How to follow a sector

V M Avinass Kumar LSD

What is expected of you ?

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Develop an industry focus and business acumen.

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Why and how does a business create value/make money? Ability to frame viewpoints on the future and backing up the same on the basis of authentic information.

Sustain an intelligent conversation on a specific sector.

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Gain insights into business practices/regulations to aid in optimal decision making.

What do we mean by following a sector ??

Understanding the Cost-Revenue Model Understanding the Value-Chain Competitive Scene & Major Players Impact of Regulations Future Trends Latest News/Deals

What do we mean by following a sector ??

Understanding the Cost-Revenue Model Understanding the Value-Chain Competitive Scene & Major Players Impact of Regulations Future Trends Latest News/Deals

Understanding the Cost-Revenue Model

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Profitability = Revenues Costs Identify Revenue Drivers

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How do I enhance their impact ? What investments should I make to enhance revenues ? Over what time frame ? What will be the impact on my top-line growth ? How do I finance this ? How do I lessen their impact ? What investments should I make to lessen costs ? Over what time frame ? What will be the impact on my bottom line ? How do I finance this ?

Identify Cost Drivers

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Key ratios/indicators

Eg: Paints & Emulsions

Source: equitymaster.com

Some key ratios /indicators

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Power: PPA (Power Purchase Agreements)

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Very important for power Generation companies as it determines the extent to which their revenues have been hedged. Key determinant for identifying growth strategy and determining revenue for telecom companies. Indication of extent to which the research employed has been successful Indication of interest costs for a bank since current account is interest free and saving account interest is low. Greater the CASA, lesser the costs.

Telecom: ARPU (Avg. revenue per user)

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Pharma: Sales/R&D expenses

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Banking: CASA Ratio

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What do we mean by following a sector ??

Understanding the Cost-Revenue Model Understanding the Value-Chain Competitive Scene & Major Players Impact of Regulations Future Trends Latest News/Deals

The Value Chain

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What is a value-chain ?
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Process of linking specific functions from input through output to delivery, enhancing the economic value of the product. Understanding backward integration forward integration strategy. Identify potential for business expansion in each link of the chain. Helps understand synergies for M&A. State of the industry in each link of the value chain. Which are the companies competing in each link of the value chain. Latest developments in technology, competition & regulations and the impact of these on the top-line and bottom-line of a firm.

Why should I know about it ?

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What should I know about it ?

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Eg: Oil & Gas

Source: PetroStrategies, Inc.

What do we mean by following a sector ??

Understanding the Cost-Revenue Model Understanding the Value-Chain Competitive Scene & Major Players Impact of Regulations Future Trends Latest News/Deals

Competitive Scene & Major Players

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What should I know about the major players?

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Which businesses of the sector are they operating in ? What is their differentiation ? What is their offerings STP ? What is their core competency ?

Eg: Pharma
Ranbaxy
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Pfizer
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Generic Drugs, lifestyle related drugs.

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New drug discovery and research

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Revital
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Lipitor

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R&D focus on reverse engineering Low-margin, high volume drugs.

R&D focus on new molecule discovery. High-margin, low volume niche drugs.

What do we mean by following a sector ??

Understanding the Cost-Revenue Model Understanding the Value-Chain Competitive Scene & Major Players Impact of Regulations Future Trends Latest News/Deals

Govt. Regulations
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Understand regulations from the following perspective:

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Impact on top-line
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Eg: tariffs, restrictions on pricing. Eg:Taxes, SEZ plans Opening up the markets for FDI, restrictions on share-holding pattern Creating specialized plans for infrastructure development like JNNURM thereby promoting private participation in these sectors.

Impact on bottom-line
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Impact on the competitive scene

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Impact on future strategy

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Cues for analysis

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Finance ministry sets depreciation standards for solar/wind energy assets at 80% (wdv)
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Impact on bottom-line allowing greater cash flows. Equity is the most expensive form of financing. Cost of financing increases considerably impact on bottom-line. Increase cost of importing and make chinese products less competitive in the Indian market. Future strategy opportunity to bring in newer technologies. Encourage participation by private sector in this space.

Minimum public holding rule.

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Imported Gear for mega power projects to attract levy

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Auctioning of 3G bandwidth
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Viability gap funding for Water supply projects.

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What do we mean by following a sector ??

Understanding the Cost-Revenue Model Understanding the Value-Chain Competitive Scene & Major Players Impact of Regulations Future Trends Latest News/Deals

Future Trends
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It is good to have an opinion on the future trends of the following:

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Revenue potential Impact of emerging technologies on Costs Direction of the sector in terms of new/destructive business models Impact of regulations on growth strategy

What do we mean by following a sector ??

Understanding the Cost-Revenue Model Understanding the Value-Chain Competitive Scene & Major Players Impact of Regulations Future Trends Latest News/Deals

Latest News/Deals
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Following news/deals consistently helps you understand the sector better. Few suggestions:
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For News:
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Business Line
Home page Industry & Economy News Related Topics

ET
Home page News by Industry

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Trade Journal - Library Research Reports:

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Consult Club Resources site.securities.com (ISI emerging markets)

So long, and thanks for all the fish