due to more business and leisure Moderate growths. Mainly related to High due to growth in infrastructure
growth rates ? For how long travel growth in foreign trade
Key industry variable which 1. Fleet utilisation levels 1. New orders/ investment in
drive the performance 2. Shipping rates infrastructure
3. % of presigned contracts / Total sales
volume
advantage
Customer advantage Factors - Low to none 1. Customer advantage factor is related

resulting in moat (customer to switiching cost for an existing
captivity) customer. However a new sale is
Higher durability than production dependent on bids by all competitors
advantage factors
Presence of Network
advantage
economics

Production advantage factors A. 1. Process economies are linked to

- resulting in moat (cost based 1. Value chain fit and complexity is a. value chain indivisibility can lead to
advantages). Weaker than important to achieve a low cost position lower cost and better value
customer based advantages through high fleet utilisation and low b. complexity and fit of all processes
expect in case of patents or operating expenses c. process costs from learning curve
government regulation (like 3.Process costs reduce with learning
licenses ) curve

sustainable and provide B. Scale economies critical in operations B. Important scale economies from
competitive edge if the ratio of and fleet utilisation and fleet type a. purchasing
fixed cost / Variable cost for the b. R&D
analysis
Architecture 1. Relationship with other providers 1. Customer relationships and contracts 1. Relationship with important or key
such as air carriers, hotels and tourism 2. Contract and relationship with ship customers such as power utility, power
providers is important to provide a builders companies, railways, defence etc
single point service to the customer 3. Fleet operation skills / costs 2. Systems/ process/ knowledge base all
2. Relationship with corporate add to the value added for a company
customers for the outsourced travel
business
Strategic assets None. Relationships are the only assets 1. Mainly vessels and fleet operational R&D/ technology and few patents - none
skills too strong
2. Customer relationships and contracts
Innovation None None Sustaining innovations
Cost Not too important Important Imp
Financial strength Moderate v. Important V Important
Reputation Very important. A brand helps in pulling Low in terms of criticality Moderate importance
retail customer

for industry
attractiveness
Industry attractiveness sumarry Returns are cyclical depending on
and reasons for low high returns demand. Entry barriers are low as
shipping companies can add capacity in
any market as required - licensing ??.
Rivalry is high due to high fixed
investment, high demand variability and
hence margins are cyclical and
dependent on demand. supplier power,
buyer and substitutes have low impact
ENTRY BARRIER - No. 1 Factor 1. High asset specificity and intensity 1. Entry barriers mainly due to scale,
deciding industry profitability 2. Economies of scale ( no. and types of low cost position, strong balance sheet
vessels ) is critical for cost advantage and customer relationships
and to weather down cycles
3. Balance sheet strength
Asset specificity 1. High asset specificity High
Economies of Scale 1. Scale economies high for capacity Very high and important
utilisation, vessel type availability and
overall costs
Proprietary Product difference 1. Low. Depends on the services Moderate

provided
Brand Identity NA Low
Switching cost Low. Except for the contracts signed High
Distribution strength NA Low
Cost Advantage Important. Exists if scale economies High

exist
Government Policy Important. Tonnage tax, investment in Important for power, transportation,
port, development of trade would railways etc
impact industry
Production scale NA High
Anticipated payoff for new ?? Moderate

entrant
Precommitment contracts Moderate to high. Benefits when rates High

are dropping
Learning curve barriers Moderate High
Network effect advantages of NA NA

incumbents
No. of competitors - Monopoly / Oligopoly. 4-5 major companies A few major competitor - dominated by
ologopoly or intense competition BHEL
RIVALRY DETERMINANT Moderate to high. Excess rates would Moderate to high

lead to low rates , resulting in low
profitability. Mainly due to high fixed
capacity
Industry growth Moderate High
Fixed cost / value added High Moderate
Intermittent overcapacity High High
Product difference Low Moderate
Informational complexity Low High
Exit Barrier High High

Demand variability High High
SUPPLIER POWER Low. Capacity is constrained by None

availability of supplier. Lead time is long
for ships
Differentiation of input Moderate to low Low

Presence of substitute None NA
Supplier Concentration ?? Low

Cost relative to total purchase High Moderate
Threat of forward v/s Backward None None

integration
BUYER POWER Moderate to low Moderate to low

concentration
Buyer volume Low Moderate
Ability to integrate backward None None
Substitute product None None
Price sensitivity
Price / Total Purchase

Product difference
Switching cost
Buyer propensity to Subsititute
Intangible assets 1. Branding very important for the 1.Customer relationships / contracts are 1. Patents / knowledge asset crucial in
leisure travel relevant for shipping. Has a critical providing value to customer
2. Distribution infrastruture important bearing on revenue stability (can reduce 2. Customer relationships and contracts
for retail business and addon business the upside for revenue also) are important
such as Forex ( thomas cook )
3. Customer relationships important for
clients which have outsourced their
travel. Margins low in such relationships
Valuation model
Valuation approach 1. DCF 1. DCF based

2. Shipping rates 2. Open order book for revenue visibility
High PE 8-10 30-40

Low PE for the industry 3-4 10-12
Avg PE for the industry 5-6 20
Valuation drivers 1. Frieght rates 1. Open order book
2. % of pre-fixed contracts 2. Debtors days
3. Asset value 3. Inventory TO
4. P/B 4. WCAP TO
5. Asset TO
6. Margins
Avg ROC numbers of industry 20-30%
Avg Growth for industry 10-20%

Avg CAP assumptions 10 Yrs
Maintanance capex Equal

as % of sales
Textiles Retail Chemical
Lifestyle and Value retailing etc Fertilizer
List of companies (by size) with Fragmented industry. 20 companies 1. Pantaloon ( 655 cr) Fragmented industry. Around 20 companies
names - By sales make the 80 % (Total industry is 26200 2.Trent (150 cr) in industry size of 33000 Cr and 12
Cr) 3. Shopper's stop (500 Cr) companies making 80 %
1.Century Textile - 10% 4. Titan 1.National Fertilizers - 11%
2.Aditya Birla Nuvo - 9% 5. Metro AG 2.Tata Chemicals - 11%
3.Raymond - 9% 6.Provogue india 3.RCF - 9%
4.Mahavir Spinning Mills - 7% 4.GSFC - 9%
5.Indo Rama Synthetics - 7% 5.Chambal Fertilizers - 8%
6.Arvind Mills - 6% 6.SPIC - 7%
7.Alok Industries - 5% 7.Zuari Industries - 7%
8.Century Enka Ltd - 4% 8.GNFC - 6%
9.Rajasthan Spinning - 3% 9.Coromandel Fertilizers - 6%
10.Garden Silk Mills - 3%
11.Abhishek Industries - 3%
Profitability pool analysis - Most companies earning below cost of Poor industry economics. Very few
ranking by ROE capital (< 13 %) companies make more than cost of capital
1.Century Textile - -2% due to pricing controls
2.Aditya Birla Nuvo - -3% 1.National Fertilizers - -5%
3.Raymond - 5% 2.Tata Chemicals - 2%
4.Mahavir Spinning Mills - 9% 3.RCF - -2%
5.Indo Rama Synthetics - -6% 4.GSFC - 13%
6.Arvind Mills - -3% 5.Chambal Fertilizers - 4%
7.Alok Industries - 23% 6.SPIC - -13%
8.Century Enka Ltd - -10% 7.Zuari Industries - 5%
9.Rajasthan Spinning - -1% 8.GNFC - 10%
10.Garden Silk Mills - -9% 9.Coromandel Fertilizers - 5%
11.Abhishek Industries - -1%
Market share stability analysis Complete data not available. However Steady market shares
companies like mahavir spinning mills, Urea - national fertilizer @ 26 %
Rajasthan spinning and sangam india RCF @ 13 %
are gaining share in the cotton yarn Chambal has gained share from 8 % to 14 %
space DAP market controlled by a few key players
1. Tata chemical at 14 %
2. GSFC has risen to 30 % from low 10-20 %
3. Zuari has risen from < 10 % to around 30
%
4. Spic and a number of companies have lost
share or stopped DAP
Pricing stability Commodity product (part is branded). 1. DAP has seen good pricing improvement
Industry has seen rising pricing (which by around 10 % (controlled by government?)
in turn depends also on cotton prices) 2. Urea has had substaintail improvements in
pricing ( by 30 % +). Check why NPM are still
poor ?
Industry structure type Extremely fragmented, due to Mainly segmented to two segments. A few
government policy of looms and not companies dominating the DAP segment. The
allowing large vertically inetgrated rest in the urea market
compaines. Export opportunities should
see consolidation and larger mills
Key Industry products or 1. DAP

segments 2. Urea
Segment and company mapping 1. DAP

2. Urea
Economic model
Return on capital : 1. Poor ROE for the last 6 years . Less 1. Currently in mid teens (10-15 %) Extremely poor economics. ROE consistenly
than 10 % and negative sometimes 2. Fairly uniform as the industry is in in single digits with some loss years
a growth phase
Dupont analysis 1. Asset TO less than 1 or at 1 1. Asset TO low at 1.2. Has improved from
2. Low margins at 1-2 %. Have improved 0.8 to 1.2
to just under 5 % 2. Poor margins at 3-4 %. Less than 5 % and
3. ROA also poor at below 5 % sometimes negative too
4. High debt equity at 1:1 . Has seen 3. ROA poor to due 1 and 2
reduction from 1.3:1 . 4. Debt levels high. Debt equit at 1.2 :1
5. Poor ROE at 9 % now due to above 5. ROE poor due to poor margins, low ROA.
reasons Has gone negative some times. consistently
below 10 %
FA Intensity 1. Fairly high TO ( 4-5 times)

2. Addition to FA happening in the
form of new stores
3. Intangibles important in terms of
brand and reach. Supply chain
efficiencies ae crucial for success
WCAP Intensity 1. Fairly high TO ( > 4-5 times)
2. WCAP is mainly in inventory which
could be financed by suppliers if the
company manages its supply chain
well
Capital intensive ? Yes, for New store additions and
resulting WCAP increase (Till
economies of scale release capital
from WCAP)
Margin intensive ? 1. Margins are low in retail. In the

order of 4-5 % for the value segment
such as food bazar, central mall etc )
2. Margins are higher for the
speciality retai/ lifestyle in the range
of 8-9 %. Capital requirement is
higher
Key Industry ratios and 1. Industrial production index

statistics 2. Capacity utilisation
3. Inventory to sales ratio
4. Producer price index (PPI)
Business units
Business model
Key Demand Drivers : 1. Domestic demand 1. Location, pricing and branding are 1. Performance of the agricultre
1. Why would there be a 2. Major export demand to overseas important
continued demand for the market due to quota removal 2. Demographics and rising
product / service disposable income
Key supply drivers 1. Cotton price 1. Cost of rentals ( Property ) at the

2. Skilled low cost labor required locations
3. Low cost design resources 2. Overhead costs
3. supply chain cost - Difference
between GPM and NPM (sourcing
efficiency)
4. Inventory and merchandising
5. Financing options
Shareholder Value creation 1. Fully integrated with economies of 1. Overhead costs
drivers scale 2. Brand - in house would give higher
2. Strong customer relationship margins
3. Economies of scale
4. Logistics and sourcing
infrastructure and scale
Degree / nature of change 1. Product stable, but due opening of 1. High degree of change due to lack
quotas , industry undergoing change of protection of process (any one can
copy )
2. Branding may help in some
categories
3. Threat of entry from foreign
majors
Predictability of business 1. Low predictability of the business due 1. Demand is predictable

change in business model 2. Retailing is tough business with
thin margins and requirement of
scale
Cyclical nature ? 1. Low as india is move to organised

retail format
Ability to increase price ahead of 1.Low pricing for yarn and textile 1. Low as value add is limited to own
inflation (Pricing power) commodity brands. For outside brands it is not
2. Moderate pricing for Branded clothes possible
3. Good pricing for high end branded
products
Some sort of monoploy or none 1. None

Oligopoly
Does the company have a yes. But dependent on a few large Yes
recurring revenue stream buyers in the export market
Does the business have commodity for the high growth export 1. Moderate Brand in some
franchise / brands or is it market. However vertically integrated categories such as - Garments,
commodity companies have branded products Restaurant
which give some pricing strenght
Does the industry enjoy high yes currently due to the removal of the Yes for now Low. Related to mainly agricultre
growth rates ? For how long quotas in international markets
Key industry variable which 1. Scale - high production capacities 1. Inventory turns. FA turns
drive the performance 2. Design capabilities 2. NPM ( over head costs = GPM -
3. Managing relationship / order for NPM )
global retailers like walmart, JC penny 3. Store expansion plans
etc 4. Per store stats - sales , profit etc
4. Execution capability
advantage
Customer advantage Factors - None 1. Differentiation important - can be Commodity product with no brand
resulting in moat (customer in the form of brand, pricing or differentiation
captivity) experience etc
Higher durability than production 2. Low switching cost if
advantage factors differentiation is based on cost
3. Network effect not important
Presence of Network
advantage
or combitorial None NA None
economics
Network taxonomy None NA None
Network profits based on None 1. Mainly based on economies of None

scale
Production advantage factors A. 1. Value chain indivisibility and fit of A. Process economies are crucial for
- resulting in moat (cost based 1. Indivisbility of value chain to small process very important to keep cost profitability
advantages). Weaker than extent as backward integration helps in down (as retail is low margin 1. Value chain indivisibility is imp for cost
customer based advantages reducing costs business) reduction
expect in case of patents or 2. Process cost changes are moderate 2. Process cost change in india is 2. Process filt and complexity is moderate
government regulation (like over time currently high 3. Process cost change is moderate and has
licenses ) 3. Resource access in the form of cotton 4.Not copyright protection. Medium impact on total cost
and manpower has some advantage in term advantage of location and long 4. No patent / R&D assets
- Scale economies very relevant india term leases 5. Resource uniquness is limited to access of
for local market - both geo and 5. Not much resource uniqueness, potash
product based ( ex: operating expect high management skill is imp
system is a specific local product in this business
sustainable and provide B. Scale economies in production and B. Scale economies very crucial for B. Scale economies very crucila for
competitive edge if the ratio of purchasing. advertising to a small all the factors (with merchandising at production and pruchasing
fixed cost / Variable cost for the extent for branded product companies the local level)
analysis
Architecture 1. Process/ knowledge base to develop 1. Relationship with supliers - Process knowldege resulting in low cost
low cost position supplier management is a key production is the only differentiator
2. Relationship with global retailers such capability
as walmart etc for repeat business 2. Inventory management /
Merchandising / Procurement process
is crucial
Strategic assets 1. Distribution network for retail 1. Distribution network is important. None
2. Plant for mfg But can be built
3. Access to low cost Raw material is
important
Innovation Low 1. Low and can be copied None
Cost Very important due to commodity 1. Not easy to maintain . Requires V. Imp
nature constant effort on part of
management
Financial strength Important, due to attempt by companies 1. Very critical for managing growth Imp for capacity additions
to capture global markets and supply to
global retailers such as walmart, target
etc
Reputation Low, only for retail 1. critical in some categories None

for industry
attractiveness
Industry attractiveness sumarry Poor returns due to fragmented nature Sunrise and growth industry. Entry Poor industry returns due to low growth, govt
and reasons for low high returns of industry, commodity nature of barriers are coming up. Early mover controlled pricing, high competition and low
product and price competition. Also adavantage for the companies which entry barriers. Supplier power is moderate as
entry barriers are not too high and scale up. Rivarly is expected to there is some conc. Of supplier. Buyer power
competition is high. Buyer power is high intense in future and from foreign and substitute are low impact.
for the large global contracts and from competiton too. This will drive down
other countries. Supplier and subsititute returns. Other factors do not have a
does not have an impact large impact
ENTRY BARRIER - No. 1 Factor Entry barriers are low for retail. For 1. Economies of scale is critical Low entry barrier. However due to low
deciding industry profitability global business scale is critical and 2. Brand is critical in some demand growth and poor returns, not too
hence barriers could be high to get categories. Franchise - profitable is many new entrants.
contracts and develop relationships possible for some categories
3. Cost structure / Management /
Logisitics & Procurement process can
create entry barriers
Asset specificity Yes. High 1.Moderate. Retail space can be High

vacated , sold
Economies of Scale High 1. Very critical as the business is High

based on low profit margins
Proprietary Product difference Moderate to low 1. Low for most companies Low
Brand Identity Important only for branded retail local 1. Relevant to some categories such Low
market as restaurant, garments
Switching cost medium to high for the global buyers 1. Low Low
Capital Requirement High 1. High especially in case of rapid High

store expansion. Low if franchise
route is taken.In such case brand /
Franchise related costs are incurred
Distribution strength Relevant moderately only for the local 1. High High
retail market. Not very important
though
Cost Advantage Important especially for the Export 1. High if the economies of scale Moderate
market exist
2. High is integrated logistics and
procurement is in place
Government Policy important. 1. Critical in india - FDI / Land laws High
etc
2. Entry of retail to foreign
competition
Expected Retaliation ?? 1. high High
Production scale Very crititcal NA High
Anticipated payoff for new Moderate to low High currently Low

entrant
Precommitment contracts High Low. More so on the supply side Low
Learning curve barriers ?? High especially in indian context ??
Network effect advantages of None 1. Moderate to an extent that the NA

incumbents incumbent can setup the retail
channel and support infrastructure
No. of competitors - Monopoly / high competition 1. High. Expected competition from high competition
ologopoly or intense competition foreign players
RIVALRY DETERMINANT High due to fragmented industry Rivalry is high and this results in high High due to fragmented industry
competition. Foregn competition can
be expected
Industry growth Moderate to high High Low
Fixed cost / value added High High Moderate
Intermittent overcapacity High Can be high in local areas - like High

metros
Product difference Low for suppliers Low in most cases Low
Informational complexity Low Low Low
Exit Barrier High High High

Demand variability ?? Low High
Low
SUPPLIER POWER Low supplier power is a low competitive Low, driven by Petroleum industry
threat
Differentiation of input 1. Low None

Switching cost of supplier 1. Low except in case of some moderate - to check
branded goods. Still low
Presence of substitute 1. Yes None
Supplier Concentration 1. Low in most categories To check, for gas high
Imp of volume to supplier 1. High ??

Cost relative to total purchase 1. High. But low in each category v/s High
total sales
Threat of forward v/s Backward 1. Low Low
integration
BUYER POWER High for global contracts Buyer power is a very low Low
competitive threat
Buyer conc. v/s firm High Low

concentration
Buyer volume High Low
Buyer switching cost Low to moderate Low
Buyer information High Moderate to high
Ability to integrate backward No NA
Substitute product None Substitution exist for competition and Moderate. Most farming done with chemical
not product. Competitive pressure fertilizers
due to substitution is high
Price sensitivity 1. High in most categories High
Price / Total Purchase 1. High in most categories High

Product difference 1. Low in most Low
Switching cost 1. Low Low

Buyer propensity to Subsititute 1. High High
Intangible assets 1. Brands have a moderate impact only 1.Logistics infrastructure None
for companies involved in selling 2. Store brands are relevant for
finished product garments
2. Distribution has a bit importance for 3. Overall Brand for the retail
companies involved in selling branded company is important to pull in traffic
products 4.Distribution infrastructure is critical
3. Customer relation / contracts / - no. and location of outlets
agreements very important for the
export market
Valuation model
Valuation approach 1. PE
2. NPM / ROE
3.DCF
High PE
Valuation drivers

Avg CAP assumptions
Maintanance capex
as % of sales
Chemical Power
Basics - organic / inorganic and PAINTS Power generation and associated
speciality activity
List of companies (by size) with 1. Asian paints - 42% 1. NTPC - 55 %
names - By sales 2. Goodlas nerolac - 18 % 2. Tata power - 10 %
3. Berger paint - 18 % 3. Reliance power - 9 %
4. ICI - 16 % 4. PTC India - 7 %
5. Shalimar - 4 % 5. Nyvelli Lignite - 6 %
total industry - 5490 Cr 6. CESC - 5 %
7. Torrent power - 3 %
8. Gujarat industries
Total industry size - 45000 cr
Profitability pool analysis - 1. Asian paints - 18% All companies have 12-13 % ROE.
ranking by ROE 2. Goodlas nerolac - 22 % Must be due to regulation.Only PTC
3. Berger paint - 20 % has 19 % ROE and Torrent has 23 %
4. ICI - -4 %
5. Shalimar - -5 %
Market share stability analysis 1. Market share consoldiation happening High as the T&D is controlled by
towards top players. Asian paints and government regulation. Regulation
berger have gained market share and being eased now
the smaller players like J&N and
shalimar have gone down. Also
unorganised market is reducing
- Asian paints - +3.4 % increase
- Berger - +3 % increase
- GNP - +.2 % increase
- ICI - -1.8 % decrease
- J&N - -6.4 % decrease
Chemical Power
speciality activity
Pricing stability Fairly stable pricing. FG price increase in Decided by the CERC based on a
the last 2 years by 8 - 10 % due to formulae - mainly a fixed return on
increase in pertroleum prices. The key capital with added incentive on PLF
players are able to pass price increase
with a lag
Industry structure type 95 % of organised industry controlled by Top 4 players have 80 % of market.
top 4 players. Also the unorganised National player is mainly NTPC. Tata
sector is now shrinking and being taken power also has some presence
up with the top organised players across country. Reliance power has
presence mainly in bombay and
some circle. Most of these companies
are generation and in some cases
distribution companies
Key Industry products or 1. Domestic
segments 2. Industrial/ commercial
Identification of companies Not applicable

Economic model
Return on capital : 1. Below tens (10%), but has increased High. High only for APIL / GNP/ Berger 1. Mid tens ( 10-15 %)
in the last 3 years to 10% + due 2. Fairly uniform (not cyclical ) -
improvement in margins and asset TO supply shortage . Also for most
company the pricing is fixed by
government based on a fixed return
on asset. Hence ROC is uniform for
the industry
Chemical Power
speciality activity
Dupont analysis 1. Generally greater than 1 and has 1. Asset TO steady at 2.2 to 2.3 1. Asset TO is fixed at 0.5
increased from 1.1 to 1.4 in the last few 2. NPM have been steady at 5.8 - 5.7 %. 2. Margins are very stable at 16-18 %
years Reduction to around 4 % in 2005 due to 3. ROA are fixed between 8-9 %
2. Fairly low. Was in 2-3 % range and petroleum prices. Should recover to 5.5 4. Debt equity is stable around 0.5 :
has increased to 6-7% driving the ROE % + in future 1
3. Has seen improvement from 2-3 % to 3. ROA is consitently in double digits - 5. ROE is stable around 13-14 %
8-9 %. However is below 10 %. 10 % + These steady numbers are mainly
4. Debt / equity ratio is generally 1:1 4. Debt equity is low at 0.5 : 1 due to pricing controls by
and has reduced a bit recently. not a 5. ROE has come down for industry from government based on fixed ROE for
very conservative number 20 % + to around 10 % , mainly to these companies and due to high %
5. ROE is < 10 % and has improved reduction in margin due to petroleum share of NTPC which is owned by
recently mainly due to improvement in prices and also due to poor profitability governmnet
NPM of players like ICI and shalimar and
collapse of J&N
FA Intensity 1. Not an asset light model. Asset TO High FA TO. High FA TO . Greater than 1 in most
seem to be 1-1.3 times sales cases
WCAP Intensity Low ratios. Paints is WCAP intensive. RM Wcap intensive due to fuel costs
as cost of FG is high. AR is high ~ 30
days. RM/ FG inventory is also high.
Capital intensive ? Moderate intensity. Asset specificity is Capital intensive for New projects,
low and poor recievables. Cash flow is
tied into SEB bonds for government
companies. Companies like reliance
do not have recievables issue
Margin intensive ? The business does not have high Low margins . NP < 10 %. cyclical for Fixed returns due to government
margins. Also the margins appear to be industrial paints. pricing controls
cyclical dependent on the industrial
growth. Also as the business is
commodity, margins would be
dependent on the demand supply
scenario
RM as % of sales and implication Main RM is fuel which has increased
from 58% to 62% in the last 5 years
due to fuel price increases. NPM are
stable due to increase of consultancy
and other income
Chemical Power
speciality activity
Key Industry ratios and 1. Industrial production index 1. ROC
statistics 2. Capacity utilisation 2. PLF factor
3. Inventory to sales ratio 3. T&D losses for distribution
4. Producer price index (PPI)
Business units 1. Power generation

2. Power distribution
3. Power trading
Business model
Key Demand Drivers : 1. Performance for end industry such as 1. Rural demand 1. Industrial activity
1. Why would there be a auto for rubber, consumer durables / 2. Conversion from lime to Distemper to 2. No. of retail customer
continued demand for the consumer goods for plastics etc Paint 3. GDP growth
product / service 3. Unorganised sector to organised 1. Performance of economy
sector 2. Government policy
4. Housing boom 3. Demand Gaps
5. New segments - exterior
6. Auto boom
Key supply drivers 1. Petroleum prices 1. Fuel prices
2. Tio2
Shareholder Value creation 1. Strong brands 1. Low T&D losses

drivers 2. Distribution infrastructure 2. Low operating cost - via fuel and
3. NPD pipeline and ability to launch others
successful new products
Degree / nature of change Low. 90 % controlled by the top 4 Low

companies
Chemical Power
speciality activity
Predictability of business High. Depends on the economy / Rural High
demand
Cyclical nature ? Moderate Moderate
Ability to increase price ahead of Moderate, especially for the mid to top 1. Regulated companies. Pricing
inflation (Pricing power) end product range. Products like decided by Return on asset. More
primers etc have poorer pricing power pricing flexibility for industrial and
commercial customer. Poor for retail
customer. Very poor power (and
ability to collect ) for rural
Some sort of monoploy or ?? Yes. Consolidation happening in industry Monopoly in each area, but pricing
Oligopoly fixed by government. Electricity act
2003 is introducing competition for
bulk consumers
Does the company have a ?? Yes. However re-purchase cycle is long. Yes , from retail / industrial / Rural
recurring revenue stream customer
Does the business have ?? The business has franchise / brands. 1. No franchise at all. Regulated
franchise / brands or is it Commoditisation reducing due to tinting monopoly at best where return are
commodity machines. decided by government
Does the industry enjoy high Moderate. Related to economic growth. Moderate. Being led by new categories, High. Major power deficiet
growth rates ? For how long cyclical in nature auto & housing boom
Chemical Power
speciality activity
Key industry variable which 1. Distribution depth 1. Government regulation
drive the performance 2. Brands 2. Fuel pricing
3. Net margins / Wcap management
4. No. of Tinting machines
Source of competitive Competitive advantage limited to

advantage licensing. Additional returns made via
more efficient operations
Customer advantage Factors - Commodity product with no brand 1.Brand effect is strong 1. Switching not possible for retail.
resulting in moat (customer differentiation. Speciality chemical has 2. Lock-in at dealer level due to tinting For industry difficult to switch to co-
captivity) lockin with customer machines gen. Larger consumers tend to setup
Higher durability than production own power generation and new
advantage factors electricity act could allow for more
competition
Presence of Network
advantage
or combitorial None 1. Network economies exist due to the None
economics distribution network. Barrier due to this
network
Network taxonomy None none None
Network profits based on None 1. Mainly due to economies of scale and None
entry barriers of the distribution network
Chemical Power
speciality activity
Production advantage factors A. Process economies are crucial for A. A.
- resulting in moat (cost based profitability 1. Value chain fit important as 1. Value chain linkage important to
advantages). Weaker than 1. Value chain indivisibility is imp for production, logisitics and distribution is keep costs low
customer based advantages cost reduction important cost differentiator 2. Protection mainly though license
expect in case of patents or 2. Process filt and complexity is 2.Protection through contract on color 3. Access to fuel such as coal, gas is
government regulation (like moderate machines crucial
licenses ) 3. Process cost change is moderate and 3. (Analyse process cost change)
has impact on total cost
- Scale economies very relevant 4. No patent / R&D assets for basic
for local market - both geo and chemical. R&D and patent are important
product based ( ex: operating for speciality chemicals
sustainable and provide B. Scale economies very crucial for B. Scale economies are critical in B. Scale economies in production
competitive edge if the ratio of production and pruchasing for basic distribution, purchasing, Ad, and R&D (scale of power plant), distribution
fixed cost / Variable cost for the chemical. Not so important for speciality (although T&D is not with the
market is high. For ex: high chemicals producers), purchasing (for fuel)
analysis
Architecture 1. Process knowldege resulting in low - Strong relationship with distribution 1. Relationship with SEB to supply
cost production is the only differentiator network through tinting machines power
for basic chemicals - Strong process / IT to control costs and 2. Process/ systems to manage
2. Process knowledge / patent and R&D manage distribution power plants and distribution
assets help for speciality chemicals systems to keep costs under control
Strategic assets Patent / R&D on speciality chemical is - distribution network 1. Plant

the only asset. For basic chemical none - Brands 2. License
such asset - Knowledge base to manage 3. Access to low cost Rawmaterial
processes / value chain 4. Switiching cost due to license
Chemical Power
speciality activity
Innovation R&D and innovation important for sustaining innovation. Product Low
speciality chemicals innovations and also delivery
innovations such tinting machines, pack
Cost V important for basic chemicals sizes
Cost critical for good ROE as the product Important, although tariffs are fixed
is RM dependent by govt based on return on
investment method
Financial strength Imp for capacity chemicals High importance now to expand Important to sustain recievables and
internationally for growth opportunities
Reputation Brands have moderate role for speciality Brands / trademarks very crucial in NA
chemicals domestic market to get strong pricing

for industry
attractiveness
Industry attractiveness sumarry High industry return due high entry Returns are fair, mandated by
and reasons for low high returns barriers, good demand and moderated government. Entry barriers are more
competition (top 4 company account for due to economics of the business and
a big share). Also supplier, buyer power government control. Rivalry is
and substitutes have low impact absent, due to licensing, but will
increase in future. Supplier power is
moderate. Substitution is due to
power generation by customer,
however it is not cost competitive.
Industry constrained by goverment
and the economics of power
ENTRY BARRIER - No. 1 Factor Entry barriers are high due to 1. Limited competition with
deciding industry profitability distribution and Brands government controlled monopolies
2. Pricing controlled by government
with poor recoveries by SEB
Asset specificity Low. High asset specificity
Economies of Scale Distribution economies of scale. High economies of scale

Purchasing economies of scale
Chemical Power
speciality activity
Proprietary Product difference Moderate None
Brand Identity High None
Switching cost Low. Low if available
Capital Requirement High, due brand building and High

Distribution infrasturcture
Distribution strength High High. Mainly through T&D network
Cost Advantage Low. Critical if competition exists.

However in india govermnet granted
monopoly and returns exist
Government Policy None Critical in india, as SEB's are key

suppliers of electricity and channels
of distribution (SEB are controlled by
government )
Expected Retaliation High Low as limited competition in the

sector (To analyse ???)
Production scale Economies of production are not too Important for being a low cost
high. Distribution/ advertising provider in this commodity industry
economies more imp
Anticipated payoff for new Low. High. However the industry is

entrant controlled by the government and AR
collection is poor
Precommitment contracts Low. Important with bigger industrial

consumers. However currently
distorted competition exists
Learning curve barriers High ??
Network effect advantages of High. Distribution network is of big None

incumbents advantage
Chemical Power
speciality activity
No. of competitors - Monopoly / Very few competitiors Currently monopolies / Duopolies at
ologopoly or intense competition best
RIVALRY DETERMINANT Moderate rivalry. Mainly top 4 None

companies now. As a result ROE is high
for most of these companies. There is
no price brutal competition now
Industry growth Moderrate None
Fixed cost / value added Low. None
Intermittent overcapacity Low. None
Product difference High None
Informational complexity Moderate None
Exit Barrier Low. None

Demand variability Low. None
SUPPLIER POWER Low coal / Gas - low to none
Differentiation of input Low. None

Switching cost of supplier Low. high
Presence of substitute No. Rutile has to be used Low
Supplier Concentration Low moderate

Threat of forward v/s Backward moderate Low

integration
BUYER POWER Low Low, due to restricted competition
Chemical Power
speciality activity
concentration
Buyer switching cost Low High
Buyer information Moderate to low Low
Ability to integrate backward None Yes, but limited to large customer
Substitute product Brand substitution is low Inhouse power generation
Price sensitivity Medium High
Price / Total Purchase High Depends on the nature of buyer

Product difference Medium Low
Switching cost Medium ??

Buyer propensity to Subsititute Low to medium. Painter are key decision ??
maker
Intangible assets 2. Patents, knowledge asset important 1. Brands critical and add to consumer 1. Local monopoly in the form of
for speciality chemicals advantage - results in pricing strenght distribution rights
4. Customer relationships for the company 2. Process based innovation to create
6. Customer lockins for speciality 2. Distribution infrasture critical in terms a low cost structure for the company
chemicals of critical dealer openings / Color tinting 3.Switching cost very high (not
machines which add to dealer lockin switching possible for retail)
3. Dealer tinting machines results in
dealer lockins ( long term contract /
agreement)
Valuation model
Chemical Power
speciality activity
Valuation approach 1. Price to book 1. P/E 1. Price to revenue ratio - bench
2. DCF ( based on normalised earnings ) 2. Cash flow mark is 0.5-0.6 times revenue
3. Reproduction costs 2. DCF approach or multiple of assets
High PE 17-19
Valuation drivers 1. Cash flow
2. Re-investment of cash flow and
capital
3. Cost structure
4. Licenses
Avg ROC numbers of industry 10-14 %
Avg Growth for industry 10-12 %

Maintanance capex Maintenance capex ~ Deprecitation

(approximate) as % of sales / Dep expense
as % of sales
Logistics
Power Paper Logistics - goods
Power cables
List of companies (by size) with 1. KEI industries - 31% Top 6 players control 80 % of
names - By sales 2. Diamond cables - 16% industry
3. Nicco - 21% 1. Ballarpur industry - 31 %
4. Universal - 19% 2. TN news print - 13 %
5. Torrent - 10% 3. Orient paper - 13 %
4. JK paper - 12 %
5. West coast paper - 9 %
Bhadrachalam is missing in the list
Total size 5900 Cr+
Profitability pool analysis - KEI / Torrent most profitable in last 2- Poor ROE of the industry. Currently at 1. Concor
ranking by ROE 3 years (25 %+) 13 % 2. GATI
Others have returns between 10- 1. Ballarpur industry - -2 % 3. Maersk
15%. 2. TN news print - 0%
Prior to 2004, most companies were 3. Orient paper - losses
in losses and KEI has single digit 4. JK paper - 5 %
returns 5. West coast paper - 10 %
Market share stability analysis ?? Data not available

Logistics
Power cables
Pricing stability Low. Decided by demand and RM Data not available Pricing seems to be good with
pricing scenario margins being maintained. However
pricing could get impacted for
trucking companies during a
downturn
Industry structure type Top 5-6 players are roughly the same Multiple players. Top 7 control 80 %
size 300-400 Crs and KEI is around of industry. Not a very profitable
600 Crs. Large no. of players in the industry due to commodity nature
industry
Key Industry products or 1. Power

segments 2. Industry
3. Oil and gas
4. Realty
Identification of companies KEI seem to have better competitive

possessing competitive advantage than other companies
Economic model
Return on capital : 1. 20%+ lately due to high demand 1.Poor ROE , usually below 10 %. As 1. 20 % + ROE for the companies
in the power, industry and the industry is commodity in nature ,
infrastructure ROE is cyclical depending on the net
2. Normative return is lower (cannot margins
put a number) due to cyclical nature
of the industry
Logistics
Power cables
Dupont analysis 1. Asset TO has improved from < 2 to 1. Asset TO are low at around 1
around 2.8-3 2. NPM have fluctuated from -ve to 5
2. Margins have now improved to % based on the demand and supply
almost 8-9 % inspite of RM increases condition
3. Improvement to 15-19 % 3. Debt equity is on higher side at 1:1
4. Varies by company 4. ROA is poor due to low margins
5. Fairly high at 25-30% lately due to and low asset TO
high growth 5. ROE is cyclical , depending on the
The above numbers represent two NPM which in turns depends on the
companies in the sector - KEI, torrent pricing (demand and supply)
cables. All others have losses till
2004 or 2005 and have had good
performance in the last 2 years.
several have had -ve Net worth in the
past
FA Intensity Low amount of FA needed. For most 1. Asset heavy

companies is around 3-4 times sales
WCAP Intensity High WCAP requirement. Especially 1. Very Low WCAP intensity. Some
for inventory and debtors in the companies work with -ve WCAP
recent past
Capital intensive ? Low obsolesence Yes. FA requirement is high
Margin intensive ? Cyclical margins. Losses during

downturn. Several companies in the
sector incurred losses for 2-3 years
during the down cycle
RM as % of sales and implication RM is almost 70% with copper, steel,

aluminium and insulation products
being the major component
Logistics
Power cables
Key Industry ratios and 1. Order book

statistics 2. Demand/ growth in power,
industry, retail
Business units 1. Institutional sales

2. Retail sales
3. Exports
Business model
Key Demand Drivers : 1. Growth in the following sectors 1. GDP growth . Industrial growth
1. Why would there be a - power 2. Inter-regional trade
continued demand for the - industry 3. Export growth
product / service - realty
- exports
Key supply drivers 1. Price of RM such copper, steel , 1. Fuel prices for the Road / Rail
aluminum and insulation material transport
2. Container availability
3. Steel / cost of equipment such as
Trucks/ Cranes etc
Shareholder Value creation 1. Volume growth 1. Asset utilisation level

drivers 2. Order booking 2. Margins ( depending on industrial
3. Exports growth )
4. Low cost of operation via scale,
backward integration and RM cost
management
Degree / nature of change Moderate 1. Low. Movement happening to
- demand is variable and dependent containerised transport.
on the other industry 2. Multi-modal business model
- cost are highly variable and account 3. Service component / Logisitics
for 70% of sale price service increasing
Logistics
Power cables
Predictability of business High, but demand is cyclical or High

variable
Cyclical nature ? yes, but for some time there could be Less for multimodal companies like
high growth in the sector Concor, high for trucking companies
Ability to increase price ahead of Not for current project, but for new 1. Fair pricing power especially for
inflation (Pricing power) contracts the pricing can be companies like concor which have a
negotiated sort of monoply
2.Trucking companies ??
Some sort of monoploy or No None. Intense competition in trucking

Oligopoly business
Does the company have a Yes, from EPC company/ retail yes
recurring revenue stream network
Does the business have Commodity. Weak brand pull in retail Brand important for certain segment.
franchise / brands or is it
commodity
Does the industry enjoy high High for the next couple of years Low. Related to economy. Cyclical in Yes. Especially multimodal
growth rates ? For how long nature companies for 3-5 years
Logistics
Power cables
Key industry variable which 1. Growth in the following sectors

drive the performance - power
- industry
- realty
- exports
2. RM prices
advantage
Customer advantage Factors - None None 4. Network effect exists

resulting in moat (customer
captivity)
advantage factors

advantage
or combitorial None None a) scale economies due to network.
economics Barriers due to network as
companies with stronger network can
provide better service levels
Network taxonomy None None None
Network profits based on None None Network profits based on economies

of scale and entry barriers
Logistics
Power cables
Production advantage factors A. Process economies A. Process economies A. Substantial process based
- resulting in moat (cost based - value chain indivisibility 1. Value chain indivisibility helps economies
advantages). Weaker than - complexity and value chain fit drive down cost 1. Value chain has high indivisbility -
customer based advantages - Small benefit from learning curve 2.Rate of change in process cost is through distribution hubs, transport
expect in case of patents or moderate vehicles etc
government regulation (like 2. Process complexity and fit is
licenses ) crucial
3. Rate of change in process cost is
- Scale economies very relevant high. Longer the time spent in
for local market - both geo and building the network, lower the cost
product based ( ex: operating can be driven
system is a specific local product 5. Only concor had a unique access
market). Scale economies more to railnetwork. But this unique access
sustainable and provide B. Scale economies from B. Scale economies in manufacturing, has beeneconomies
B. Scale taken away in logisitics
competitive edge if the ratio of - Production distribution and purchasing network, distribution and purchasing
fixed cost / Variable cost for the too
analysis
Architecture 1. Relationship with key customers 1. Relationship with pulp suppliers, 1. Customer relationship
such EPC, power companies etc distributors etc 2. Systems / Processes to manage
2. Knowledge base / experience to 2. Process knowledge for speciality the large fleet / network and deliver
implement turnkey projects products low cost
3. Relationship with export
customers
Strategic assets 1. Plant None which add to competitive 1. Large fleet or containers
2. Distribution network for retail advantage 2. Depots at key locations
3. Marketing team
Logistics
Power cables
Innovation None Sustaining innovations at best NA
Cost V imp Important as it is a commodity Critical

industry
Financial strength Imp Important to expand capacity and Critical factor

add asset to reduce cost
Reputation Important - both for institutional and Not too important Brands / image in form of reliability /
retail Location served / Low cost provider

for industry
attractiveness
Industry attractiveness sumarry Low to moderate returns due to weak High returns due to high entry
and reasons for low high returns compeptitive advantage. Weak to barriers. High competition for the
moderate entry barrier, high rivalry, road/ trucking industry, low for
strong buyer power and no control on multimodal. Buyer power, supplier
input cost results in cyclical and power is less. Interchange of traffic
weak returns between different transport modes
based on cost situation
ENTRY BARRIER - No. 1 Factor Moderate entry barriers mainly due 1. High asset specificity
deciding industry profitability to economies of scale, customer 2. High economies of scale resulting
relationship in lower cost, bigger network and
long term relationships results in
competitive advantages
3. Brand / customer relationships
resulting from value added service,
economies of scale and bigger
network results in enduring CA
Asset specificity Moderate High asset specificity - Wagons,

containers etc can be used by this
industry only
Economies of Scale High High economies of scale advantages.
Companies with large no. of trucks,
wagons, containers have advantage
over smaller players
Logistics
Power cables
Proprietary Product difference Low Difference in the form of service and

reach of the network. Higher value
added service and bigger network
can be provided by the bigger
Brand Identity Moderate players
Moderate to high
Switching cost Low High as a company may provide long

term logisitics service. Low for the
low end smaller players
Capital Requirement Moderate High
Distribution strength Moderate Not too critical
Cost Advantage Important High for companies with high

economies of scale
Government Policy Low and indirect Important as the monopoly on rail

transportation has been taken from
Concor.
Production scale High NA
Anticipated payoff for new Low Low initially till scale is realised and
entrant new contracts signed
Precommitment contracts High Important for the larger players.

Important asset even for the smaller
players
Learning curve barriers Moderate High. As it results in higher capacity

utilisation and lower costs
Network effect advantages of None Not much
incumbents
Logistics
Power cables
No. of competitors - Monopoly / None High no. of players

RIVALRY DETERMINANT High High in the trucking business. Low in

the multimodal buisness due to less
number to players / high capital
requirement
Industry growth Low to moderate - cyclical Moderate. Depends on EXIM and

inter-region trade. More towards
containerised trade
Fixed cost / value added Low High - hence utilisation rate is
critical. V imp in the transport
Intermittent overcapacity Moderate business
High especially in the trucking
busines
Product difference Low Low. Difference is in the value added
service / No. of locations serviced
Informational complexity Moderate High as the asset have to be

managed efficiently
Exit Barrier Moderate High due to asset specificity
Demand variability High Low
SUPPLIER POWER Supplier power is low. However RM Low for Multimodal business for
pricing depend on metal prices in the wagons / Containers. Moderate for
global markets which the companies Trucks
cannot influence
Differentiation of input None Low
Switching cost of supplier Low Medium to low. In some regions cost
is very high if TELCO has high market
share
Presence of substitute None None
Supplier Concentration Low High
Imp of volume to supplier Low NA

Threat of forward v/s Backward None Low

integration
BUYER POWER High especially for institutional High for trucking business especially
customer for small operator.Low for large
companies like Concor
Logistics
Power cables
Buyer conc. v/s firm High High for trucking. Low for multimodal
concentration
Buyer volume High High for trucking for large

companies. Moderate for multimodal
companies
Ability to integrate backward None Low
Substitute product None None for trucking. Moderate to high

for containerised business via rail
( can be send through road )
Price / Total Purchase Low High for some industries

Switching cost Low Low to moderate

Buyer propensity to Subsititute High high for standard service. Lower for
long term contracts for export
services with bigger companies
Intangible assets 1. Brands to a small extent in retail 1. Moderate advantage through R&D 1. Brand to moderate extent, mainly
and instutional sales and distribution infrastructure for long term relationship with big
2. Customer relationship customers
2. Customer relationship and
contract - especially long term
contract with big customers
Valuation model
Logistics
Power cables
Valuation approach DCF 1.DCF

2.PE
High PE 12-14
Valuation drivers 1. Cash flow
2. COGS
3. ROC
4. Order book and growth in
consumer industry
Avg ROC numbers of industry 20% + for the top players, < 10% for 25 % +
the weaker player
Avg Growth for industry 15% 12-13 %
Avg CAP assumptions 1 yr for strong players, 0 for weaker 7-9 years
Maintanance capex ?? Maintenance cap is roughly equal to

(approximate) as % of sales / Dep Dep due to high FA TO and negative
as % of sales Wcap
Logistics
Courier - documents Telecom services Sugar
** - Reliance infocomm missing.

Some private companies missing in
the analysis
List of companies (by size) with 1. Bharati televentures - 44 % Fragmented industry . 15 companies
names - By sales 2. Reliance infocomm - forming top 80 %. Also due to the
3. VSNL - 15 % nature of industry (sugar company
4. MTNL - 21 % have to be located close to supply of
80 % of industry controlled by 5-6 RM). Top 2 in the list to be checked.
players (some private players like Not sure
Reliance , IDEA, hutch etc are 1. Bajaj Hindustan - 10 %
missing) 2. Triveni - 9 %
3. Balarampur chini - 9 %
4. EID parry - 7 %
5. Dhampur sugar mills - 7 %
6. Sakthi sugars - 6 %
7. Mawana sugar - 5 %
Profitability pool analysis - 1. Bharati televentures - 31 % All companies have a very High ROE
ranking by ROE 2. Reliance infocomm - currently (avg ROE is over 20%) .
3. VSNL - -5 % However ROE is very cyclical and has
4. MTNL - -8 % to analysed by company over entire
Only Bharati is profitable among business cycle
listed companies. Details not
available for non listed companies.
Some small operators like shyam
telecom are profitable

Logistics
Pricing stability Pricing in this industry is continously Pricing has improved in the last 5
down. Prices due to competition and years. Increase of 15-20 %. Also due
technology are continously going to supply shortage and low imports,
down capacity utilisation and hence
margins/ Profits are high
Industry structure type Intense competition among major Fragmented. Companies are located
players. Consolidation among major in UP, bihar close to cane growing
players may happen areas where supply can be procured
easily.

segments
Economic model
Return on capital : 1. Reducing from 20 % + (pre- Poor return on capital. Improvement
telecom opening up ) to current 9 %. in the last few years ( from 3-4 % to
Drops mainly due to compeition and 9 %). Improvement has happened
also due to -ve profitability of several due to interest expense reduction.
players such as MTNL, VSNL and Operating profits roughly the same.
smaller players ROC is highly cyclical
Logistics
Dupont analysis 1. Asset TO fairly stable at 0.7 to 0.8 1. Asset TO ration not high at 1-1.2
as this industry requires constant 2. Low NPM @ < 5 %. Lately have
investment due to high obsolence gone up due to tight supply and
2. Continuous slide in margins from dropping inventory
15 % + to < 10 % 3.Return on asset low due to poor
3. ROA has gone down from 10 % + NPM. Improvement recently due to
to below 10 % ( and < 5 % ) tight supply
4. Debt equity is same 0.4 : 1 . Not 4. Ratio is high (> 2.5) , showing high
too high debt scenario. most debt levels in industry. Companies
financing may be through equity raising equity to bring this down
5. ROE due to margin pressure 5. ROE low during down cycle. Has
(dropping price) is also sliding down improved recently to 15 % +
FA Intensity 1. FA intensity is high.

2. Low intangible assets
WCAP Intensity 1. WCAP ratio is high due to both

inventory and recievables
Capital intensive ? High capital intensity due to High capital intensity. Mainly a
obsolence commodity industry. Asset TO in the
range of 0.8 - 1.2
Margin intensive ? The business low Net margins which Poor margins. Typically < 5 %
are continously going down due to
competition and new technology
RM as % of sales and implication Avg profit margins are 15 %. High

Depreciation and interest expenses
due to high debt component
Logistics

statistics
Business units
Business model
Key Demand Drivers : 1. Basic food commodity
1. Why would there be a
continued demand for the
product / service
Key supply drivers 1. Cane prices
Shareholder Value creation 1. Enduring low cost position

drivers
Degree / nature of change Very low change

Logistics
Predictability of business Very low change. Critical factor is

demand supply situation
Cyclical nature ? Cyclical nature of industry. Depends

on demand supply scenario
Ability to increase price ahead of 1. Moderate pricing strenght. Value 1. Constant drop in pricing for most 1. Close to none. Depends on supply
inflation (Pricing power) added services have more pricing services demand
strenght
2. Low end document services have
lower pricing power
Some sort of monoploy or None No monoply. Each license area has 3- None. Commodity industry
Oligopoly 4 operators. Competition from
alternate technology / new business
model too
Does the company have a Yes , from retail and corporate Yes. From retail and corporate yes
recurring revenue stream customers customers
Does the business have 1. Moderate brand / franchise exist. 1. Moderate brand / pricing power. 1. No Brand / Franchise . Pricing
franchise / brands or is it Brands like DHL/ Bluedart are able to More due to lockin (or network based on demand supply
commodity charge higher prices for the value effects).
added service. 2. Telecom companies trying to
2. Low end document movement has improved pricing through innovation
become commoditised and lockins
Does the industry enjoy high Very high due increase in telecom Moderate growth. Based om GDP
growth rates ? For how long penetration growth
Logistics
Key industry variable which 1. Demand supply level

drive the performance 2. % revenue from alcohol / Power
3. Cane prices
advantage
Customer advantage Factors - None

resulting in moat (customer
captivity)
advantage factors
Presence of Network
advantage
or combitorial None
economics
Network taxonomy None
Network profits based on None

Logistics
Production advantage factors

- resulting in moat (cost based
advantages). Weaker than
customer based advantages
expect in case of patents or
government regulation (like
licenses )

sustainable and provide
competitive edge if the ratio of
analysis
Architecture 1. Relationship with government on 1. Relationship with farmer to

license and other issues procure cane
2. Relationhip with handset providers
3. Process / knowledge to operate
the telecom network, marketing
Strategic assets 1. License is very critical. access to raw material at favorable

2. Network effects very strong and terms
critical
3. Distribution is very crucial to get
subscribers
Logistics
Innovation Disruptive innovation has high None

impact in this industry and can effect
long term economics
Cost Low position is important as it is help Very critical as it is a commodity
achieve profitiability early industry
Financial strength Very important as it is a capital Important for capacity expansion

intensive industry
Reputation Branding is important for getting None

customers. However cost of service is
also important

for industry
attractiveness
Industry attractiveness sumarry Good returns due high growth cyclical returns driven by demand
and reasons for low high returns industry. Entry barriers due to high and supply. Government
initial cost and scale effect. Also intervention. Low entry barrier and
licensing has an impact. Entry high competition between firms due
barriers also due to network effect to fragmented industry. Other factors
and early mover advantage. Rivalry do not impact much. As a result poor
is intense due to multiple player in industry returns
the industry. also competition is also
driven by price. buyer power,
supplier and substitutes do not
impact the industry much
ENTRY BARRIER - No. 1 Factor High entry barriers due to fixed costs Moderate entry barriers.
deciding industry profitability and scale effects
Asset specificity Very high High
Economies of Scale High High. Depends more on availability of

raw material (captive supply)
Logistics
Proprietary Product difference Low None
Brand Identity Moderate Very low
Capital Requirement High High.
Distribution strength High Low
Cost Advantage High High
Government Policy Moderate Critical. Government sets the

procurement price for sugarcane.
Expected Retaliation High Moderation
Production scale NA ??
Anticipated payoff for new ?? Low

entrant
Precommitment contracts Low Low
Learning curve barriers High moderate
Network effect advantages of High None

incumbents
Logistics
No. of competitors - Monopoly / Multiple players High competition

RIVALRY DETERMINANT High in each circle due 2-3 players in High, due to commodity nature.
each circle
Industry growth High Low
Intermittent overcapacity Not yet High
Exit Barrier High Moderate

Demand variability Not yet Low
SUPPLIER POWER Low Very low
Differentiation of input Low None

Switching cost of supplier Low Farmers cannot switch
Presence of substitute High None
Supplier Concentration Low None

Threat of forward v/s Backward Low None

integration
BUYER POWER Low Low
Logistics
Buyer conc. v/s firm Low

concentration
Buyer volume Low
Buyer switching cost Low
Buyer information High
Ability to integrate backward NA
Substitute product None Artifical sweeteners. However these

are niche product which would not
effect sugar demand
Price sensitivity
Price / Total Purchase

Product difference
Switching cost
Buyer propensity to Subsititute
Intangible assets None
Valuation model
Logistics
Valuation approach 1. DCF
High PE
Valuation drivers

Avg CAP assumptions
Maintanance capex
as % of sales
Pharma Managed Health care Construction
List of companies (by size) with Top 25 companies form 80 % of
names - By sales industry. Very fragmented industry.
Top companies are indian
companies (mainly due to patent
laws ?)
1. Ranbaxy - 10 %
2. Cipla - 9 %
3. DRL - 6 %
4. Lupin - 5 %
5. Glaxo Smithline - 4 %
6. Sun pharma - 4 %
7. Nicholas piramal - 4 %
Total industry size - 33000 Cr
Profitability pool analysis - Fairly variable. But all top players

ranking by ROE (25) have ROE higher than 15 %
and most more than 20 %

Pricing stability Pricing for generics is controlled by

government and is commodity
business
Patented / non generics is decided
by companies and allows them to
get high returns
DPCO controls pricing on all listed /
notified drugs
Industry structure type Fragmented industry

segments
Economic model
Return on capital : 1. ROC capital trend is upwards
with avg ROC at 15 % +
2. Not much cyclicality. ROC is
increasing
Dupont analysis 1. Asset TO ratio is around 1- 1.2.

Not very high ratios
2. NPM is around 10% + and has
been increasing steadily (need to
check why)
3. Total asset / equity is 1.6- 1.8
which should moderate debt and
has improved the ROE
4. Good ROE (15 % + ) and
increasing. increase seems mainly
due to improvement in NPM
FA Intensity Low - asset light model except for

generic outsourcing companies
WCAP Intensity Low
Capital intensive ? 1. Capital intensity is low for FA.

Most expense is related to R&D
which should be expenses out
Margin intensive ? 1. NPM 10% + showing strong

margins. Should be defensible for
companies with strong distribution,
brands. Patent based protection is
low for most companies (indian)

Key Industry ratios and 1. No of ANDA applications filed

statistics 2. No. of molecules in various
stages of development
Business units
Business model
Key Demand Drivers : 1. Health care is a basic need.
1. Why would there be a Rising income level also raising
continued demand for the need for higher level of health care
product / service 2. For domestic co. demand will
depend on no. of expired patents
which can challenged successfully
Key supply drivers Not much. Depends on access to

patent medicine
Shareholder Value creation 1. Patents

drivers 2. Effective R&D spends
3. Ability of indian companies to
effectively challenge off patent
drugs
4. Operational effectivenes/ scale
economies for generics
Degree / nature of change High
Predictability of business 1. Patented drugs have patent

protection
2. Generics are price based and
depends on brand pull - marketing
and sales important
3. Generics also impacted by
government pricing for some drugs
Cyclical nature ? No
Ability to increase price ahead of 1. High pricing power for Patent,

inflation (Pricing power) high end life style based drugs
2. Very low pricing for generics. In
most cases pricing decided by
Government (DPCO)
Some sort of monoploy or High competition based on price for

Oligopoly generic. Monopoly scenario only in
patented or complex product. Less
in case for indian companies
Does the company have a Yes, from retail customers and
recurring revenue stream hospitals
Does the business have Franchise or brands especially for

franchise / brands or is it prescription medicine. For
commodity generics , it is commodity business,
hence cost of production is
important
Does the industry enjoy high Yes, but low drug usage in india. High due increased demand Very high, due to real estate boom
growth rates ? For how long Pricing is still controlled by for healthcare
government - Via the DPCA
Key industry variable which 1. DPCO controlled pricing

drive the performance 2. Government policy on patent,
new products etc
3. New product introductions by
industry
4. Export market - generics growth
advantage
Customer advantage Factors - 1.High switching cost especially for

resulting in moat (customer patented drugs (once prescribed by
captivity) docs they stick to it)
Higher durability than production 2. Habit forming from doctor
advantage factors prescription point to view
3. Brand effect for doctors
especially for critical drugs
Presence of Network
advantage
or combitorial Network economics have an
economics impact. Once a drug is prescribed
and favored by majority of doctors,
the other doctors will prescribe the
Network taxonomy same drug
None
Network profits based on None

Production advantage factors Process economies mainly through

- resulting in moat (cost based 1. Patent protection
advantages). Weaker than 2. R&D effectiveness
customer based advantages 3. Learning curve in production
expect in case of patents or processes
government regulation (like
licenses )

sustainable and provide Scale economies for branded
competitive edge if the ratio of products (customer captivity) -
fixed cost / Variable cost for the mainly for specific product lines
market is high. For ex: high 1. Advertising / sales benefit for
distribution expense (wide large companie as the same fixed
distribution network), product cost can be distributed across
investment ( R&D and multiple products
technology) etc. Growing markets 2. R&D expense can averaged out
will reduce this ratio can weaken over multiple products
the edge of the incumbent 3. Scale economies depend on
product lines (cardio, neurologicals)
and sometime the product line
combined with Geo. (economies to
scale exist in product segment)
analysis
Architecture Architecture crucial to create the

competitive advantage on
1. Customer - through sales force,
branding etc
2. Production - through patents via
R&D
Strategic assets Patents, low cost manufacturing

process
Innovation critical to create patentable

products
Cost Relevant only for genrics
Financial strength Important to spend on R&D and

accquisitions to create production
based competitive advantages
Reputation Important for products off patents

to create customer advantages

for industry
attractiveness
Industry attractiveness sumarry high returns due to very high entry
and reasons for low high returns barrier and moderate competition.
Other factors are not very crucial.
Generics business has lower
returns due to low entry barrier,
high competition and substantial
buyer power
ENTRY BARRIER - No. 1 Factor Very high barriers due to patent,

deciding industry profitability Distribution / Marketing network to
doctors, R&D organisation and
capital requirement to develop new
molecules. In india similar barriers
exist. Not so in generics, where
reverse engineering capability and
sales/ Distribution network is
critical
Asset specificity Specificity in terms of R&D and

Patents/ Brands
Economies of Scale Important for generics. Process

patents could result in cost
advantages
Proprietary Product difference High. Depends on the patented

product
Brand Identity Moderate to high for generics
Switching cost High especially for established

brands. Consumers / Patients would
stick with know brands. OTC brands
are also strong
Capital Requirement High for basic research and
developing new molecules
Distribution strength High. Sales network to reach

doctors for new drugs
Cost Advantage Critical for developing new drugs
Government Policy Critical in india / US in terms of

patent regime / New drug approvals
Expected Retaliation High
Production scale Medium to low
Anticipated payoff for new High, but difficult to develop new

entrant molecules. Indian companies
entering through generics
Precommitment contracts Low
Learning curve barriers High
Network effect advantages of Low

incumbents
No. of competitors - Monopoly / Moderate to high for generics

RIVALRY DETERMINANT High for generics. Low in patented

drugs as long as similar drug is
developed through different patent
by competition
Industry growth Moderate to high
Fixed cost / value added Low
Intermittent overcapacity Low
Product difference High
Informational complexity High
Exit Barrier Low

SUPPLIER POWER Low
Differentiation of input Low

Switching cost of supplier Low
Presence of substitute Low
Supplier Concentration Low
Imp of volume to supplier High / Low

Cost relative to total purchase Low
Threat of forward v/s Backward Low

integration
BUYER POWER Low. High is the company is
contract manufacturer
Buyer conc. v/s firm Low. Except for companies in

concentration government contracts for generics/
or MNC customers for Local
Buyer volume companies
High if the pharma company is
contract manufacturer
Buyer switching cost Low to moderate
Buyer information High in contract mfg. Low for

consumer
Ability to integrate backward High for contract. None for

consumer
Substitute product Buyer would switch if generic
exists. In contract cost and
capability are critical factor.
Propensity to switch is high if the
buyer can find a more effective
Price sensitivity supplier
High
Price / Total Purchase High

Product difference High
Switching cost Low if generic exist

Buyer propensity to Subsititute High
Intangible assets 1. Brands are crucial in the pharma

for both generic and other products
2. Patents very crucial and involve
high R&D
3. S&D expenses high for building
customer relationship with doctors
4. Relationship with key influencers
- the Doctors is critical
5. None
6. Switching cost / Customer lockin
happens through point 1/3
Valuation model
Valuation approach 1.DCF
High PE 25
Low PE for the industry 10
Avg PE for the industry 18
Valuation drivers 1. Top line growth
2. New product introduction
3. ANDA and other filings
4. Distribution and mkt
infrastructure
5. R&D expenses as % of sales
Avg ROC numbers of industry 20%
Avg Growth for industry 8-10 %

Maintanance capex
as % of sales
general
Overhead cost as a % of sale
Asset TO ( shud be > 1.5 )
Easier to increase asset TO than margins ( to increase ROI )
Margins driven or Asset TO driven
Sustainability of CA
Volatile earnings or steady earnings
Underlying business subject to change / intense competion ?
Commodity
Asset based valuation to be given equal weights
valuation to be seen in light of the commodity cycle
CA based on cost adavantage to be seen .Can the cost
advantage be maintained ?
Technology
Low capital intentsity in some businesses
High rate of change / obsolence
Higher margin of safety
Higher mortality of companies
Winner takes all market
Network effects / Lock ins
Does the business have strong CA - as low capital requirements
Media
What media assets ? - Film library, content, Key personnel
Does the business have a strong Distribution infrastructure ?
Does the Business have a history of good content ?
Is the business able to respond to changing entertainment tastes
?
Does the Business have mutliple content type - films / television
program etc
consumer goods
Earnings based valuation more meaningful
Dsitribution assets important
Brands are imp
Predictable earnings
Medium - low growth business except certain category
NPD pipeline and past history of developing NPD
Financial institution
Book value to be weighed more than earnings
Adjusted book value ( net of NPA ) to be seen
Other income analysis to be done in detail to find the nature of
recuring/ non recurring expense
asset based valuation more meaningful
Expense ratios for FI to understand the spreads available
Loan book quality - made up of loans to weak co.s / sectors ?
Key ratios
Return on Asset ( atleast > 1.5 %)
NPA
Return on Networth
Cost / income ratio
CAR
FMCG
Tea Others
Question Answer Question Answer
1. Do brands in the industry
add to the pricing power
2. Do brands have franchise

strenght to the industry
3. % of Branded to loose tea

PAINTS AUTO A
Automobiles Auto components
Question Answer Question Answer Question
1. Percentage of OEM to
total business
1. Are their process cost

efficiencies in some
companies
Batteries Tyres
Answer Question Answer Question
1.Why are NPM low for the
industry
Technology
Hardware BPO
Answer Question Answer Question Answer
Financial instituiton
IT services BANKS
nstituiton COMMODITY
Rating agency Cement steel
Question Answer Question Answer Question
1. What is the % of the new 1. Why is TISCO
lines of business like lowest cost
advisory / Equity research producer
and their growths 2. What is the
difference between
cost per ton
forTISCO v/s others
1. Check extent of rivalry
among existing companies.
Is there price competition ?
DITY Media
Metals TV / Films Publishing ( including papers )
Answer Question Answer Question Answer Question
Projects
ng papers ) ENGG PROJECTS ( A/C, Electrical , const ) Power Gas
Answer Question Answer Question Answer Question
1. Dp patents / research create asset for
eng companies ?
Oil and Gas
Refinery Marketing company
Answer Question Answer Question Answer
Tourism
Lubricants Hotels and Travel
1. Do some brands higher
pricing power. Check
operating profit margin /
Average selling price for
companies
rism Telecom Shipping Capital goods
Travel and
tourism
Question Answer Question Answer Question Answer Question Answer
1. Do telecom
companies have
pricing power
Textiles Retail Power
Question Answer Question Answer Question Answer

Logistics Chemical Telecom services
Question Answer Question Answer Question Answer

1. Do trucking companies
have pricing power
Sugar
Question Answer
1. Why has return on capital
improved in the last few years

Business+Analysis Working Aug+2007

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FMCG

Tea Others - cleaning, home care etc

Competitive landscape Details

Profitability pool analysis - Poor profitability in industry due to

Market share stability analysis Complete data not available

Pricing stability Pricing seems to be poor and has

Industry structure type Dominated by a few key players like Tata

Key Industry products or

Segment and company mapping

Economic model Details

FA Intensity 1. Asset light model ? High FA TO in the industry. Mainly due

RM as % of sales and implication

Key Industry ratios and

Cyclical nature ? Is the business subject economic cycle Low

Key industry variable which 1. Distribution depth / No.

Source of competitive Strong competitive advantages create

Presence of Network Presence of network effect increases

Distinctive capability Distinctive capability analysis applied

Porter's model : 5 factor

Asset specificity High, especially for backward integrated

Economies of Scale Important - in production, distribution Distribution economies of scale.

Proprietary Product difference Low Minimal

Brand Identity Moderate Strong brand differences

Switching cost Low Low

Distribution strength High High. Getting eroded in local areas

Cost Advantage Important Low

Government Policy Low None

Expected Retaliation moderate High

Production scale important

Anticipated payoff for new Low. Check for unbranded

Precommitment contracts Low

Learning curve barriers Moderate

Network effect advantages of None

No. of competitors - Monopoly / High competition

Industry growth Low for organised sector Low now

Fixed cost / value added ?? Low

Intermittent overcapacity High High now as these product involve low

SUPPLIER POWER Low as tea is a commodity Supplier power is low

Differentiation of input Low Low

Presence of substitute Yes, from other tea gardens Yes

Supplier Concentration Low No

Imp of volume to supplier High High

Threat of forward v/s Backward Low Low

Buyer volume Low Buyer volume is low

Buyer switching cost Low Buyer switching cost is low

Ability to integrate backward None No

Substitute product Coffee Brand substitution high especially in

Price sensitivity Yes High and hence subsititution of brands

Switching cost Low Low

Intangible assets 1. Brands - requiring high ad spends 1. Brands important in industry . Do

Valuation approach 1. P/E

Avg ROC numbers of industry

Avg Growth for industry

Profitability pool analysis - 1. Eicher - 50.5 % 1. Bharat forge - 28 %

Market share stability analysis

Key Industry products or

Segment and company mapping

FA Intensity Moderate TO ratio. Generally > 2.

Capital intensive ? Yes. The Ratios have improved from < 1

RM as % of sales and implication

Key Industry ratios and

Key industry variable which 1. Brands 1. R&D 1. R&D

Network taxonomy None None

Network profits based on None Economies of scale in advertising,