Equity Research Workshop Session 1

Equity Research Workshop
Intension of the Course

To Learn, implement and practice the
fundamental principles of Equity Research
2 Empowering People Transforming Businesses

Outcome of the Session Course
By the end of the course the participant will be Skilled in:
• Handling Microsoft Excel efficiently & Effectively

• Industry Analysis
• Economic Factor Analysis
• Company Analysis
• Advanced Financial Statement Analysis
• Factoring in Rationale Assumptions
• Building financial models
• Implementing Discounted Cash Flow Models
• Building rational investment thesis
• Report writing
• Client Interaction

Session wise Outcome
Session Outcome
Session 1 -Getting a broader view of Equity Research
-Brushing up the basics
- Economic Factor Analysis
- Industry Analysis
Session 2 -Handling Microsoft Excel Efficiently & Effectively
-Company Analysis
Session 3 - Advanced Financial Statement Analysis

- Factoring in Rational Assumption
Session 4 - Factoring in Rational Assumption
- Building Financial Models
Session 5 - Learning & Implementing Various Valuation Techniques
Session 6 - Building rational investment thesis
- Report writing
- Client Interaction

Session 1

Outcome of Session 1
• Participants will be skilled in:
– Getting a broader view of Equity Research
– Brushing up the basics
– Economic Factor Analysis
– Industry Analysis

Session 1 Agenda
• Prerequisites
• Mentoring Structure
• A broader view of Equity Research
• Touching upon the basic concepts
• Economic Factor Analysis

Prerequisite
• To get the most out of the sessions:
– Participate in the discussion
– Do the assignments religiously
– Raise your hand if you have a question. Depending upon the time, you
will get an opportunity to ask a question. Or else it will be answered at
the end of the session.
– During the concept delivery, if you have any question, please note it
on the notepad.
– Sharing anything & everything that is coming in your way of fulfilling
that you are up to fulfilling
– Not holding back anything with you. Share it with me and/ or with
your mentor.
– Do not be afraid to ask a question.

Prerequisite
• To get the most out of the sessions:
– Let us know immediately if something is not working for
you.
– Mentoring is not optional.
– Do not miss any of the sessions. Please be unreasonable to
attend each & every session.
– What you get is what you are looking for!
– Many of you may be looking for getting some notes,
reference material. You will get that, but it’s a workshop!
Equity Research will happen here, in the classroom!! So no
attention on going back and understanding it later through
notes.
Prerequisite
– Please make sure that your cell phones are on silent mode.
I hope you have already conveyed it your kith-n-kin about
your participation in the workshop. Only pick up the
urgent calls by stepping outside the classroom.
– Please return your name tags at the end of the session.
– Most Important, You must Enjoy the Session!

Questions and Queries, if any?

Mentoring Structure
• You will be allotted mentors in a while & you will be part of a group along
with the mentor.
• Next 15-20 minutes, you will interact with the mentors.
• In that interaction, please fix up the timings that are suitable for you to
interact with the mentors.
• Please keep the mentoring call timings fixed as much as possible.
• Participant needs to call the mentor.
• Also, please give your respective mentor your expectations from the
session in the sheet that will be provided to you.
• Please exchange the phone numbers.

What Equity Research is ALL
About?

What Equity Research is ALL About?
• Financial Statement Analysis

• Economy Analysis
• Company Analysis
• Financial Statement Analysis
• Valuation
• Recommendations
• Fat Salaries
What Equity Research is ALL About?
• Management interactions
• Lot of work in Core Finance
• Analyst Meets
• Investment World
• Fascination
• Money; Wealth
• Excitement

Equity Research Demo

Demo
• Infosys
– We have a Buy recommendation on Infosys and have set a
target price of Rs3,536 indicating an upside of 26% from
current level.
– Our Buy for Infosys is driven by
• We expect a strong recovery in the US economy leading release of
IT budgets from the US clients in turn leading to revenue growth of
37% (rupee term) and EPS growth of 25%.
• Further scope for maintaining EBIDTA margins given multiple
levers like lower utilization rates, scale benefits, onsite-offshore
mix, employee mix, etc.
• Clear indication of improvement in the billing rates & increasing
mix of high end consulting work
Demo
– Our Buy for Infosys is driven by
• We have estimated Infosys’ FY11 EPS of Rs136 indicating a YoY
growth of 25%.
• We expect RoE to improve base on better employee utilization &
billing rates leading to improving revenue productivity, although
higher tax rates offset that effect slightly.
• Currently, Infosys is trading at 20x our FY11E EPS. This valuation,
we believe is lower compared to its peers that are trading in the
range of 23-27x their 1 year forward EPS. And hence we have
valued Infosys at 26x its FY11E EPS of Rs136 setting the target
price of Rs3,536
– What have we factored in:
• Employee addition of 30,000 for next year
• Utilization rates moving up from 72% to 75%
• Billing rates up by 2%
Demo
– What have we factored in:
• EBIDTA margins stable 32.5%
• USDINR rate of Rs48 (depreciation of 2.2%)
• Capital Expenditure of Rs12,000 mn
• Tax rates of 22% (as the STPIs will come out of tax free
period)
• Equity dilution of 0.3% on conversion of ESOPs
• Interest on other income going up as cash is expected
to go up due to improving collection period

Demo
– Revenue Driver
• Strong employee addition of 30,000
• Improving utilization rates
• Increase in the billing rates
• US and European economies are improving and
spending on software is expected to increase.
• Company management has said that the clients are
quite optimistic about the quick budget releases and
expect new projects to flow in as well.
• US financial markets have shown early signs of
recovery.

Demo
– EBIDTA Margin Drivers
• Higher utilization rates leading to higher revenue at the same costs
• Better billing rates
• Hiring about 70% of freshers of the total 30,000
• Hiring includes non-IT graduates that come at relatively cheaper
costs with equivalent skills
• Increasing proportion of consulting business to bring in higher
margins
• Fixed costs projects increasing. Fixed cost projects typically show
higher profitability.
• Planning to increase the offshore employee by 2% leading to
better margins

Demo
• Valuation
– We valued Infosys by using two methods:
• Relative valuation
– Relative Valuation
• P/E(FY11) = Payout ratio(h) *(1+gh)*
(1- ((1+gh)/(1+keh))^n)/ (keh-gh) +
Payout ratio(n)/ (Ken-gn)*1/(1+Ken)^n
– Ke Cost of Equity
– Gh: Growth rate

Demo
– Relative Valuation
• We have factored in High growth rate of 25%
• Stable growth rate of 5%
• Beta High growth: 1.1
• Beta Stable growth: 0.7
• Market premium of 8%
• Rfr of 7.5%
– P/E (FY11) = 26
– And hence we have valued Infosys at 26x its FY11
EPS of Rs136.
Demo
• Risks to our call
– US & European markets can go in double deep
recession and the revenue growth could be
adversely impacted.
– INR may appreciate due unforeseen reasons and
can impact the revenues adversely
– Loss of key clients

So what is equity research
really about?
• Identifying Undervalued stocks
• Timing
• Being ready to stand in uncertainty
• Knowing your client’s requirements
• Being creative
• Asking right questions, at right time to
right people
• Building a distinct view and doing good enough work for
having conviction about your view
What it demands from you?
• Lot of reading across the spectrum
• Lot of interaction with the

companies, their clients, their
employees etc.
• Rigorous work on model making,

valuations
• A lot of client interaction

Analysis

Analysis
• We will be using this word a lot through out our discussion.
So, let me tell you what it means by doing “Analysis”
• Analyze what?
– Industry
– Economy
– Company
– Market share
– Company Management
– Risk
– Business
– Projects
– Share price, volume, pricing etc. etc. etc.

Analysis
• What does it mean by doing analysis?
– Reading through the economic, company, industry, annual reports
– Talking to company management
– Reading about the competitors
– Trying to identify the connections between different things that are
happening around
– Doing a sample survey
– Testing/ tasting the products
– Observing the share prices; noting the
– Noting the data
– Arriving at conclusions
– Collecting enough data to build the argument

Analysis
• What will you be left with after doing analysis
– Understand new terms & terminologies
– Trend
• Declining
• Increasing
• Cyclical
• Whimsical/ no trend
– Insights: You may have some insights about the functional,
technical aspects of the business, industry.
– Charts, sensitivity tables, etc.
– Conclusions

Analysis
• Three time periods where you can analyze:
– Historical State Analysis
– Current State Analysis
– Future Expectations Analysis
– Till the time we do not talk of analyzing the future

prospects of the company, we will broadly talk
about the historical & current state analysis

Analysis
• What is most important is you build your view
about anything & every thing you see and
observe.

Analysis
• Pitfall 1: Tunnels in Research
• By the way, Analysis is never going to end.
• So, what is most important is that always keep
your analysis:
– Focused
– Time Bound
• Or else, you will keep moving in different
tunnels without knowing how much is actually
getting done.
Analysis
• Pit Fall 1: Tunnels in Research
– IT Sector
– Telecom Domain
– VAS
– VOIP
– GPRS
– Logistics Sector
– Reliance to invest into Deccan
– Aviation Sector
– Indian Airlines to break even by 2015

Analysis
• Handling it All?

Our Approach to Work
• Understand the basic Concept
• Understand the terminologies
• Understand in depths (Focused & Time
Bound)
• Apply to the real life

Data Collection
• Never go for collecting all the data right from the
start.
• First focus on the understanding of the concepts and
then collect the data that is required.
• There is huge data available out there; you must be
clear and choosy right from the beginning about the
data collection. Because, in the end, you would have
ended up analyzing unwanted, non-relevant, data
resulting into no concrete outcome & time running
out of hands.

• Be-Do-Have

Groups
• Bulls
• Bears
– Special Gift for the winner group at the end of
every session

Where are we Stand?
• We got the overview of:
– Session prerequisite
– We got the mentors with a small mentoring
session
– what it takes to be Equity Research Analyst
– We got broader Equity markets
• After this break and before lunch, we will brush up
the fundamentals and get grounded in the basic
concepts of finance.

After the Break 1
• We got the overview of:
– Session prerequisite
– We got the mentors with a small mentoring
session
– what it takes to be Equity Research Analyst
– We got broader view on the Equity markets
• Now, we will brush up the fundamentals and get
grounded in the basic concepts of finance.

Getting Grounded
Profit & Loss Account

Getting Grounded
Balance Sheet

Getting Grounded
Cash Flow Statement

Getting Grounded
Time Value of Money

Where are we Stand?
• Post the 1st Break, we have covered the basic
concepts of reading:
– Profit & Loss Account
– Balance Sheet
– Cash Flow Statements
– Time Value of Money
• After this break, we will look at Economic Factor
Analysis; where in we will see at how different
economic factors affect the equity analysis.

After the Break 1
• Post the 2nd Break, we have covered the basic
concepts of reading:
– Profit & Loss Account
– Balance Sheet
– Cash Flow Statements
– Time Value of Money
• Now, we will look at Economic Factor Analysis; where
in we will see at how different economic factors
affect the equity analysis.

Economic Factor Analysis
• Global Economy
• Domestic Macro economy
• Demand & Supply Shocks
• Government Policy
• Business Cycles

• Let us understand how it emerged in the first
place.

• Global Economy
– The top-down analysis of a firms prospects must
start with the global economy. The international
economy may affect the firm’s export business,
the price competition it faces from its competitors
or the profits it makes on the investment abroad.
– Certainly, there is a considerable variation in
economic performance across the countries.

• Global Economy
Stock Market Returns
Growth in Real GDP Local Currency $ Terms
China 11.2 -7.6 -7.6

Hog Kong 3.3 -20.0 -20.0
India 5.8 -0.1 +1.0
Indonesia 3.8 1.4 18.7
Singapore 3.0 -20.7 -15.6
South Korea 5.8 -14.9 -5.7
Taiwan 4.2 -19.7 -19.1
Venezuela -16.7 24.0 -41.2
Argentina -10.1 98.3 -37.5
South Africa 3.0 -20.7 19.5
Russia 4.3 50.9 45.7

• Global Economy

• Global Economy

Empowering People Transforming Businesses
03-Jun-10
03-Apr-10
03-Feb-10
03-Dec-09
03-Oct-09
03-Aug-09
03-Jun-09
Nasdaq_Close
03-Apr-09
03-Feb-09
– Chart of Infosys, Nifty and Nasdaq
03-Dec-08
03-Oct-08
03-Aug-08
Nifty _Close
03-Jun-08
03-Apr-08
03-Feb-08
03-Dec-07
Infy_Close
03-Oct-07
03-Aug-07
• Global Economy
03-Jun-07
03-Apr-07
03-Feb-07
03-Dec-06
03-Oct-06
03-Aug-06
03-Jun-06
03-Apr-06
200
180
160
140
120
100
80
60
40
20
54
• Global Economy
– Political Risk
• We all remember what happened in 2003 to the stock
markets when BJP lost Loksabha election to congress
on 16th May.
• In 1997, the Hongkong market extremely sensitive to
the political developments leading up to transfer of
governance to China.
• Iraq war
• Etc.

• Global Economy
– Exchange rate: The exchange rate is the rate at
which the domestic currency can be converted
into a foreign currency.
– Currency Appreciation: Good for importers/Bad
for exporters
– Currency Depreciation: Good for exporters/ bad
for importers

• If GBP depreciates against USD & USD
appreciates against INR, what will happen to
exchange rate between GBPINR?
– INR will_______________ against GBP

• Domestic Macro Economy
– The macro economy is the environment in which
all the firms operate.
– The price-earnings ratio vary with the factors such
as interest rates, risk, inflation rates, and other
variables.

• Domestic macro economy
– GDP: It is a measure of economy’s total
production of goods & services
– Industrial Production: Another measure is the
Industrial Production. It is more focused on the
manufacturing side of the economy.
– Employment: Unemployment rate is a percentage
of total labor force (i.e. either who are working or
actively seeking employment) yet to find work. It
basically tells the extent to which the economy is
working to its fullest capacity.
– Inflation: It is a rate at which a general level of
prices is rising. High rates of inflation are generally
related to “over heated economies”. Here, the
demand for goods & services is outstripping the
productive capacity.
– The unemployment vs inflation dilemma

– Interest Rates: Higher interest rates reduce the
present value of the future cash flows, there by
reducing the attractiveness of the investment
opportunity. Moreover, higher interest rates are
also disincentive for the corporate as they will
hesitate to borrow at higher cost (even for
expansion)
– Moreover, demand for housing, durable goods,
vehicles, etc. is also sensitive to the interest rates
fluctuations.
– Budget Deficit: The budget deficit of the
government is the difference between government
spending and revenues. Any budgetary shortfall
must be offset by government borrowing. Large
amounts of government borrowing can force up the
interest rates by increasing the total demand for
credit in the economy. This can also lead to
“crowding out” effect leading to higher interest rates
and chocking off business investments.

Economic Factor Analyis
• Concept Check Question 1
Consider an economy where the dominant industry is
automobile production for domestic consumption as well
as for export. Now, suppose, the auto market is hurt by an
increase in the length of time people use their cars before
replacing them. Describe the probable effect of this
change on a) GDP b) Unemployment c) the government
budget deficit and d) interest rates.

– A demand shock is an event which affects the
demand for goods and services in the economy.
– Example for positive demand shock are reduction
in taxes, increase in money supply, increase in
government spending, or increase in foreign
export demand.
– Demand shocks are usually characterised by
aggregate output moving in the same direction as
that of interest rates & inflation.
– A supply shock is an event that influences the
production capacity and cots.
– supply shock is usually characterized by aggregate
output moving in opposite direction of inflation
and interest rates.
– Where can you use this analysis?
• If there is an indication of tightening of money supply,
you might want to avoid industries such as automobile
producers because it will be affected due to increase in
interest rates.
• Government Policies
– Government has two broader tools those that
affect the demand for goods and services and
those that affect the supply.
– Recently, most of the focus has been on demand
side of the story
– The focus has been on government spending, tax
levels, and monetary policy.

– Fiscal Policy
• It refers to the government’s spending and tax actions
and is part of “demand-side” management. Fiscal policy
is probably the most direct way to stimulate or slow the
economy.
• Increases in the govt spending inflate the demand of
goods & services & vice-a-versa.
• Similarly, increases in taxes implies deflate in the
demand of the goods & services.
• However, the execution of the fiscal policies is rather
very slow.
– Monetary Policy
• It refers to the manipulation of money supply to affect the macro
economy. It typically works through its impact on the interest
rates, ultimately increasing the consumption & demand.
• Increase in money supply will reduce the short term interest rates
and will increase the consumption & demand. Over long period,
however, higher money supply only leads to higher price levels and
does not have any permanent impact on the economic activity.
• And it becomes a difficult balancing act. Thus, stimulation/
inflation trade-off is implicit.
• Open Market Operations: The Govt. buys & sells securities
increasing or decreasing the supply of money in the economy.

– While the Fiscal Policies are more direct in nature,
it takes longer to implement.
– Impact of Monetary policies is more of a round
about and works largely through its impact on
interest rates.

Suppose the government wants to stimulate the economy
without increasing interest rates. What combination of
fiscal and monetary policy might accomplish this goal?

– Supply Side Policies
• The supply side policies treat the issue of the
productive capacity of the economy. The goal is to
create an environment in which workers and owners of
capital have the maximum incentive and ability to
produce and develop goods.

Large tax cuts were followed by rapid growth in GDP. How
would demand-side and supply-side economists differ in
their interpretations of this phenomenon?

• Business Cycles
– The economy recurrently experiences periods of expansion
and contraction, although the length & depth can be
irregular.
– This recurring pattern of recession & recovery is called as
Business Cycles.
– A Peak is the transition that occurs at the end of the
expansion and lasts till the start of the contraction.
– A Trough occurs at the bottom of a recession just as the
economy enters a recovery.

• Business Cycles
– Cyclical Industries:
• As the economy passes through the different stages of the
business cycles, the relative performance of the industries is
expected to vary.
• At the trough, when the economy just begins to recover, the
industries that are sensitive to economic recovery, like Auto, would
tend to outperform. E.g. Automobiles, durable goods industries.
Because purchase of such goods can be deferred during recession,
the sales of such industries are sensitive to the macroeconomic
conditions.

• Business Cycles
– Cyclical Industries:
• Other cyclical industries are the producers of the capital goods i.e.
the goods used by other firms to produce their products. When
the demand is slack, few companies will be expanding and
purchasing capital goods. So, the capital goods industry bears the
burnt of the economic slow down but does well in expansion.
– Defensive Industries:
• These are the industries that are least sensitive to the economic
cycles. These industries include food producers & processors,
pharmaceuticals and public utilities. These industries will
outperform at the time of recession.

• Economic Indicators
– Leading Indicators
– Coincident Indicators
– Lagging Indicators

Where are we Stand?
• Post the 2nd Break, we have covered Economic Factor
Analysis:
– Global Economy
– Domestic Macro economy
– Demand & Supply Shocks
– Government Policy
– Business Cycles
• After this break, we will look at Industry Analysis and why &
how it is important from the perspective of Equity Analysis
and further finer aspects of the same.

After the Short Break 2
• Post the 3rd Break, we have covered Economic Factor
Analysis:
– Global Economy
– Domestic Macro economy
– Demand & Supply Shocks
– Government Policy
– Business Cycles
• Now, we will look at Industry Analysis and why & how it is
important from the perspective of Equity Analysis and further
finer aspects of the same.

Industry Analysis

Industry Analysis
• Defining an Industry
• Sensitivity to a Business Cycle
• Operating Leverage
• Sector Rotation
• Industry Life Cycles
• Industry Structure & Performance

Industry Analysis
• Defining an industry: It becomes a very crucial
activity and can be difficult at times.
• IT-ITES

Industry Analysis
• Sensitivity to the Business Cycle
– Given the state of the economy, it is very crucial to identify
implications to individual industry.
– Not all industries are equally sensitive to the business cycles. For e.g.
automobile manufacturing industry & cigarettes.
– Clearly, cigarettes industry is independent of the business cycle.
Demand of cigarettes does not seem to deflect despite the economic
slowdown.
– Cigarette consumption is largely led by habit and it forms small
enough part of most of the budgets.
– Auto production, by contrast is different. Most of the people would
defer their decision to go for auto purchase till their income level is
higher.

Industry Analysis
– Three things will determine the sensitivity of the
firm’s earnings to the business cycle
• Sensitivity of Sales
• Degree of operating Leverage
• Financial Leverage

Industry Analysis
– Sensitivity of Sales
• Necessities will show little sensitivity to the business
conditions.
– Examples of such industries are: food, drugs, and medical
services
– Other industries that show low sensitivity are those whose
demand is independent of income. These incluse tobacco,
movies; because it is observed that people substitute movies
for more expensive sorts of entertainments.
• Machine tools, steel, autos, and transportation are
highly sensitive to the state of economy.
Industry Analysis
– Degree of Operating Leverage
• Operating Leverage: A firm with higher proportion of fixed costs
has higher operating leverage.
• Firms with higher operating leverage are more sensitive to the
economic conditions.
• Firms with higher operating leverage will see higher changes in
profitability vis-à-vis it sales.
• DoL = (% Change in Profits)/ (% Change in Sales)
• So, if the DoL is 2, then for every 1% change in sales, the profits
move (up or down) by 2% in the same direction.

Industry Analysis
– Degree of Operating Leverage
Recession Normal Expansion
A B A B A B
Sales (Nos mn) 5 5 6 6 7 7
Price per Unit (Rs) 2 2 2 2 2 2
Revenue (Rs mn) 10 10 12 12 14 14
Fixed Costs (Rs mn) 5 8 5 8 5 8
Variable Costs (Rs mn) 5 2.5 6 3 7 3.5
Profits (Rs mn) 0 (0.5) 1 1 2 2.5

Industry Analysis
– What will be the profits in the three scenarios for Firm C
with fixed costs of Rs 2 mn and variable costs of Rs1.5 per
unit? What are your conclusions regarding operating
leverage?

Industry Analysis
– Financial Leverage

Industry Analysis
• Sector Rotation
Peak Basic Industries Excel

Contraction Expansion
Consumer Staples Excel

Capital Goods Excel
Financial Stocks Excel Consumer Durables Excel
Trough

Industry Analysis
• Peak
– At the peak of the business cycle, the economy
would be over heated with high inflation and
would be characterized by higher interest rates
and pricing pressures on basic commodities
– This might be good time to invest into firms
engaged in natural resource extraction and
processing such as minerals or petroleum.

Industry Analysis
• Contraction Phase:
– In the contraction or recession, one would expect
industries that are less sensitive to the economic
conditions. For example pharmaceuticals, food, and other
necessities.
– At the height of contraction, the financial firms will be hurt
by the shrinking loan volumes and higher default rates.
Towards the end of the contract phase, however, financials
could do well as contraction would induce lower inflation
and interest rates.

Industry Analysis
• Trough
– It is the point at which many of the firms may be
looking forward to investing in to cater for the
future demand.
– It is the phase where you should invest into capital
goods industry such as equipments,
transportation or construction.

Industry Analysis
• Expansion Phase:
– It is the phase where consumer durables would do
well. Luxury businesses, automobiles would do
well. In this phase, banks will also do well as loans
volume would go up and default rate would be
low.

Industry Analysis
– In which phase of the business cycle would
you expect the following industries to enjoy
their best performance?
• News paper
• Machine tools
• Beverages
• Timber

Industry Analysis
• Industry Life Cycle
– Look at industries like Biotechnology you will find higher
rate of investment, higher rates of return and lower
payouts
– Versus, look at the industries like utilities, you will find
lower investments, modest rates of return and higher pay
out.
– New industries will always offer high risk/ high returns kind
of profile.
– Where as, the mature industries will be “cash cows” and
will be low-risk, low return but higher dividends proposal.

Industry Analysis
• Industry Life Cycle
S4
S5
S3
S2
S1
S1 : Pioneering Development S2 : Rapid Accelerating Growth

S3 : Mature Growth S4 : Stabilization & Market Maturity
S5 : Deceleration of Growth and Decline
Industry Analysis
• Peter Lynch’s Approach
– Slow Growers
• Large & aging companies that will only grow at a rate slightly
higher than economy. They have matured from their high growth
phase and have steady cash flows and pay generous dividends.
Indicating the companies is generating more cash that can be
profitably invested in the business.
– Stalwarts
• They grow faster than the slow growers, but are not in
very rapid start up phase. These tend to be non-cyclical
industries

Industry Analysis
• Peter Lynch’s Approach
– Fast Growers
• Small and aggressive firms have growth rates in the range of 25-
40% annually.
– Cyclicals
• Companies whose profits expand and contract with the business
cycles.
– Turnarounds
• These are the companies that are in bankruptcy or soon might be.
If they recover from this, they can offer tremendous returns.
– Asset Plays
• There could be companies possessing assets that are not getting reflected
in the current stock . It could be a piece of real estate, some apparently
intangible asset that could take the stock value to different heights.

Industry Analysis
Potential Entrants
Porter’s Five
Threat of new Force Model
entrants
Bargaining Power of
Industry Competitors buyers
Suppliers (Rivalry Buyers

among Existing
Bargaining Power firms)
of Suppliers
Threat of
Substitutes
Substitute
Industry Analysis
Important Facets of Industry Analysis
Structural Changes in the Economy
Structural changes are widespread or long term changes of the fundamental

structure of the economy
Eg: The Liberalization of the Indian Economy

Globalization – a structural change in the world economy
The changing of US economy from a manufacturing giant to a service oriented economy
The down fall of communism in Soviet is a structural change for the economy
Industry Analysis
Effect of Inflation
Higher Inflation causes uncertainty about future prices and cost , causes
Higher Interest rates and is harmful for firm as their costs increase.
But on the contrary Inflation is good for Natural resource

industries, Industries with high operating leverage or with high financial
leverage.
Interest rates
Higher Interest rates are harm full for the Banking and Financial sector
and the construction sector but they increase the income of retirees
Industry Analysis
Study of Demographics
Demographics includes the population growth and age distribution

along with this it also includes geographical distribution of
people, changing ethnic mix in the society and changes in the income
distribution
Eg: The expected decline in workforce in Japan in the next 15 years
due to changes in priorities.
Study of Lifestyle
Lifestyles deal with how people live , work consume, educate themselves as
the consumer behavior gets affected by trends and fads.
These things affect industries like the housing, hospitality automobiles,

retail financial services and entertainment industry
Industry Analysis
Technology
Technology implementation across industries can affect the a large part of the
economy .
Eg : Carburetors are out of demand as fuel injection technology was introduced.

Companies generate their own power , so demand of power in industrial area
goes down.
Internet has brought down the cost of advertising drastically.
Study of Regulations and Politics
Political change reflects social values , social trend gets converted in to a law
or tax.
Eg : The government controls prices of life savings drugs

Industry Analysis
International Economics
International economies are constantly interacting with each other which

affects the value of currency of the nation. The exports and imports gets affected.
Creation of free trade zones and International communities for trade benefit the
companies present in those areas those areas
Eg : Fluctuation of the Indian rupee or the US dollar
European community , North America Free trade zone, SAARC etc.
Consumer Sentiments
Consumer spending has a large impact on the economy and consumer
spending is a function of consumer sentiments . Optimistic consumers are
good for the economy and affect various sectors
Eg: Spending in Cars, Cloths, White goods and borrow for house purchase etc
Industry Analysis
Study of Global Industry
Studying scenario in the global industry helps to understand the development

and scope for the domestic industry, by introduction of multinational players in
the market and the market dynamics change
Eg: The Automobile sector witnessed a rapid change due to the foreign car makers
entering India.
Relation of the Global and Local Industry
The study of domestic industry’s interaction and dependence on the global

players helps us to understand the revenue expectations from the industry in the
short term and long term.
Domestic Industry’s presence in global area brings revenue in foreign currency
Eg : Indian Computer manufacturers depend completely on foreign companies like Intel

for their core material requirements
Industry Analysis
History of the Industry in world and India
The complete knowledge of the industry right from its inception and major milestones in
World and India gives a deep understanding about the industry and helps to spot trends
and major shift in the industry
Current Happenings in the Industry
An update about the happenings in the industry helps to understand the future
direction of the industry and growth prospects of the industry
SWOT
SWOT analysis helps to have a clear picture about the industry’s Advantage
points and the areas where it can face problems in future. This study helps to
understand the effect of various events from the Industry’s perspective.
Industry Analysis
• Taxation
• Industry Growth
• Industry Margins

Quick Access to Industry Analysis
• Pick up an industry
– Pick up the industry leader
• Note its Products/ Services
• Note its clients
• Observe Material costs: for product company
• Observe Labor costs for a services company
• Get the financials of the company for 5 years
• Look at Gross profit, EBIDTA and PBT & Net Margins
• Look at Payout Ratio
• Look at Debt to Equity Ratio
• Look at Return ratios

• Be-Do-Have

Before We End today’s Session
• Please carry your homework sheets with you
• Please carry your soft data on Pen drives, if
you require
• Please return your name tags while going
• I am around to ask any questions you may
have
• Make sure that you are calling your mentors
on the time decided

Thank You
Session 1 Ends 6pm

Equity Research Workshop Session 1

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Intension of the Course

2 Empowering People Transforming Businesses

• Handling Microsoft Excel efficiently & Effectively

3 Empowering People Transforming Businesses

Session 3 - Advanced Financial Statement Analysis

4 Empowering People Transforming Businesses

5 Empowering People Transforming Businesses

6 Empowering People Transforming Businesses

7 Empowering People Transforming Businesses

8 Empowering People Transforming Businesses

10 Empowering People Transforming Businesses

11 Empowering People Transforming Businesses

12 Empowering People Transforming Businesses

13 Empowering People Transforming Businesses

• Financial Statement Analysis

15 Empowering People Transforming Businesses

16 Empowering People Transforming Businesses

19 Empowering People Transforming Businesses

20 Empowering People Transforming Businesses

21 Empowering People Transforming Businesses

22 Empowering People Transforming Businesses

24 Empowering People Transforming Businesses

• Lot of interaction with the

• Rigorous work on model making,

• A lot of client interaction

27 Empowering People Transforming Businesses

28 Empowering People Transforming Businesses

29 Empowering People Transforming Businesses

30 Empowering People Transforming Businesses

– Till the time we do not talk of analyzing the future

31 Empowering People Transforming Businesses

32 Empowering People Transforming Businesses

34 Empowering People Transforming Businesses

35 Empowering People Transforming Businesses

36 Empowering People Transforming Businesses

37 Empowering People Transforming Businesses

38 Empowering People Transforming Businesses

39 Empowering People Transforming Businesses

40 Empowering People Transforming Businesses

41 Empowering People Transforming Businesses

Profit & Loss Account

42 Empowering People Transforming Businesses

43 Empowering People Transforming Businesses

Cash Flow Statement

44 Empowering People Transforming Businesses

Time Value of Money

45 Empowering People Transforming Businesses

46 Empowering People Transforming Businesses

47 Empowering People Transforming Businesses

48 Empowering People Transforming Businesses

49 Empowering People Transforming Businesses

50 Empowering People Transforming Businesses

China 11.2 -7.6 -7.6

51 Empowering People Transforming Businesses

52 Empowering People Transforming Businesses

53 Empowering People Transforming Businesses

55 Empowering People Transforming Businesses

56 Empowering People Transforming Businesses

57 Empowering People Transforming Businesses

58 Empowering People Transforming Businesses

60 Empowering People Transforming Businesses

62 Empowering People Transforming Businesses