Business+analysis Working Aug+2007

Tea

Competitive landscape (and identification of competitive advantage)

FMCG Others - cleaning, home care etc

Details

List of companies (by size) with names - By sales

Top 5 companies account for 80 % of 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 ranking by ROE

Poor profitability in industry due to 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

Tea

FMCG Others - cleaning, home care etc

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 Return on capital :

Details 1.Trend for the last 10 years. 2. What is the normative return. Is it cyclical ?

ROE has dropped from 20 % + to below 10 %

High , above 20 % for most

Tea

FMCG Others - cleaning, home care etc

Dupont analysis

1. Asset turnover ratio = Sales / total assets ( Asset efficiency) 2. NPM. 3. Return on asset = NPM* Asset TO ratio 4. Total asset / Equity ( indication of debt levels) 5. ROE = Total asset/ equity * Return on asset

FA Intensity

1. Asset light model ? 2. High on intangible asset ( R&D / Customer relations / Brand / patent )

High FA TO in the industry. Mainly due to outsourcing of manufacturing to third party suppliers

WCAP Intensity

1. Which component of WCAP is high inventory / recievables and why

High Ratio as payables is on credit. 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. Are the margins defensible ?

Low margins for most. NP < 10 %. Not cyclical. Structural reduction happening

RM as % of sales and implication

1. Asset turns have come down from 1.3 to 0.8 2. Margins have dropped from 10 % + to 5-6 % in 2005 due to poor pricing 3. ROA is poor due to 1 and 2 4. Debt equity has held steady at around 0.5:1 5. ROE is dropping due to the above reasons

Tea

FMCG Others - cleaning, home care etc

Key Industry ratios and statistics

Business units

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Consumed regularly as bevarage 2. In decline, being overshadowed by coffee (check this assumption)

1. Rural demand 2. Demand in specific segments 3. Down trading happening

Key supply drivers

supply side factors which impact the economics of the business 1. Does the supplier power effect the pricing 2. Is the business RM sensitive ?

1. Tea crop (volumes) - global production 1. Price of LAB / Oils 2. Global pricing determined by international demand

Shareholder Value creation drivers

Important Drivers which which would enhance the long term value

1. Strong brands 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 product remain the same 2. Can the need be met with substitute products ?

Was low. Currently business model is changing due to local players. Price senstivity increasing

Tea

FMCG Others - cleaning, home care etc

Predictability of business

1. Does the product/ service have long life cycle 2. Does it satisfy some recurring need 3. Has the business model changed drastically several times ?

High. However growth is low in the main categories due to high penetration

Cyclical nature ?

Is the business subject economic cycle or exempt from it . Is it in a state of perptual decline ?

Low

Ability to increase price ahead of 1. Is the business able to increase 1. Poor for unbranded. Depends on inflation (Pricing power) price easily ? This is a strong indicator demand / supply situation of CA 2. Moderate for the branded. However demand growth is low and moving towards unbranded and hence poor pricing power

Some sort of monoploy or Oligopoly

Does the company have a recurring revenue stream

Does the business have franchise / brands or is it commodity

Does the industry enjoy high growth rates ? For how long

1. Is consolidation happening ? 2. 80 % market share controlled by how may firms ?

Was high. Has got impacted due to local players and intense competition between major players. Food / Some segments still have moderate pricing power

None

Multiple co.s . Multiple local companies

Yes . Due to FMCG nature of product

Yes.

1. What has been the trend in the last 1. Brands are present. Poor pricing / few years Franchise levels

The business has franchise/ brands. Commoditisation has now started

No. Growth is negative due to migration Low growth in general category. Growth to coffee only in niche categories now

Tea

FMCG Others - cleaning, home care etc

Key industry variable which drive the performance

1. Distribution depth / No. 2. Ad spend / Brands 3. Net margins

Strong competitive advantages create entry barriers for incumbents, preventing entry of competition and enables incumbents to earn high returns Customer advantage Factors 1. Habit forming and High resulting in moat (customer Differentiation - No. 1 captivity) 2. Experience goods (brand effect, Higher durability than production trademarks) - No. 2 advantage factors 3. High switching cost (Lock-in) - No. 3 (for ex : change of business software 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)

Source of competitive advantage

1. Habit forming, but low differentiation. Although companies are moderately successfully in branding part of the market

1.Habit forming and differentiation created through branding and product differentiation 2.Brand effect strong in several categories such as cold drinks, soaps, detergents, oils etc

NA

NA

Presence of Network economics - customer advantage factor network Radial or combitorial economics

Presence of network effect increases switching cost for the customer a) Scale economics due to network effects b) Barriers to entry due to network effect

Network taxonomy

1. Transaction based (like ebay) 2. Community based (like Fools) 3. Complementary products (VHS+ players)

NA

NA

Network profits based on

1. Commerce transaction 2. advertising 3. Subscription 4. Data 5. Incubation (Like windows network effects taken to MS office or Explorer

NA

NA

Tea Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of 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 will reduce this ratio can weaken the edge of the incumbent

A. Process economies (resulting in A. Not much process economies lower cost of production for incumbent) 1.indivisbility of value chain 2. Complexity and fit of processes 3. Rate of change in process costs 4. Protection through copyright / Patent / License / Lease 5. Resource uniqueness such as acess to raw material or manpower etc

FMCG Others - cleaning, home care etc A. 2. Complexity and process fit present in certain categores such as food B. Scale economies in distribution, Purchasing, Advertising. Helps in building brand and reducing COGS

B. Scale Economies ( In conjuction B. Scale economies exist for b. Scale economies very crucial and with with demand captivity result in very Distribution / Advertising and moderately customer based advantages add to sustainable competitive advantages ) for production in farms competitive advantage through 1.Distribution 1. Distribution - strong distribution 2. Purchasing network 3. Advertising 2. Purchasing efficiency 4. R&D 3. Information based economies through advertising

Distinctive capability analysis

Distinctive capability analysis applied to specific market (product or geographic create the customer based or production based advantages

Architecture

Relationships with all stakeholder / systems / process / Knowledge base / - analyse the architecture v/s the target market

Strategic assets

Distribution network / plant / license monopoly / natural reserve /Patents / Media Properties/ Network effects / Switching costs - analyse with target market

Strong know how from parent / IP transfers

1. Distribution network for retail 2. Tea gardens 3. Brands

Strategic assets in the form of distribution network

Tea Innovation

FMCG Others - cleaning, home care etc

None

Moderate innovations. Higher in past. Low currently

Cost

R&D / Innovation history /NPD - Disruptive innovations ? - Sustaining innovations ? 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 and reasons for low high returns

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Low industry returns due to low entry 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

1. The Brand pull should create Entry barriers exist in the form of scale, prevent the customer from switching branding and distribution strenght. 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 and marketing

Entry barriers are high due to distribution and Brands

Distribution economies of scale. Purchasing economies of scale

Tea

FMCG Others - cleaning, home care etc

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 entrant

Low. Check for unbranded

Precommitment contracts

Low

Learning curve barriers

Moderate

Network effect advantages of incumbents

None

Tea

FMCG Others - cleaning, home care etc

No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio )

High competition

RIVALRY DETERMINANT

Rivarly is high now due to poor growth and unorganised sector

Rivalry is high now. Local competition is 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

Product difference

Low

Informational complexity

Low

High now as these product involve low tech Medium. Quality -> but reducing now. Differentiation is mainly through Distribution and brands Low

Exit Barrier Demand variability

moderate. Low for unorganised Low

Medium . Business is not capital

SUPPLIER POWER

Low as tea is a commodity

Supplier power is low

Differentiation of input Switching cost of supplier

Low Low

Low Low

Presence of substitute

Yes, from other tea gardens

Yes

Supplier Concentration

Low

No

Imp of volume to supplier Cost relative to total purchase

High High

High Low

Threat of forward v/s Backward integration BUYER POWER

Low

Low

Low as the final consumer is the final buyer

Buyer power on individual basis is low

Tea

FMCG Others - cleaning, home care etc

Buyer conc. v/s firm concentration

Low

Buyer conc. Is low and dispersed

Buyer volume

Low

Buyer volume is low

Buyer switching cost

Low

Buyer switching cost is low

Buyer information

High, mostly priced based other than brand and taste

Good, although not critical

Ability to integrate backward

None

No

Substitute product

Coffee

Brand substitution high especially in soaps/ detergents / oral care. Less in foods

Price sensitivity

Yes

Price / Total Purchase Product difference

Low High

High and hence subsititution of brands happen Low Medium to low now

Switching cost Buyer propensity to Subsititute

Low Low, new generation moving toward coffee

Intangible assets

Valuation model

1. Brands - requiring high ad spends for maintenance 2. Patents / Knowledge assetrequiring high R&D expenses 3. Distribution infrastructure - S&D expenses ? 4.Customer relationships/ contracts / agreements 5. Media property / License / Some sort of monopoly 6. Network effects / Switching costs / Customer lockins

1. Brands important in industry . Do brands give excess returns in india (to check ??) 2. No patents 3. Distribution infrastructure is similar to FMCG companies. No longer a key differentiator for the top companies

Low High

Tea Valuation approach

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

FMCG Others - cleaning, home care etc 1. P/E 2. Cash flow

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

List of companies (by size) with names - By sales

1. Tata motors - 50 % 2.Maruti udyog - 30 % 3.Ashok leyland - 12.5 % 4.Eicher motor - 3 % 5. Force motors - 2 % Total industry sales - 41195

1.MICO - 12.7 % 2.Bharat Forge - 6.7 % 3.Exide Industries - 5.9 % 4.SRF - 5.5 % 5.Sundram Fasteners - 4.4 % 6.SKF India Ltd. - 3.9 % 7.Wheels India - 3.6 % 8.Amtek Auto - 3.5 % 9.Rico Auto - 2.8 %

Profitability pool analysis ranking by ROE

1. 2. 3. 4. 5.

1. 2. 3. 4. 5. 6. 7. 8.

Competitive landscape (and identification of competitive advantage)

Market share stability analysis

Eicher - 50.5 % Tata - 19.8 % Maruti - 13.2 % Ashok - 12.9 % Force - -10%

Bharat forge - 28 % Rico auto - 15 % MICO - 12 % SRF india - 10 % Exide - 8 % SRF/ Amtek - 7 % Sundaram fastner - 4 % Wheels india - 2 %

1. Exide - 80 % OEM and 65 % after sales

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

Not too fragmented. Top 3 companies account for 90 % of industry

Very fragmented. But each company works in its own niche product. Easily 40+ no. of companies. Top 10 companies account for only 50 % industry

Cyclical in nature Has improved from < 10 % to 20 % + in the last few years . Mainly due to improved asset utilisation and margins improvement

High.Being driven by export demand and increase in the knowldege component of business. Improvement in asset turns have improved ROC. Interest expenses have improved margins. OPM are stable

Pricing stability

Industry structure type

Key Industry products or segments

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

Economic model Return on capital :

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

Dupont analysis

1. Asset TO has doubled to 2.9 from 1999 to 2006. TO has doubled, but the asset being used are the same 2. Margins have also doubled from 3 % to 6 %. 6 % NPM appear sustainable 3. To doubling of NPM and asset TO, the ROA has gone up 4 times from 4.5 % to 18 % + 4. Debt levels have gone down due to total asset to equity dropping from 1.8 to 1.3 5. ROE has gone from 10 % range to 20 % due to above factors (point 1-4)

1. Asset turns have improved from 1.3 to 1.8. And hence has driven the efficiency 2. NPM has gone up by 3-4 % (doubling). The Profit margins look sustainable in 47 % range 3.Return on asset has improved from 56 % range to 10% +. More 10 % sustainable ? 4. Debt level (total asset / equity) has seen some drop but not too much (2 to 1.7) 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 ?

Margin intensive ?

RM as % of sales and implication

Yes. The Ratios have improved from < 1 to almost 2 times TO ratios. Asset efficiency has improved the ROC

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

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Consumer demand for cars. Depends on general affluence level. 2. Commercial vehicle demand depends on industrial activity 3. Availability of finance

1. Driven by demand for commerical and cars 2. Some parts also driven by industrial demand

1. Driven by OEM sales of cars, two wheelers, and Tractors 2. Replacement demand 3. Industrial demand

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 drivers

1. Strong brands 2. Enduring low cost position 3. NPD pipeline and ability to launch successful new products 4. Innovation capability

1. Patents / Technology skills 2. Strong R&D capability 3. Ability to develop new products to meet the demands of the auto industry

1. 2. 3. 4.

Degree / nature of change

Moderate.Smaller life cycle of a product. High. Smaller product life due to Changes in technology continous improvement in technology and change in car models

Key Industry ratios and statistics

Business units

Business model

Patent / Technology Strong R&D and new products Distribution for aftersales Relationship with OEM customers

1. Low driven mainly by changes in the technology

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

Predictability of business

high. Due car buying by consumer and Commercial vehicle for Goods movement

High. Low level of change High especially if long term contracts are being signed. Auto component companies are moving to higher end items improving the predictability of the business

Cyclical nature ?

Moderate for cars. High for commercial vehicle

Business is cyclical in nature as the end demand comes from automobiles. However india is move into the global supply chain and hence will have lower volatility 1. Poor for the OEM except for long term

Ability to increase price ahead of Poor inflation (Pricing power)

1. OEM business is cyclical 2. After sales follows OEM with lag, but is less cyclical

1. Poor for the OEM except for long term 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 Oligopoly

Low in india. High competitive intensity Multiple companies. especially in mid segment

Very high market share enjoyed by Exide

Does the company have a recurring revenue stream

Yes. High value purchase with long cycle Yes. However from limited customer

Yes - From OEM contracts and retail sales

Does the business have franchise / brands or is it commodity

Franchise / branding is strong in india

1. No brands. Franchise is more 1. No brands. Franchise is more production (cost driven) in OEM production (cost driven) in OEM 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 growth rates ? For how long

Commerical vehicles is cyclical. Cars / personal vehicle have a much steadier trend

Yes. Trend towards good growth due change in global dynamics

1. High currently. Driven by OEM 2. Later to be driven by Replacement market

Key industry variable which drive the performance

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

1. Brands 2. Cost of manufacturing

1. R&D 2. Long term contracts 3. Cost of mfg ( Cost competitiveness) 4. Ability to deliver on quality and service levels

1.High differentiation among products 2. Brand effect is strong 3. Moderate lockins due long purchase cycle

1. Switching cost / Locking exist 1. Moderate differentiation due to moderately due to technology transfers brands and long term contracts

1. R&D 2. Long term contracts 3. Cost of mfg ( Cost competitiveness) 4. Ability to deliver on quality and service levels 5. Distribution and dealer relationship. Relationship with OEM customer (Market share in each )

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

None

Network taxonomy

None

None

Network profits based on

None

Economies of scale in advertising, manufacturing and OEM relationship

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

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

A. 1. Value chain indivisbility is very high 2. Complexity and process fit is high 3. Process cost reduction happens due to learning curve 4. Patents may exist in some unique cases. Less so in india

A. 1. Value chain indivisibility is high 2. Complexity and process fit high due to technology component 3. Process cost drops may happen on learning curve 4.Patent may exist and provide competitive edge 5. Low cost manpower a plus for indian industry

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies in production/ competitive edge if the ratio of Purchasing/ Ad/ 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 will reduce this ratio can weaken the edge of the incumbent

A. 1. Value chain indivisibility has impact on cost. Lead procurement process and manufacturing costs have impact 2. Complexity and process fit has moderate impact 3. Moderate benefits through patent or R&D knowhow

B. Scale economies exist for purchasing, B. Scale economies important for distribution (for retail) and R&D distribution, purchasing , Ads and R&D

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 dealers are important

1.Patents 2. Switching cost of OEM , though not too high

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

Innovation

Important - but technology is mainly imported

1. Sustaining innovation

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 depends on brands and reputation

Important only in retail

Industry attractiveness sumarry and reasons for low high returns

Industry has good returns as demand has been high, early entrats who developed scale have been able able to create barriers and keep returns high. Key variables are entry barriers and rivarly. In event of drop in demand, rivalry could increase resulting drop in returns

High entry barriers, muted rivalry due to lesser no. of competitior in each product segment and improvement in scale due to export and local market has resulted in an attractive industry returns, especially for the larger companies. Rivalry is not intense. Supplier power is very low. Buyer power has resulted in lowering of returns a bit.

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Entry barriers are high and hence maruti high entry barriers due to and other first movers have a higher 1. Economies of scale advantage. 2. Customer relationship and contracts 3. Tech knowhow and R&D assets

Asset specificity

High. An automobile plan is capital intensive

high

Moderate

Economies of Scale

High for manufacturing/ Purchasing/ Marketing etc

1. Purchasing / Manufacturing and marketing economies of scale

1.Purchasing / Manufacturing / Distribution and Advertising economies of scale

Porter's model : 5 factor for industry attractiveness Returns are high for exide which has control on the market. However buyer power from OEM reduces returns somewhat. Rivarly is less due to high market share of exide. Supplier power and substitutes do not have high impact

High entry barrier due to dominance of exide in the OEM and after sales market

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

Proprietary Product difference

Moderate. New technology is being added. But it gets copied quickly

1. High due to employement of technology / R&D spend

Brand Identity

High

Switching cost

1. Medium to low (if supplying OE vendors) moderate. New buyers have tendency to 1. High for the OE stick to their brand.

1. Moderate. Branding and quality create a meaningfull difference.

1. Strong. Gives pricing power in replacement market Low

Capital Requirement

High for the industry

High to achieve global scale economies ??

Distribution strength

Critical

1.Not critical as many supplier are located close to OE 2. Important only if the company is a domestic retail player

Critical, especially for the replacement market

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 entrant

??

Low as capacity / Technology / 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 incumbents

None

None

None

Automobiles - cars / HCV

Auto components

AUTO AND ANCILLARIES Batteries

No. of competitors - Monopoly / Low concentration ratio for all segments 1. Intense competition due to a no. of ologopoly or intense competition except entry level small companies (concentration ratio ) 2. Some companies building scale to global levels - would result in lower competition RIVALRY DETERMINANT Rivarly is high due to high fixed Low rivalry among major competitor as

High market share with exide

Low, due to dominance of exide

investments. Muted currently due to good demand growth

most of the autocomponent companies 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

Product difference

Moderate

currently low for specific product due to Not very critical shift in global model 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 Demand variability

High High

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 Switching cost of supplier

Low Moderate

Low Medium - Only if some special RM type is required

Low Low

Presence of substitute

High

None

Yes

Supplier Concentration

Low

Low

No

Imp of volume to supplier Cost relative to total purchase

High High

Low High

?? ??

Threat of forward v/s Backward integration BUYER POWER

Low

Low

Low

Low

High

high for OEM resulting in lower margins, Low for Replacement market resulting in higher margins

AUTO AND ANCILLARIES Batteries

Automobiles - cars / HCV

Auto components

Buyer conc. v/s firm concentration

Low

High

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

Buyer information

Ability to integrate backward Substitute product

1. High as lot of companies invest in developing their vendors High 1. High as key vendors are important for the auto makers in their total cost structure None 1. Low. Most top auto companies are trying to out source as much as possible Public transport - not really a key factor Low

High for OEM, low for the replacement market

Low High for OEM, low for the replacement market Low None, except for brand substitution

Price sensitivity

High

High

Price / Total Purchase Product difference

Low High. Taken care through vendor selection process High Low if quality and cost is maintained

Low Moderate

1.Brands not too critical and do not add to pricing power 2. R&D / Patents required from process point of view for indian vendors to achieve low cost of production 3. Distribution critical for Spares supply in the after's market only 4. Customer relationships very important for the OEM market and can result in moderate lockins 5. Technology tie-ups are also important

1. Brands - important in after sales market 2. R&D and knowhow important for new products and to improve quality and to reduce cost 3. Distribution infra important for after sales markets 4. Customer relationship important for OEM relationships

Switching cost Buyer propensity to Subsititute

Intangible assets

Valuation model

1. Brands are critical. Pricing strength is moderate due to brands. Depends more on the product quality / review 2. R&D spends high for cost cutting / new technology. More from the production advantage standpoint than from a consumer standpoint

Low Low

Valuation approach

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

Automobiles - cars / HCV

Auto components

1. P/E 2. Cash flow

1. P/E 2.DCF

AUTO AND ANCILLARIES Batteries 1. PE 2. DCF - normalised a small extent

ANCILLARIES

Technology Tyres

Competitive landscape (and identification of competitive advantage) List of companies (by size) with names - By sales

Profitability pool analysis ranking by ROE

Market share stability analysis

Hardware

BPO

ANCILLARIES

Technology Tyres

Pricing stability

Industry structure type

Key Industry products or segments

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

Economic model Return on capital :

Poor. In the region of 7 - 12 % . OPM drop has resulted in drop to 7 %. Asset efficiency is steady

Hardware

BPO

ANCILLARIES

Technology Tyres

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

Hardware

BPO

ANCILLARIES

Technology Tyres

Hardware

BPO

Key Industry ratios and statistics

Business units

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Driven by OEM sales of cars, two wheelers, and Tractors 2. Replacement demand

1. Offshoring of services

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

ANCILLARIES

Technology Tyres

Hardware

BPO

Predictability of business

Cyclical nature ?

Ability to increase price ahead of 1. Poor for the OEM except for long term inflation (Pricing power) contract. Depends more if technology is able to drive costs low 2. Much higher for the spare parts business but much lower than other auto components. Also re-treading plays an important role too

1. Extremely lower for computers 2. Higher for other computer equipment with lower standardisation such as PDA/ routers / etc. more based on feature 3. Pricing power is present only in the first few months during new model introduction. None later- has to be reduced

Some sort of monoploy or Oligopoly

None

??

None

Does the company have a recurring revenue stream

Yes - From OEM contracts and retail sales

??

Yes, but only after long term contract is signed

Does the business have franchise / brands or is it commodity

1. No brands. Franchise is more Brand power results in moderate production (cost driven) in OEM pricing. Not very attractive customer 2. For service market brands and pricing franchises power is present (moderate)

Weak to moderate brand.No franchise.Lock in due to Switching costs

Does the industry enjoy high growth rates ? For how long

Yes - From OEM contracts and retail sales

Yes, very high due to increased outsourcing

Yes, due increasing penetration by computers

ANCILLARIES

Technology Tyres

Hardware

BPO

Key industry variable which drive the performance

Source of competitive advantage

Customer advantage Factors 1. Moderate differentiation due to resulting in moat (customer brands captivity) Higher durability than production advantage factors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

1. Moderate brand effect. 1. Lock or high switching cost mainly Commoditisation happening now with a vendor company due to built in 2. From some electronic products such knowledge sharing with the vendor as consumer electronics brand effect is increasing for the high end

None

None

None

Network taxonomy

None

Network effect for some consumer electronics (but not in india)

None

Network profits based on

None

None

None

ANCILLARIES

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

Technology Tyres

Hardware

BPO

A. 1.Indivisibility of value has impact on manufacturing costs 2. Process fit not too complex

A. Process economies due to 1. Value chain fit and process cost reduction over time

A. Process economies 1. Complexity and fit of process is critical for BPO kind of operations. More for the high end than the vanilla call centre business 2. Process cost reduction over time is critical 3. Acess to quality manpower in india is imp

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scales economies in manufacturing, competitive edge if the ratio of distribution, purchasing , R&D and fixed cost / Variable cost for the moderately in R&D market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

Distinctive capability analysis

Architecture

Strategic assets

B. Scale economies in B. Scale economies in 1. Production 1. manpower availability 2. Distribution which is critical for 2. Sales and marketing electronics 3. Purchasing of components 4. Advtg 4. R&D for new products (non existent in india)

ANCILLARIES

Technology Tyres

Hardware

BPO

Innovation

Cost

Financial strength

Reputation

Porter's model : 5 factor for industry attractiveness Industry attractiveness sumarry and reasons for low high returns

Extremely attractive returns due to high 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 deciding industry profitability

1. Entry barriers exist for - 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

ANCILLARIES

Technology 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 entrant

Good

Precommitment contracts

Highly critical in this industry

Learning curve barriers

High

Network effect advantages of incumbents

None

ANCILLARIES

Technology Tyres

Hardware

BPO

No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio )

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 Demand variability

Low Low

SUPPLIER POWER

None

Differentiation of input Switching cost of supplier

None None

Presence of substitute

None

Supplier Concentration

None

Imp of volume to supplier Cost relative to total purchase

None None

Threat of forward v/s Backward integration BUYER POWER

None High, especially for smaller companies

ANCILLARIES

Technology Tyres

Hardware

BPO

Buyer conc. v/s firm concentration

High for each firm. For some very high

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 Product difference

NA NA

Switching cost Buyer propensity to Subsititute

NA NA

Intangible assets

Valuation model

1. Brand have moderate impact 3. Distribution infrastructure important for after sales market 4. Customer relationship important for OEM market

1. Brand not resulting in too much pricing power. Indian brands not so powerful. 2. Low for indian vendors 3. Distribution critical . Service infrastrucuture is important 4. Customer relationship important for Corporate customers / Dealer relationship important for retail

1. Customer relationship important. Similar to IT services 2. Knowledgement management critical

ANCILLARIES

Technology Tyres

Valuation approach

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

Hardware

BPO

Technology IT services

Financial instituiton BANKS

Rating agency

Competitive landscape (and identification of competitive advantage) List of companies (by size) with names - By sales

Large no. of companies. However top 8 companies account for 80 % and top 4 for 70 % (cognizant is not listed 1. TCS - 22 % 2. Infosys - 19 % 3. Wipro - 17 % 4. Satyam - 10 % 5. HCL - 5 % 6. Iflex - 2 %

Industry is fragemented. Top 16 players 1. Crisil account for 80 %. Total no. of banks is 2. ICRA 50 + 1. SBI - 25% 2. ICICI bank - 10 % 3. Punjab national bank - 7 % 4. Canara bank - 6 % 5. BOB - 5 % 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 ranking by ROE

Very profitable industry. However only the top vendors or specialist are highly profitable. A number to tier II and III vendors are losing money 1. TCS - 65 % 2. Infosys - 22 % 3. Wipro - 29 % 4. Satyam - 26 % 5. HCL / Iflex - 8 % 6. Patni - 10 %

Most banks have ROE in the range of 17-22 % . Almost 90 % + banks have double digit ROE in last few years

Market share stability analysis

NA

Cannot analyse. However accquisition mergers should reduce the no. of players.

Technology IT services

Financial instituiton BANKS

Rating agency

Pricing stability

Pricing is better for Top tier and specialist companies. For Tier II and III companies pricing is squeezed due to reliance on key customers

Competition has made pricing of credit competitive. However it decided more by interest rates

High, due to oligpoly between the 3 companies

Industry structure type

Fragmented. But consolidating at the Top and to specialist vendors

Very fragmented. Should consolidate through M&A

oligopoly between three companies 1. CRISIL 2. CARE 3. ICRA

1. 2. 3. 4.

1. Ratings 2. Market research

Key Industry products or segments

Retail lending Corporate lending Treasury operations Fee based incomes

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

1. SBI 2. ICICI

1. CRISIL 2. CARE/ICRA

Economic model Return on capital :

1.Very high return on capital 2. Trend for last 10 years towards high ROCE and low debts 3. No cyclicality as the industry is in a growth phase

Retun on capital depends on economic 1. Very high to strong competitive cycle. High in last few years due to advantage ( > 50 %) reducing int rates. Better for private and some psu due better lending and risk management processes

Technology IT services

Financial instituiton BANKS

Rating agency

Dupont analysis

1. Asset turnover not too high. Between 1-1.5. Main asset is building 2. High NPM. Between 17-20 %. Fairly steady due to GDM 3. High ROA. 20% + 4. Very low debt. Most companies are cash rich 5. Persitently high ROE, in excess of 20 %

Not entirely relevant. ROA is a more important no. any bank with ROA > 1.5 % will have good ROE as banks have leverage of 9-10 times

FA Intensity

High FA TO as business requires only Building and IT infrastructure

Not relevant : FA is mainly branches and 1. Asset light model. 2-3 time FA IT / ATM infra turnover

WCAP Intensity

Very Low WCAP - Main WCAP is Debtors, Not relevant : no inventory, Low creditors. Tier 1 companies have debtors days of 30 days. Tier 2 has 60-90 days of Debtors

1. WCAP needs are close to 0

Capital intensive ?

Low capital intensity

1. Low intensity of capital. 3-4 times TO ratios

Margin intensive ?

High margins due to GDM model. To go Low margins (NII and other income). 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 due to labor shortage

Very capital intensive. Operates with high level of leverage ( 10:1)

1. 2. 3. 4. 5.

High Asset TO ration - 2-3 times of FA NPM 15-20 % ROA is high. 30-40 % range Low to no debt High ROE in the range of 40% +

1. High margins - 15-20 % NPM

Cost of funds. Depends on interest rate. 1. High margins - 30-40 % OPM Does not impact as long as the bank can manage the asset liability durations

Technology IT services

Key Industry ratios and statistics

Financial instituiton BANKS

Rating agency

1. Interest rates and yield curve 2. GDP performance 3. NPA

Business units

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Low cost proposition for same services 2. Labour / skill shortage in long run

1. Credit offtake - Industrial / rural / Consumer through consumer loan 2. Continual demand of the product although alternate channels such as capital markets are now relevant

1. Debt raising by companies 2. No. of companies looking at raising debt and getting rated

Key supply drivers

1. Educated mapower at reasonable cost 2. Continous skill enhancement of employees

Demand deposit / Time deposit and cost None of deposit

Shareholder Value creation drivers

1. Branding 2. Strong sales capabilities 3. Service solution / innovation capabilities

1. Ability to improve loan portfolio with low risk profile and source fund at low to competitive rates 2. Other income streams as Fee based income , treasury income, Distribution income

Degree / nature of change

High degree of change - due to technology changes / high competition

Low level of change Medium - competition from alternate sources of finances such as capital markets / Consumer finance companies for consumer loans / HFC for housing loans / Project finance & WCAP finance from FI

Technology IT services

Financial instituiton BANKS

Rating agency

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 offshore

Ability to increase price ahead of Very moderate. More demand supply inflation (Pricing power) gap driven. Commoditisation at lower end and moving up the value chain

Not cyclical Cyclical based on economy . Low now due to Retail loans / Retail business which depends on the growing affluence

Some sort of monoploy or Oligopoly

None at all - close to perfect competition.

1. Not very high due low differentiation 1. Very high for the main rating agency levels for retail services like crisil / ICRA etc 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 None at all Restricted competition due to three main firms - CRISIL , ICRA and …

Does the company have a recurring revenue stream

Yes

Yes, high recurrence of reveneues

Does the business have franchise / brands or is it commodity

Weak to moderate brand.No Moderate branding - Not resulting in a franchise.Lock in due to Switching costs franchise

Branding / Franchise very powerful and gives good pricing power

Does the industry enjoy high growth rates ? For how long

High growth currently due model shifts. High growth currently as banking not Looks likely for the next few years too developed in india

No, moderate in the current line of business.

Yes , if new debt is issued. Companies like crisil have developed new revenue streams like Risk assesment, Advisory services, Equity research etc

Technology IT services Key industry variable which drive the performance

Financial instituiton BANKS

Rating agency

1. No. of new accounts 2. % repeat business 3. Utlisation levels 4. Margins 5. Geographic split of business 6. Split of business by vertical ( and performance in the vertical )

1. Net interest income 2. NPA 3. Credit / deposit ratios 4. Non interest cost/ operational income 5. Level of treasury income 6. Return on equity 7.No. of branches / Infra 8. CAR

1. No of new customer added 2. Margins 3. Other income - other value added service other than rating services

1.Lock in exist due process knowledge of customer and long term contracts 2. Brand effect exist, but is only moderate

1. Moderate differentiation due to 1. High brand effect branding and distribution network / size 2. High lockin (High switching cost) 2. Brand effect is high 3. Moderate lockin for retail customer

None

Scale economies come due to bigger network

none

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

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

Technology IT services Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses )

A. 1. Value complexity is not too high unless IPR is being created 2. Copyright may exist for a few knowledge assets. Not much for IT services industry

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies not too high other competitive edge if the ratio of than staffing 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 will reduce this ratio can weaken the edge of the incumbent

Financial instituiton BANKS A. 1. Value chain is reasonable level of complexity and fit of process, which results in lower costs and better service for customer 2. No copyright or patent protection exists B. Scale economies critical for distribution (financial products, services), purchasing (raising deposits/ funds), and advertising

Rating agency High customer advantage due to government regulation . Rating is generally done by a set of fixed co.s CRISIL, CARE and ICRA

B. Scale economies in securing low cost No significant process economies deposit Scale economies in fee based income from retail Scale economies in Advertising

Distinctive capability analysis

Architecture

1.Domain specific IPR and knowledge base 2.Employee relationship and recrutiment / retention capability 3.Experience / knowledge base of IT project execution

Crucial architecture factors : Relationship with depoitors / Risk management processes / Knowldege base / Employees

- Systems / knowledge base of company details / industry expertise

Strategic assets

1. Domain specific IPO and Knowledge base 2. Key employees groups with knowledge assets 3. Moderate switching costs

Distribution network. Though does not offer very high CA

Brand / Toll gate like monopoly of the rating agency as any company wanting to access capital market have to get rated

Technology IT services

Financial instituiton BANKS

Rating agency

Innovation

Weak to none

Low

None

Cost

Currently low cost position. Endurability ?

Not critical

Financial strength

High . 1. Relevance in outsourcing 2. Relevance in Acquisitions

Imp - Depends on access to low cost deposit / Credit management and Risk management processes V Imp . CAR decide the growth capability of the bank

Reputation

Moderate to low. India brand stronger than individual company brands

Brand / strenght important for accessing V imp. Any company wanting to access low cost deposit capital market has to get rated by these companies - like a toll gate

Industry attractiveness sumarry and reasons for low high returns

Extremely attractive returns due to high 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

Returns high currently due to growth in the industry. Entry barrier and exit barrier also high. Rivarly is high, but has not impacted returns. However a very fragmented industry and slowdown can impact returns for smaller players. Buyer, supplier and substitutes not very crucial

ENTRY BARRIER - No. 1 Factor deciding industry profitability

- Barriers due to economies at low end work - Barriers due to vertical based competency (BCM / Insurance ) : Depends on individuals - Companies can enter although the industry is now consolidating

- Barrier to entry is due to RBI license 1. Entry barrier very high due to - Economies of scale important for powerful brand (Franchise) Distribution (retail), advertising and for getting low cost deposit - Switching cost moderate especially as consumers generally stay with the bank

Asset specificity

Low

Low

Low. Limited to building etc

Economies of Scale

Economies important at low end epecially for outsourcing

High

Low

Not critical

Porter's model : 5 factor for industry attractiveness Very high returns due very high entry barriers, low rivarly due to limited competition. No buyer power, supplier power or substitutes

Technology IT services

Financial instituiton BANKS

Rating agency

Proprietary Product difference

None - IPR / knowledge base for vertical Low is the only differentiator

high. Credit rating work done by an 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 essential

Low

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 by RBI

Low. Can have an impact if government decides to create a new agency and gives it credibility

Expected Retaliation

High

High. Extremely fragmented and competitive industry

Production scale

NA

Not applicale

Not likely to happen in the ratings business. Other streams of work have higher competition Low

Anticipated payoff for new entrant

High

Moderate

Low

Precommitment contracts

High

None

high. Being leveraged for new streams of revenue

Learning curve barriers

High

Medium

High

Network effect advantages of incumbents

None

High. Higher no. of branches is critical in Low the industry

Technology IT services No. of competitors - Monopoly / Intense competition ologopoly or intense competition (concentration ratio )

Financial instituiton BANKS

Rating agency

Intense competition now

Limited number of companies

RIVALRY DETERMINANT

Medium rivalry. However firms in the Intense competition now industry due to low exit barriers do not engage in destructive competition. Expected to increase with growth in the US companies in india

Low due to limited no. of companies

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 Demand variability

Low Low

High High to medium

Low 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 Switching cost of supplier

None None

None None

NA NA

Presence of substitute

None

None

NA

Supplier Concentration

None

None

NA

Imp of volume to supplier Cost relative to total purchase

None None

None None

NA NA

Threat of forward v/s Backward integration BUYER POWER

None

None

NA

% Sales contributed by Top 5 account. High for smaller companies

Imp in wholesale a/c. Retail not critical

Not too high

Technology IT services

Financial instituiton BANKS

Rating agency

Buyer conc. v/s firm concentration

Varies for companies. Tier II companies Low have higher Buyer conc

Low

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 vendor. However switching costs are high. Hence repeat business is key variable

1.Capital markets for Industry 2. ECB markets

None

Price sensitivity

High for low end work

High

Price / Total Purchase Product difference

High Low

High Low

Switching cost Buyer propensity to Subsititute

Medium High

Low High

Intangible assets

1.Customer relationships important 1.Brand critical on the deposit side 2. Knowledgement management 2. Distribution infra important for important. deposit side / for retail sector for other 3.Branding important more from products such as insurance , mutuals recruitement point of view. Branding etc. Distribution also important for retail becoming critical for the top vendors business 4.Research for creating IP for high end is 3. Customer relationship important for gaining importance corporate business. 4.Risk management systems important for keeping NPA low and for treasury income

Valuation model

1. Brand very important and locked in by the three main agencies - crisil, CARE, ICRA 2. Customer relationship critical for having clients for the ratings business 3. Distribution now through the NET to provide research services

Technology IT services Valuation approach

High PE Low PE for the industry Avg PE for the industry Valuation drivers

1. DCF

Financial instituiton BANKS

Rating agency

1.Price to Book - private market value is 1. DCF 2 to max of 3

1.ROA 3. ROE 4. Yield on earning assets 5. Cost of funding (from equity, term 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

1. Cash flow 2. No. of clients 3. Non ratings revenue stream and growth

Avg ROC numbers of industry Avg Growth for industry Avg CAP assumptions Maintanance capex (approximate) as % of sales / Dep as % of sales

8-10 years Low ..< 5%

COMMODITY Cement

steel

Metals

List of companies (by size) with names - By sales

1.Grasim Industries - 22% 2. ACC - 15 % 3. Ultratech Cement - 11 % 4. Gujarat Ambuja Cements - 10 % 5. Jaiprakash Associates(Div) - 10 % 6. India Cements - 6 % 7. Birla Corporation - 4 % Total industry - 30000 cr

1. SAIL - 37 % 2. TISCO - 20 % 3. JSW steel - 8 % 4. Ispat industry - 6% 5. Jindal steel - 4% 6. Jindal saw - 4 % 7. Bhushan - 4 % total industry - 75000 cr

1. 2. 3. 4. 5.

Profitability pool analysis ranking by ROE

1. 2. 3. 4. 5. 6. 7.

1. 2. 3. 4. 5. 6. 7.

1. Hindalco - 4.4 % 2. Sterlite - 0.2% 3. NALCO - 16.3 % 4. NMDC - 80 % 5. Sesa Goa - 50% A lot of variation in profitability. Need to analyse specifics. Is it due to cyclicality of industry ?

Market share stability analysis

Market share changes show consolidation happening in the industry 1.ACC maintained mkt share at 18.5 % 2. Grasim has maintained at 15 % 3. Gujarat ambuja has gained 4 % to 16 % 4. Jaiprakash associate has gained 3 % to 6.6 % 5. All smaller players like shree cement, madras cement, dalmia cement losing market share losing share and would either be bought out or close

Competitive landscape (and identification of competitive advantage)

ACC - 22 % Guj ambuja - 11 % Birla cement - 11 % Grasim - 5 % Ultra tech cement (L&T) - 2 % Jaiprakash associate - 31 % (?) India cement - -7%

SAIL - 20 % TISCO - 32 % JSW steel - 90 % Ispat industry - -81% Jindal steel - 2 Jindal saw - 2 % Bhushan - 5 %

Hindalco - 36 % Sterlite - 24 % NALCO - 15 % NMDC - 12 % Sesa Goa - 5 %

Market share lossed by SAIL/ TISCO and Aluminum - NALCO - 53 %, Hindalco - 48 being captured by smaller players % 1. SAIL has lost 2% to 59.5 % Copper - Hindalco - 55% , sterlite - 45% 2. TISCO has lost around 1.2 to 22.4 % 3. ISPAT industry gained highest share to 8.9 % (up 7 %) 4. JSW steel has gained 3.4 % market share to 6 % Smaller players stable. More consolidation not very probable

COMMODITY Cement

steel

Pricing stability

Pricing has increased by only 3 % in the last 6 years. NPM increases must be due to cost cuts. However price swings are high ( - 7 % to + 20 %)

Very high price swing . Almost 80 % price increase from 2002 to 2005. Price increase the main cause of high profitability

Industry structure type

Currently a lot of companies. Top 4 Kind of a duoploly with 74 % industry companies comprise of 55 % of industry. between SAIL and TISCO and top 3 A lot a poor profitablity regional players. companies 82 % of industry. Not too Consolidation likely in the next much left to consolidate downturn cycle

Metals

Industry is mainly duopoly for Aluminium and copper. As a result pricing seems to much more stable

Key Industry products or segments

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

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 are :

Low FA TO ratio. Typical FA TO ratios are :

WCAP Intensity

Low WCAP intensity for Co. like GACL , others have poor WCAP ratios

Low WCAP intensity

Capital intensive ?

Highly capital intensive in nature . Major capital investments : Plant, Distribution network (sales / purchasing office ), distributors etc

Highly capital intensive in nature . Major capital investments : Plant, Distribution network (sales / purchasing office ), 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

Asset heavy model with Asset TO generally < 1

Highly capital intensive in nature . Major capital investments : Plant, Distribution network (sales / purchasing office ), distributors etc

COMMODITY Cement

steel

Key Industry ratios and statistics

Business units

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Demand supply mismatch due to excess supply can put pressure on margin 2. Infrastructure growth / Housing Construction demand especially in higher urbanisation areas

1. Demand supply mismatch due to excess supply can put pressure on margin 2. Infrastructure growth / Housing Construction demand especially in higher urbanisation areas 3. Performance of downstream companies such as Cars, White goods 1. Price of iron ore

Key supply drivers

1. Price of coal/ limestone 2. Energy price such as oil / coal etc

Shareholder Value creation drivers

1. Enduring low cost position

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

1. Enduring low cost position

Metals

COMMODITY Cement

steel

Predictability of business

1. Medium

1. Medium

Cyclical nature ?

1. high

1. high

Metals

Ability to increase price ahead of 1. Only if there is supply shortfall, else inflation (Pricing power) poor

1. Only if there is supply shortfall, else poor

1. Only if there is supply shortfall, else poor

Some sort of monoploy or Oligopoly

1. None 2. Consolidation would result in better pricing power

1. None

??

Does the company have a recurring revenue stream

Yes.

Yes.

??

Does the business have franchise / brands or is it commodity

Commodity with poor brand / franchise value

Commodity with poor brand / franchise value

Commodity with poor brand / franchise value

Does the industry enjoy high growth rates ? For how long

Medium growth rates especially in india. Highly cyclical industry However growth would add value only if there is industry consolidation

Cyclical

COMMODITY Cement Key industry variable which drive the performance

1.Most important is production cost for company 2. Cement pricing depending on demand supply scenario 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)

steel 1. 2. 3. %

Metals

Demand supply mismatch 1. Global demand and pricing 2. Production cost (cost of goods sold as 3. of sales) %

Demand supply mismatch Global demand and pricing Production cost (cost of goods sold as of sales)

Source of competitive advantage

Customer advantage Factors Low customer advantage except for resulting in moat (customer moderate brand effect captivity) Higher durability than production advantage factors

None

None

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

None

none

none

None

Network taxonomy

none

none

None

Network profits based on

none

none

None

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

COMMODITY Cement

steel

Metals

A. 1.Value chain indivisibility / complexity and process is important to derieve a sustainable cost advantage (ex: GACL) 2.Process cost reduction happens through learning curve 3.Access to limestone and other raw material such as low cost captive power can give moderate cost advantage

A. 1.Value chain indivisibility / complexity and process is important to derieve a sustainable cost advantage (ex: TISCO) 2.Process cost reduction happens through learning curve 3.Access to coal, iron ore and other raw material such as low cost captive power can give moderate cost advantage

A. Process economies - very critical 1. Value chain indivisibility is important 2. Process complexity and fit has critical important for some metals such as Al 3. Process cost reduction happens over time 5. Resource access such as ore / power has high important

B. Scale economies in purchasing, distribution(logistics)

B. Scale economies important for production and purchase of raw material

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies in purchasing, competitive edge if the ratio of distribution(logistics) 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 will reduce this ratio can weaken the edge of the incumbent

Distinctive capability 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 market . May not be easy to replicate 2. Tie up of RM from specific source . Ownership of mines resulting in low cost RM can add to low cost position 3. Presence of plant close to key market. Can be replicated though

1. Strong distribution network in specific market . May not be easy to replicate 2. Tie up of RM from specific source . Ownership of mines resulting in low cost RM can add to low cost position

1. Strong distribution network in specific market . May not be easy to replicate 2. Tie up of RM from specific source . Ownership of mines resulting in low cost RM can add to low cost position

COMMODITY Cement

steel

Metals

Innovation

None.

None. Would be limited to new processes / practises

None. Would be limited to new 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

Industry attractiveness sumarry and reasons for low high returns

Cyclical and low returns during downturns. Fragmented industry which is slowly consolidating. As a result of scale, entry barriers are going up. Still local economies of scale exist. Returns also drop due intense rivalry and high competition. Low impact of supplier, buyer power and substitutes

Cyclical and low returns during downturns. Fragmented industry which is slowly consolidating. As a result of scale, entry barriers are going up. Returns also drop due intense rivalry and high competition. Low impact of buyer power and substitutes. Suppliers have moderate influence due to coal and ore pricing

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Entry barriers are not too high till consolidation happens. Also some companies can supply to local markets

Entry barriers are not too high till consolidation happens. Companies can supply to Global markets

Asset specificity

High

High

Economies of Scale

High

High

Porter's model : 5 factor for industry attractiveness

Low

COMMODITY Cement

steel

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 entrant

Moderate

Low

Precommitment contracts

Low

Low

Learning curve barriers

Moderate

Moderate

Network effect advantages of incumbents

None

None

Metals

COMMODITY Cement

steel

No. of competitors - Monopoly / High. 60 % capacity with top 6. Too ologopoly or intense competition many players (concentration ratio )

High. Too many players such mini mills , Integrated steel plant etc

RIVALRY DETERMINANT

high competitive intensity causes poor profitability of industry. Fragmented industry - now consolidating

high competitive intensity causes poor profitability of industry. Fragmented 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

Product difference

Low

Low

Informational complexity

Low

Low

Exit Barrier Demand variability

High High

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 Switching cost of supplier

Low Low

Low Low

Presence of substitute Supplier Concentration

None. Cost escalation of RM has impact None. Cost escalation of RM has impact on Margins on Margins Medium - For coal and fuel Medium - For coal and fuel and iron ore

Imp of volume to supplier Cost relative to total purchase

Low High

Moderate High

Threat of forward v/s Backward integration BUYER POWER

None

None

Low

Low

Metals

COMMODITY Cement

steel

Buyer conc. v/s firm concentration

Low

Low

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 sensitivity

High

High

Price / Total Purchase Product difference

High None

High Low

Switching cost Buyer propensity to Subsititute

None None

None High

Intangible assets

1. Brands important , but do not give pricing strenght 2. R&D / Process based research for reducting the costs 3.Distribution important for retail sales.But no longer a key differentiator

1.Brands also do not give pricing power 1.Brands also do not give pricing power 2. Process innovations / improvements 2. Process innovations / improvements for cost reductions for cost reductions

Valuation model

Metals

COMMODITY Cement Valuation approach

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

steel

Metals

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

Media Media - Broadcasting

Media - Production

Publishing ( including papers )

Competitive landscape (and identification of competitive advantage) List of companies (by size) with names - By sales

Fragmented industry with multiple players in various niches. 1. Zee - 28 % 2. HTMT - 18 % 3. Adlabs - 3 %

Fragmented industry with multiple players in various niches. 1. Zee - 28 % 2. HTMT - 18 % 3. Balaji tele - 8 % 4. UDTV - 5 % 5. NDTV - 5 % 6. TV today - 5 % 7. Sandesh - 4 % 8. TV 18 - 4 % 9. Saregama - 3 % 10. Adlabs - 3 %

Only 3 listed companies ( bennet & coleman is not listed ) 1. Jagaran prakash 2. Deccan chronicle 3. Mid-day

Profitability pool analysis ranking by ROE

1. Zee - -7 % 2. HTMT - -6 % 3. Adlabs - 9 %

1. Zee - -7 % 2. HTMT - -6 % 3. Balaji tele - 14 % 4. UTV - -8 % 5. NDTV - -20 % 6. TV today - 0 % 7. Sandesh - -11 % 8. TV 18 - 15% 9. Saregama - 11 % 10. Adlabs - 9 %

Good ROE 1. Jagaran prakash - 13 % 2. Deccan chronicle - 11 % 3. Mid-day - -5%

Market share stability analysis

Data not available

Data not available

Data not available

Media Media - Broadcasting

Media - Production

Pricing stability

Not relevant

Not relevant

Industry structure type

Fragmented industry 1. Broadcasting - Zee is the only listed co 2. Several content generation companies - Balaji telefilm, UTV,saregama 3. Channel - TV18, NDTV, TV today etc

Fragmented industry 1. Broadcasting - Zee is the only listed co 2. Several content generation companies - Balaji telefilm, UTV,saregama 3. Channel - TV18, NDTV, TV today etc

Publishing ( including papers )

Key Industry products or segments

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

Economic model Return on capital :

Poor ROE trends. Constant drop in ROE due to competitive nature of the industry. ROE has been below 10 % on avg. however several specific content companies may have double digit ROE

1. Good ROC for publishing business 15 % 2. Very high for digital (BPO) publishing business

Media Media - Broadcasting Dupont analysis

Media - Production

Publishing ( including papers )

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

RM as % of sales and implication

Media Media - Broadcasting

Key Industry ratios and statistics

Media - Production

Publishing ( including papers )

1. GDP growth, industry performance 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. Why would there be a continued demand for the product / service

1. Demand depends on the specific product. A hit film , or popular soap will have high demand 2. Channel fragmentation / media fragmentation and other new forms of entertainment impacting demand

1. Demand depends on the specific product. A hit film , or popular soap will have high demand 2. Channel fragmentation / media fragmentation and other new forms of entertainment impacting demand

Key supply drivers

None

None

Shareholder Value creation drivers

Degree / nature of change

1. Cost of paper / ink 2. Obsolence cost / wastage of books

1. Tight management of WCAP (Distribution channel) 2. Demand forecasting

Media Media - Broadcasting

Media - Production

Publishing ( including papers )

1.Very product dependent - revenue based on hits 2. Secondary stream like DVD / games in US give better pricing if the film / show has been a hit (low in india due to piracy) 3. Only exception is a company like disney which can price on brand name. None such in india.

1. High once the monopoly is established, pricing power is good. 2. For standard publishing, margins are cost driven

Predictability of business

Cyclical nature ?

Ability to increase price ahead of 1.Very product dependent - revenue inflation (Pricing power) based on hits 2. Secondary stream like DVD / games in US give better pricing if the film / show has been a hit (low in india due to piracy) 3. Only exception is a company like disney which can price on brand name. None such in india. Some sort of monoploy or Oligopoly

None

None

Yes. Especially for the dominant paper. Being threatened by alternate sources such as TV / Internet

Does the company have a recurring revenue stream

None , in india

None , in india

Yes.

Does the business have franchise / brands or is it commodity

Does the industry enjoy high growth rates ? For how long

1. Brand / franchise has limited power 1. Brand/ franchise very high for for initial appeal. Each product succeeds newspaper. Very good pricing if the based on it own strenght paper is dominant 2. For regular publishing pricing power is weak and Franchise value low

Moderate

Moderate. In synch with increase in no. of channel

Moderate . Slightly higher than economy

Media Media - Broadcasting

Media - Production

Publishing ( including papers )

Key industry variable which drive the performance

Source of competitive 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 economics - customer advantage factor network Radial or combitorial economics

None

None

Network taxonomy

None

None

Network profits based on

None

None

Media Media - Broadcasting Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of 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 will reduce this ratio can weaken the edge of the incumbent

Media - Production

A. A. Process economies are very 4.Process economies through license in moderate the past ( doordarshan in india , and 4. Moderate resource uniqueness NBC/ABC etc in US) through talent 5. Resource uniqueness through programming talent

A. Limited to copyright

B. Scale economies on 1. Distribution 2. Purchase 3. Advertising 4. Production of multiple programs and distribution to a large audience

B.Scale is important for distribution, purchasing (content and raw material) and Ad

B. Moderate scale economies for production

Distinctive capability analysis

Architecture

Strategic assets

Publishing ( including papers )

Some importance of talent

1. Media license Media properties, talent 2. Media properties in the right to films/ serials

Innovation

Media Media - Broadcasting

Media - Production

None

None

Cost

Publishing ( including papers )

None

Financial strength

Important

NA

Reputation

Important

NA

Porter's model : 5 factor for industry attractiveness Industry attractiveness sumarry and reasons for low high returns

Not very high returns to moderate to low entry barriers. High competition exist. Buyers especially Ad providers and cable operators have some amount of power and take away some of the returns

High entry barriers in papers and moderate to high rivalry. So established papers returns are high.supplier, buyer power and substitutes do not make too much impact. For other publishing entry barriers are not too high. Rivalry is high. Also returns impacted by buyers such as goverment or bulk buyers

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Moderate entry barriers due to scale, licensing requirement. However a large number of new players are able to get in in niche segments

1. Very high entry barrier in case of newspaper / magazine if it is no. 1 due to buyer / advertiser behaviour 2. Low entry barrier for other publishing companies

Asset specificity

High

High

Economies of Scale

High for production. Fixed investment are high and once done , will come down as volume goes up

1. Matters for distribution / sourcing of Raw material / in generating content

Media Media - Broadcasting

Media - Production

Publishing ( including papers )

Proprietary Product difference

None

Brand Identity

High. But depends on programming

1. high but Depends on title. The publishing company does not have a brand 2. Very in case of newspapers / 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 themselves

Moderate importance

Cost Advantage

None

Low

Government Policy

High. Licensing is critical

Low

Expected Retaliation

High

Production scale

None

High in case of paper business where the no. 1 paper is very dominant and has network effects High

Anticipated payoff for new entrant

Low

High

Precommitment contracts

None with customer. Done annually with advertisers

Low

Learning curve barriers

High

High

Network effect advantages of incumbents

None

High

Media Media - Broadcasting

Media - Production

Publishing ( including papers )

No. of competitors - Monopoly / High competition ologopoly or intense competition (concentration ratio )

Oligopoly, but in some cases, single paper dominates a local market

RIVALRY DETERMINANT

High level of competition due to fixed nature of investment

High for regular publishing as it is 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 Demand variability

Moderate

High

SUPPLIER POWER

Moderate

Low except if the publisher is printing exclusive writer content

Differentiation of input Switching cost of supplier

High Moderate

Presence of substitute

High

Supplier Concentration

Low

Imp of volume to supplier Cost relative to total purchase

High High

Threat of forward v/s Backward integration BUYER POWER

Low Buyers are cable opertors, Ad providers and consumer. Cable operators have influence

Low

Media Media - Broadcasting

Media - Production

Publishing ( including papers )

Buyer conc. v/s firm concentration

Low

Low

Buyer volume

Low

Low

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 sensitivity

High

High

Price / Total Purchase Product difference

NA NA

Low High

Switching cost Buyer propensity to Subsititute

Low High

Low Low in old generation, high in current

Intangible assets

1. Brand strength - mainly through 1.Brands have limited pricing power. programming now Know brands can get good openigs for 2. Distribution infrastructure through their films / serials. Branding of films / cable and transmission towers for characters like disney does not happen terrestial channels 2. Customer relationship with broadcast 3. Customer relationship with channels advertisers and programming co. 4. License /media property for broadcast right

1.Brand - such as vikas / macmillan for textbooks . Not so much for other books 2. Distribution infrastructure - S&D expenses 3. Marketing / Procurement infra sourcing books / striking book deals etc

Valuation model

Media Media - Broadcasting Valuation approach

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

1. DCF 2. PE

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

Media - Production

Publishing ( including papers )

Projects ENGG PROJECTS ( A/C, Electrical , const )

Petrochemicals Gas

1. L&T 2. BHEL 3. ABB

Four companies in the buisness 1. GAIL - national player - 75 % 2. Petronet LNG - 19 % 3. Guj Gas - 3 % 4. Indraprastha gas - 3 %

Fairly consolidated industry. Top 5 account for 85 % of industry (513200 Cr) 1. IOC - 33 % 2. Reliance - 16 % 3. HPCL - 14 % 4. BPCL -13 % 5. ONGC - 9 %

Profitability pool analysis ranking by ROE

Very profitable industry 1. GAIL - 10 % 2. Guj Gas - 11 % 3. Indraprashta gas - 18 % 4. Petronet LNG

Profitability impacted due to govermental controls on pricing 1. IOC - 4 % 2. Reliance - 8.5% (not impacted as it is 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 largest. Other companies are city specific and enjoy a level of monopoly

Data not available

Integrated petroleum companies

Competitive landscape (and identification of competitive advantage) List of companies (by size) with names - By sales

Pricing stability

Industry structure type

Key Industry products or segments

Segment and company mapping

Projects Petrochemicals Gas ENGG PROJECTS ( A/C, Electrical , const ) 1. Pricing is fixed based on project. RM Data not available prices fluctuates during contract and have to be managed to manage margins

Mainly controlled by GAIL. Reliance now forming a nationwide network using their gas finds in godavari basic. Local monopolies like Guj gas in surat, baroda or in delhi by indraprashta gas

1. Power, Oil and gas, and other 1. Consumer 2. Industrial retail industry 2. Electrical projects, power project, 3. Bulk Refigration project, construction project, refinery etc.

Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Integrated petroleum companies Data not available. Pricing controlled by government and driven by crude costs

Mainly government sector gaints. Competition from reliance in refinery, and marketing Additional competition from the global majors in E&P. private players now in retail such as Essar etc. 1. Fuels 2. Naptha 3. Distillates

1. Reliance due to scale and management 2. IOC - due to backward intergration 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 % economic activity 2. Normative return difficult to calculate. Has varied from single digit to 30%+ in recent past

Good ROE . General in 15-20 % range only for reliance. Government pricing impacting the other companies

Projects ENGG PROJECTS ( A/C, Electrical , const ) 1. Asset TO = 1.2- 2 times 2. Low single digit - 3-7 % 3. 10-14 % 4. 0.8 - 0.3 5. 10- 25 % All the return ratios are cyclical and depend on business cycle

Petrochemicals Gas

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 where the procurement has to be done negative WCAP and payment is by percentage completion. Also as projects are long term in nature , WCAP depends on project management Low capital intensity .skills Working capital Yes. Fixed asset intensive. Wcap management is crucial intensity is low or -ve

High now mainly due to rise in inventory costs. Debtors and other Wcap components still stable

Not high Margin. Competitive business subject to bidding

variable. Depends on govt policy

Dupont analysis

Capital intensive ?

Margin intensive ?

RM as % of sales and implication Low teens margins. NP margins are 5-7 % range also

1. Asset TO is 1.8-2 with increases in last few years 2. NPM fairly stable (with improvements also) 3. Working Cap/ Sales is low 4. Low Debt to equity 5. ROE is good. From 12-20% +

Not high. Margins are 10% plus

Integrated petroleum companies 1. Asset TO is 1.8-2 with increases in last few years 2. NPM impacted for government companies due to subsidy for petrol and other products. Industry average steady due to gas and private sector 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

Yes

1. Depends on GRM - which depends on crude price 2. Mktg margins depends on govt pricing of fuels and SKO

Projects ENGG PROJECTS ( A/C, Electrical , const )

Petrochemicals Gas

Integrated petroleum companies

Key Industry ratios and statistics

Gas pricing

GRM Pricing for govt controlled products Crude cost Refining capacity

Business units

1. Retail 2. Bulk 3. Transmission

1. 2. 3. 4. 5.

Refinery Retails LPG/Gas Aviation E&P

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Industrial economy performance 1. Industrial performance 1.Basic demand for petro products 2. Commerical business performance for 2. Switching to Gas as source of energy A/c business ( Price of oil / regulation is key factor) 3. Retail demand 4. Conversion of Auto to CNG

Key supply drivers

1. RM costs such as steel, copper, cement etc

Shareholder Value creation drivers

1.Ability to manage RM costs 1. Ability to tie long term contracts with 1. Capacity utilisation at refinery 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 being opened up. Threat of new licenses. Impact of Reliance needs to be analysed. Impact of GAIL and National grid

1. New Gas finds 2. Import availability ( LNG vs NG vs CNG )

1. Crude price

1. Low 2. Check on how much new capacity is expected . Expansion in refinery capacity could impact the refining margins in the future.

Projects ENGG PROJECTS ( A/C, Electrical , const )

Petrochemicals Gas

Integrated petroleum companies

Predictability of business

Good predicability of revenue stream. Retail customer has highest predictability. Industrial is next in predicability. Transmission is lowest.

Low. However margins are not predicable due to Crude volatility and government pricing policy

Cyclical nature ?

Business is not very cyclical. Depends on the manufacturing business cycle. Also depends on gas prices

Yes. Depends on economy growth and crude prices

Ability to increase price ahead of 1.Pricing power is low and subject to inflation (Pricing power) bidding. 2.Margins depend on the project duration / rm costs

Till date not high. Prices are subject to Refining margins are dependent on the annual contracts. However changing as price of crude. However for some input price is being decontrolled companies it depend on the retail price of product which is controlled by the government. Hence poor pricing.

Some sort of monoploy or Oligopoly

None. Competitive bidding

Monopolistic in nature till date. Duopoly None due to reliance (GAIL/Reliance). Local areas to may have monopolies

Does the company have a recurring revenue stream

None. Competitive bidding

Yes. As contracts are signed for mid to long term

Only from contract (Ex reliance ) or if the refinery has downstream distribution. Retail business has high repetitive revenue

No . The business is mainly a commodity. Value add is through a strategic asset such as pipeline / Tech knowhow/ License for a certain area.

No franchise power. Only production driven advantages. Companies trying to build brand for retail network

Does the business have franchise / brands or is it commodity

Does the industry enjoy high growth rates ? For how long

High, due to big investments in power, Yes. The industry has high growth for Moderate growth due to good growth of cement and other infrastructure projects next 5-7 years till the gas infrastructure the economy is setup in india

Projects ENGG PROJECTS ( A/C, Electrical , const ) Key industry variable which drive the performance

Petrochemicals Gas

Integrated petroleum companies

1.Demand growth 2. Supply assurance and cost of supply 3. License and Distribution infrastructure

1. 2. 3. 4. 5.

Government policy Capacity utilisation Product cost Economies of scale Production technologies

Customer advantage Factors 1. Brand has moderate impact at the resulting in moat (customer bidding stage captivity) Higher durability than production advantage factors

1.Lockin due to infrastructure in place and long term contracts. This results in switching costs which may be high

1. Brand effect is low. Relevant if fuel outlets are owned by company

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

Source of competitive advantage

None

None

none

Network taxonomy

None

None

none

Network profits based on

None

None

none

Projects ENGG PROJECTS ( A/C, Electrical , const ) A. 1. High indivisibility of value chain due to long term nature of projects 2. Complexity and fit of process is critical for low cost and on time delivery 3. Moderate rate of change in process cost 4. Protection through patents and R&D assets

Petrochemicals Gas A. 1. Value chain indivisibility is important in terms of procurement process, distribution, marketing and sales etc 2. Cost advantage realised due to learning curve 3. License /Lease / rights can create entry barriers 4.Access to gas a low prices such company owned wells is critical

A. 1.Value chain indivisibility is critical and complexity process fit can add to cost advantage 2. Cost advantage can be achieved through learning curve 3.Access to petroleum at cost effective price. Not so critical in india as most companies import oil

B. Scale economies in 1. Production 2. Purchasing of RM 3. Sales and mkt 4. R&D

B. Scale critical in distribution, purchasing and R&D. Scale economies are useful in tying up purchasing contracts and in distribution

B. Scale economies critical in production, distribution and purchasing

Architecture

1. Relationship with key customers such as power companies for power projects, or cements companies ec 2. Engineering, project management knowledge base and experience

1. Procurement contracts / relationship with supplier crucial in profitability 2. Process knowldege to run the gas infra is important. Not a key differentiator

1.Procurement contract / supply contracts with marketing companies (if relevant) 2. Relationship with government 3. Ability to setup and run refineries with high scale - resulting in economies of scale

Strategic assets

1. Patents 2. Knowledge assets 3. Experience of delivering similar projects

Patents on gas technology, Gas pipelines, Switching cost , Gas license

1. Distribution network very critical 2. Plant - especially for of high scale 3. Access to oil properties on special terms

Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of 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 will reduce this ratio can weaken the edge of the incumbent

Integrated petroleum companies

Distinctive capability analysis

Projects ENGG PROJECTS ( A/C, Electrical , const ) Sustaining innovation especially in process

Petrochemicals Gas

Integrated petroleum companies

None

Low

Cost

Important as project margins are very low

Important - if own supplies and own infrastructure.

important

Financial strength

Very important as some project involve high financial risks too

high

Reputation

Brand is important for recognition in the critical for institutional buyer industry

Moderate. Companies attempting to build retail brands

Industry attractiveness sumarry and reasons for low high returns

Barriers are high for new players. However due to cyclical nature of demand and industry, rivalry is high. Also buyers have high involvement and due projects nature the margins and returns are low during demand downturns.

Moderate entry barriers and moderate rivalry should keep the returns above average. However government intervention has destroyed margins. Also buyer power, supplier power and substitutes have low impact

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Barrier to entry is high for new players. High entry barrier exist. Would change However high competition among based on the policy / regulatory exisiting players and international decisions players. Scale and experience, exisiting relationship with customer create entry barriers for existing players

Moderate entry barriers based on economies of scale

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)

Innovation

Porter's model : 5 factor for industry attractiveness High entry barrier and monopoly due to licensing has resulted in high returns. However supplier power is high, buyers especially bulk customer can negotiate and there are substitutes available. These have reduced the returns a bit, but still the returns are above average

Projects ENGG PROJECTS ( A/C, Electrical , const ) Low. Project execution skills and knowledge is more critical

Petrochemicals Gas

Integrated petroleum companies

None

Low to none

Brand Identity

Low to moderate

None

Switching cost

V high during project. Low for new project

High

none- relevant only if the refining business has associated marketing infrastructure Low to none

Capital Requirement

High

High

High

Distribution strength

Low

High

Critical

Cost Advantage

High

Medium to low . Depends on procurement contracts and the cost structures

Medium to low. Depends on economies of scale

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 may increase the competitive impact

Competition between existing competitors

Production scale

High

NA

Critical

Anticipated payoff for new entrant

Moderate

Low

Low

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 incumbents

Low

High

None

Proprietary Product difference

No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio )

Projects ENGG PROJECTS ( A/C, Electrical , const ) High competition

Petrochemicals Gas

Integrated petroleum companies

Monopoly changing to duopoly. Increase moderate competition in competition happening.

RIVALRY DETERMINANT

High rivalry due to cyclical growth, high Currently low due to local licenses exit barriers and intermittent over ( monopoly ). At national level low due capacity to monopoly with GAIL. Will reduce in future with other companies / competition

moderate as the industry has been a controlled one

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 Demand variability

High High

High Low

High Low

SUPPLIER POWER

Low. RM prices are decided by commodity prices

Supplier power is high. The impact to reduce as new sources would be available

Low as crude can be sourced from a variety of locations sources

Differentiation of input Switching cost of supplier

Low Low

none low

Presence of substitute

Low

Supplier Concentration

Low to moderate

Imp of volume to supplier Cost relative to total purchase

Low to moderate High

Minimal High as sourcing contracts are signed. Integrated gas co. such as GAIL will not have any issues Other sources of energy. Currently move towards gas is high globally Currently high. Limited to GAIL / CAIRNS etc. Situation to ease in the future Moderate to high High

Threat of forward v/s Backward integration BUYER POWER

None

High as some supplier are themselves integrated companies. Like Reliance / GAIL Buyer power strong for bulk customer

Moderate

High especially large projects

none low ?? high

None - except if the refinery is standalone and supplies through a marketing company

Projects ENGG PROJECTS ( A/C, Electrical , const ) high to moderate

Petrochemicals Gas

Integrated petroleum companies

Buyer conc is low

low

Buyer volume

High

Buyer volume to total sales volume is low

low

Buyer switching cost

Low

low

Buyer information

High

Buyer switching cost (retail) is high. At Bulk customer switching is more probable High for bulk customer. Low for retail

Ability to integrate backward

Low to moderate

Low

none

Substitute product

Inhouse projects for commodity/ low end effected by other forms of energy 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

None for the product and indsutry

Price sensitivity

High

High

high

Price / Total Purchase Product difference

High Low for commodity work

High Low

high low

Switching cost Buyer propensity to Subsititute

Low initially Low for complex projects

High Low

V high Low to none

Intangible assets

1.Brands are not too important 2. Knowledge assets in the form of technical expertise for specific projects is critical. Project management skills crucial for large projects 3. Patents may exist in the some cases for unique process / design - not seen in india 4. Customer relationship for repeat business

1. Patents for processes and new 1.Patent / Knowledge asset for usages. Not much in india achieving low cost production 2. Local / regional monoply for gas 2. Customer relationships need to be distribution. This is weaking now with developed by stand-alone refinery to CAS for pipeline sharing at national level market their product 3. Customer relationship important for wholesale business (industrial customer) 4. Moderate Switching costs / Lockin exist once the customer has signed up the supplier

Buyer conc. v/s firm concentration

Valuation model

low

Projects ENGG PROJECTS ( A/C, Electrical , const ) DCF

Petrochemicals Gas 1. Earning based measures - P/E 2. Asset based measures

DCF, asset replacement value

High PE Low PE for the industry Avg PE for the industry Valuation drivers

50 10 15-20 1. Open orders position 2. Inventory/ Debtors position 3. RM costs 4. Net margins

12-14 8-9 10-12

12-14 5-6 8-10 1. Asset replacement value 2. Government pricing and policy (GRM) 3. Crude pricing 4. Capacity for refining 5. Demand for petro products

Avg ROC numbers of industry

10-15 %

15%+

Variable

Avg Growth for industry Avg CAP assumptions

10-12 % currently 10 years

8-10% None by mkt

6-7% (linked to GDP) None by mkt. Mkt pricing below replacement cost

Valuation approach

Maintanance capex (approximate) as % of sales / Dep as % of sales

Integrated petroleum companies

Petrochemicals (excluding lubes)

Lubricants

Tourism Hotels

Competitive landscape (and identification of competitive advantage) List of companies (by size) with names - By sales

Multiple products 1.Reliance+ IPCL (through IPCL) - 70 % 2. Ruchi soya - 7 % 3. Supreme petrochem - 6 % 4. Castrol - 5 % 5. Tamilnadu petro - 4 % Total industry - 23700 Cr

1. Indian hotels - 28 % 2. EIH limited - 20 % 3. Hotel leela - 9 % 4. Asian hotel - 9 % 5. ITC hotel - 6 % 6. Taj GVK hotel - 5 % 7. Bharat hotel - 5 % Total industry - 3500 Cr

Profitability pool analysis ranking by ROE

Profitability of industry is poor except for reliance, castrol, and narmada chematur 1. Reliance - 19% 2. Castrol - 29 % 3. Narmada chematur - 27 % 4. Lanxess ABS - 4 %

1. Indian hotels - -1.5% 2. EIH limited - 13 % 3. Hotel leela - 7 % 4. Asian hotel - 1.7 % 5. ITC hotel - 2.7% 6. Taj GVK hotel - 27 % 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

Petrochemicals (excluding lubes)

Lubricants

Tourism Hotels

Pricing stability

Driven by crude/ input cost and demand / supply condition

Highly dependent of the volume of 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 controlled by government

Multiple companies. High compeition. To check if consolidation happening

Key Industry products or segments

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

Reliance

Economic model Return on capital :

Poor ROE for most companies except the 3 companies noted above

1. Normative return on capital is high . 20 % range

1. Poor for the last few years ( due to 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

Petrochemicals (excluding lubes) Dupont analysis

1. Asset TO has improved from 1 to 2.5. The improvement is driven by reliance 2. NPM has improved from 4 % to 8 % again mainly due to reliance 3. Asset to equity or debt to equity has improved 1.5:1 to 0.5 :1 4. ROE improvement for industry from 5-9 % from 2003 to 30 % + in 2006

FA Intensity

High. Capital intensive business with investment in plant and euquipment

WCAP Intensity

High. Capital intensive business with investment in plant and euquipment

Margin intensive ?

Moderate. < 10 %. Cyclical in nature

Tourism Hotels 1. Very low Asset TO ratio (<0.5) 2. Highly variable NPM , from 17 % to 5 % depending on the business cycle 3. Highly variable ROA due to cyclical business 4. Asset / Equity is < 2. Moderate to low debt levels 5. Low ROE . Typically < 10 %. Depends on margins (business upcycle)

1. FA intensity low for castrol. Other Co. Low. High capital investment. Model have FA TO in 0.8 - 1.5 . shifting to managed property to improve 2. FA are typically lube blending plants. ROA

WCAP intensity Low for castrol.

Capital intensive ?

RM as % of sales and implication

Lubricants

??

Yes

Poor margins in this business. Except for Low to moderate margins ( depends on companies with strong brands / occupancy levels ) Distribution infra

Operating margins in 25 % range. However low NPM due to high depreciation costs (High asset intensity) and interest component due to debt

Petrochemicals (excluding lubes)

Key Industry ratios and statistics

Lubricants

Tourism Hotels

Demand supply Capacity scenario Pricing

Business units

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Petrochemicals are used in wide variety of industry and essential to economy

1. Industrial demand 2. Automotive demand - No. of old vehicles

1. Business travel - Related to economy performance 2. Liesure travel - Related to income levels 3. Inbound tourist levels

Key supply drivers

1. Crude price and RM prices which are derieved from crude

1. Price of petroleum / oil

1. Room capacity (available stock) 2. Depends on location too

Shareholder Value creation drivers

1. 2. 3. 4.

Degree / nature of change

1. Low, mainly dependent on capacity scenario and demand - supply

Demand - supply condition (capacity) 1. Brand Costs of product 2. Distribution infrastructure R&D and research on product Economies of scale

1. Low to medium

1. Shareholder value improvement can be done through managed property model to reduce asset intensity 2. Better brands / Targeted hotels can be used to improve occupancy rates 1. Low

Petrochemicals (excluding lubes)

Lubricants

Tourism Hotels

Predictability of business

High. However margins are not predicable due to Crude volatility

1.High

1. High although Cyclical in nature

Cyclical nature ?

Yes. Depends on economy growth and crude prices

1.Auto segment has low cyclicality 2. Industrial segment depends on industrial activity

Yes

Ability to increase price ahead of Not very high. Mostly commodity 1. Low inflation (Pricing power) product wherein the margins are highly dependent on the crude pricing

No. Depends on the demand supply gap at any point of time

Some sort of monoploy or Oligopoly

1. Reliance may have some pricing power in its products. 60-70 % mkt share held in reliance some key products

1. Intense competition due to large no. of players

None. Except in some heritage property / Key locations

Does the company have a recurring revenue stream

Yes

Yes

Yes.

Does the business have franchise / brands or is it commodity

More of commodity

Weak Franchise. Strong brands , but high price senstivity ( pricing strenght some times ??)

Brands . But not very profitable franchise due to high fixed costs .

Does the industry enjoy high growth rates ? For how long

Yes

Low growth rates in the last few years. Also a lot unorganised companies

Not very high growth due to cyclical nature

Petrochemicals (excluding lubes) Key industry variable which drive the performance

Lubricants

Tourism Hotels

1. Capacity utilisation 2. Product cost 3. Economies of scale

1. ARR ( average room rent) 2. Occupancy rates - depending on business / tourism levels 3. Net margins (costs) 4. Asset turns

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

1. Low customer related moats. Small moat due to following factor - specialised relationship with specific customer due to special product developed for them - in case the supplier has high mkt share, customer may not have much choice - long term contracts

1. Experience good - brand effect results in premium pricing

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None None

None

Network taxonomy

None

None

Network profits based on

None

None

Source of competitive advantage

Petrochemicals (excluding lubes) Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses )

A. 1.Value chain indivisibility is critical and complexity process fit can add to cost advantage 2. Cost advantage can be achieved through learning curve 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) market). Scale economies more sustainable and provide B. Scale economies critical in competitive edge if the ratio of production, distribution and purchasing 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 will reduce this ratio can weaken the edge of the incumbent

Lubricants

Tourism Hotels 1. Value chain indivisbility not too high 4. License / lease of key properties can have impact on pricing and profits (for ex Taj properites)

B. Scale economies have importance in purchasing and advertising

Distinctive capability analysis

Architecture

1. Customer and supply contracts 2. Process knowledge to reduce product cost 3. Vertically intergrated companies with access to RM at favorable prices have a cost advantage

Service orientation of personnel. Not a very big differentiator

Strategic assets

1. Scale economies are important 2. Technincal knowhow also important

Key properties which can duplicated. Such Taj at Gateway etc. May not add too much to overall profitability if demand is weak

Petrochemicals (excluding lubes)

Lubricants

Tourism Hotels

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

Industry attractiveness sumarry and reasons for low high returns

Good returns in the industry as the industry is dominated by reliance. Also entry barriers in specific product groups by specific companies and moderated competition in each segment. Buyer power is high is several cases, supplier power is low as the RM is general a commodity and the substitutes are absent in most cases

Entry barriers are low except in metros and business segment. Also as demand fluctuates and fixed costs are very high, the competitive intensity is very high and hence returns are cyclical. Supplier buyer and substitutes are absent. Buyer power has some impact, but not a major impact on returns

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Moderate entry barriers mainly due to - economies of scale and resultant cost advantage

Entry barriers are low. Subject to availability to land in some key areas.

Asset specificity

High

High

Economies of Scale

High

Economies to scale are local in nature.

Porter's model : 5 factor for industry attractiveness

Petrochemicals (excluding lubes)

Lubricants

Tourism Hotels

Proprietary Product difference

Low to none

Medium. Ex : Taj manages to have percieved differences

Brand Identity

Low to moderate

Strong

Switching cost

Low

Low

Capital Requirement

High

High

Distribution strength

Moderate

Low

Cost Advantage

High

Pricing ability is weak due to commodity nature and high fixed costs

Government Policy

Low

Low

Expected Retaliation

High

High

Production scale

Important

NA

Anticipated payoff for new entrant

??

Low

Precommitment contracts

High from both buy and sell side due pricing variability

Applicable for corporate customers

Learning curve barriers

Moderate

Moderate to low

Network effect advantages of incumbents

None

NA

Petrochemicals (excluding lubes)

Lubricants

Tourism Hotels

No. of competitors - Monopoly / Duopoly in some product groups ologopoly or intense competition (concentration ratio )

High

RIVALRY DETERMINANT

Moderate to high rivalry. Not high competitive intensity

High rivalry and price based competiton. Due to high fixed costs this industry resembles the airline industry in some aspects

Industry growth

Moderate

Low

Fixed cost / value added

High

High

Intermittent overcapacity

Moderate

High

Product difference

Low

Low

Informational complexity

Low

Low

Exit Barrier Demand variability

Moderate Low

High High

SUPPLIER POWER

Supplier power is moderate. In some product group there are limited no. of RM suppliers. Also threat of forward integration exists

None

Differentiation of input Switching cost of supplier

none Low

None None

Presence of substitute

None

None

Supplier Concentration

Low to moderate

None

Imp of volume to supplier Cost relative to total purchase

Low to moderate High

None None

Threat of forward v/s Backward integration BUYER POWER

High

None

Low to moderate

Corporate market is price sensitive and able to negotiate price

Petrochemicals (excluding lubes)

Lubricants

Tourism Hotels

Buyer conc. v/s firm concentration

Low

Medium to Low. Corporate buyers have leverage

Buyer volume

Moderate

Medium to Low. Corporate buyers have leverage

Buyer switching cost

Low

Low

Buyer information

High

High

Ability to integrate backward

none

None

Substitute product

Low as each petrochemical has specifc usages

None in india . Possibility of competition from budget hotels

Price sensitivity

Moderate

Price / Total Purchase Product difference

Low to moderate Low

Switching cost Buyer propensity to Subsititute

Low Low

Intangible assets

1. Customer relationship / contracts and agreement are a few intagible assets 2. Process and learning curve advantages 3. In some products R&D and special technology. Not critical in most products

Valuation model

1. Brands - requiring high spend to maintain visibility for retail . 2. R&D assets in terms of developing new types of lubes 3. Distribution infrastructure for retail 4. Customer relationhip with OEM need to be maintained. Pricing power is poor for big customers such as state agencies / OEM etc

1. Brands are important and provide relative pricing power (better pricing than other hotels - but not necessarily adequate pricing ) 2.Customer relationship important (not critical ) for corporate customer for business travellers

Petrochemicals (excluding lubes) Valuation approach

DCF

High PE Low PE for the industry Avg PE for the industry Valuation drivers

12-14 8-9 10-12 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 Avg CAP assumptions

1.5 times GDP None by mkt

Maintanance capex (approximate) as % of sales / Dep as % of sales

Lubricants

Tourism Hotels 1. Price to book 2. DCF ( based on normalised earnings ) 3. Reproduction costs

Tourism

Shipping

Engg. And Industrial Mach Power , capital goods etc

List of companies (by size) with names - By sales

1. Shipping corp of india - 46 % 2. GESCO - 32 % 3. Varun shipping - 13 % 4. Mercator line - 9 % Total industry size : 7123 Total indian industry is only 4 listed co. However foreign competition is imp

The industry is mix of several subsectors such as power, engg goods etc BHEL - 21 % Siemens - 8 % ABB - 8 % 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 ranking by ROE

1. 2. 3. 4.

Most companies earning above cost capital. Also cyclical industry and hence current ROE is good BHEL - 4 % Siemens - 17 % ABB - 27 % Sulzon - 85 % Crompton greaves - 24 % KOEL - 0 % KEC infra - 34 % Areva T&D - 49 % Cummins - 13 % Thermax - 29 %

Travel and tourism services

Competitive landscape (and identification of competitive advantage)

Market share stability analysis

Varun shipping - 73 % Maercator lines - 56 % GESCO - 43 % Shipping corporation of india - 26 %

BHEL accounts for 65% of power sector and has highest market share. Other companies especially foreign companies are expanding

Tourism

Shipping Travel and tourism services

Engg. And Industrial Mach Power , capital goods etc

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 segments

1. Power sector 2. Industry 3. Transport - trains

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

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

Tourism

Shipping Travel and tourism services

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

WCAP Intensity

Engg. And Industrial Mach Power , capital goods etc

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 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. However single hull ships would require phasing out

Not high

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

RM as % of sales and implication

Tourism

Shipping Travel and tourism services

Key Industry ratios and statistics

Engg. And Industrial Mach Power , capital goods etc 1. Order book ( as % of sales) 2. Net margins

Business units

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. International trade 2. Oil shipments

1. Infrastrcuture development - power, roads and industry

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 drivers

1. Tight supply scenario ( new capacity requires 2-3 years to come online 2. Higher proportion of double hull vessel 3. High capacity utilisation 4. High margins

1. Growth/ demand for capital goods due infrastructure requirement 2. Cost leadership/ technology leading to growth in international markets and better ROC in domestic market

Degree / nature of change

Low change. Business is cyclical

1.Low level of change in basic demand, however technology for capital goods is evolving

Tourism

Shipping

Engg. And Industrial Mach Power , capital goods etc

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 inflation (Pricing power)

No pricing strenght can be seen. However pricing depends on demand supply ( FA can move to any area of demand !!). Global trade volume and capacity are the drivers

Moderate, depends on technical capabiliies, financial strenght

Travel and tourism services

Some sort of monoploy or Oligopoly

None. A large number of companies

None

BHEL has a very strong position in power sector

Does the company have a recurring revenue stream

A recurring revenue stream from retail channel or from corporate contracts

Yes

Yes partly from services (after sales) ,but not big

None. Although larger fleets add to scale economies and better service

Moderate franchise driven by scale, technology and accumulated knowledge and skills

Moderate growths. Mainly related to growth in foreign trade

High due to growth in infrastructure

Does the business have franchise / brands or is it commodity

Does the industry enjoy high growth rates ? For how long

High, due to more business and leisure travel

Tourism

Shipping Travel and tourism services

Key industry variable which drive the performance

Engg. And Industrial Mach Power , capital goods etc

1. Fleet utilisation levels 1. New orders/ investment in 2. Shipping rates infrastructure 3. % of presigned contracts / Total sales volume

Source of competitive advantage

Low to none

1. Customer advantage factor is related to switiching cost for an existing customer. However a new sale is dependent on bids by all competitors

None

None

Network taxonomy

None

None

Network profits based on

None

None

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

Tourism

Shipping

Engg. And Industrial Mach Power , capital goods etc

A. 1. Value chain fit and complexity is important to achieve a low cost position through high fleet utilisation and low operating expenses 3.Process costs reduce with learning curve

1. Process economies are linked to a. value chain indivisibility can lead to lower cost and better value b. complexity and fit of all processes c. process costs from learning curve

Travel and tourism services Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of 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 will reduce this ratio can weaken the edge of the incumbent

B. Scale economies critical in operations B. Important scale economies from and fleet utilisation and fleet type a. purchasing b. R&D

Distinctive capability analysis

Architecture

1. Relationship with other providers such as air carriers, hotels and tourism providers is important to provide a single point service to the customer 2. Relationship with corporate 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

1. Customer relationships and contracts 2. Contract and relationship with ship builders 3. Fleet operation skills / costs

1. Relationship with important or key customers such as power utility, power companies, railways, defence etc 2. Systems/ process/ knowledge base all add to the value added for a company

Tourism

Shipping

Engg. And Industrial Mach Power , capital goods etc

Travel and tourism services 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 retail customer

Moderate importance

Porter's model : 5 factor for industry attractiveness Industry attractiveness sumarry and reasons for low high returns

Returns are cyclical depending on 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 deciding industry profitability

1. High asset specificity and intensity 1. Entry barriers mainly due to scale, 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 utilisation, vessel type availability and overall costs

Very high and important

Tourism

Shipping

Engg. And Industrial Mach Power , capital goods etc

Proprietary Product difference

1. Low. Depends on the services provided

Moderate

Brand Identity

NA

Low

Switching cost

Low. Except for the contracts signed

High

Capital Requirement

High

High

Distribution strength

NA

Low

Cost Advantage

Important. Exists if scale economies exist

High

Government Policy

Important. Tonnage tax, investment in port, development of trade would impact industry

Important for power, transportation, railways etc

Expected Retaliation

High

High

Production scale

NA

High

Anticipated payoff for new entrant

??

Moderate

Precommitment contracts

Moderate to high. Benefits when rates are dropping

High

Learning curve barriers

Moderate

High

Network effect advantages of incumbents

NA

NA

Travel and tourism services

Tourism

Shipping

Engg. And Industrial Mach Power , capital goods etc

No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio )

Oligopoly. 4-5 major companies

A few major competitor - dominated by BHEL

RIVALRY DETERMINANT

Moderate to high. Excess rates would lead to low rates , resulting in low profitability. Mainly due to high fixed capacity

Moderate to high

Industry growth

Moderate

High

Fixed cost / value added

High

Moderate

Intermittent overcapacity

High

High

Product difference

Low

Moderate

Informational complexity

Low

High

Exit Barrier Demand variability

High High

High High

SUPPLIER POWER

Low. Capacity is constrained by None availability of supplier. Lead time is long for ships

Differentiation of input Switching cost of supplier

Moderate to low Low

Low Low

Presence of substitute

None

NA

Supplier Concentration

??

Low

Imp of volume to supplier Cost relative to total purchase

High High

High Moderate

Threat of forward v/s Backward integration BUYER POWER

None

None

Moderate to low

Moderate to low

Travel and tourism services

Tourism

Shipping

Engg. And Industrial Mach Power , capital goods etc

Buyer conc. v/s firm concentration

Low

Low

Buyer volume

Low

Moderate

Buyer switching cost

Low

Low

Buyer information

High

High

Ability to integrate backward

None

None

Substitute product

None

None

1.Customer relationships / contracts are relevant for shipping. Has a critical bearing on revenue stability (can reduce the upside for revenue also)

1. Patents / knowledge asset crucial in providing value to customer 2. Customer relationships and contracts are important

Travel and tourism services

Price sensitivity Price / Total Purchase Product difference Switching cost Buyer propensity to Subsititute

Intangible assets

Valuation model

1. Branding very important for the leisure travel 2. Distribution infrastruture important for retail business and addon business such as Forex ( thomas cook ) 3. Customer relationships important for clients which have outsourced their travel. Margins low in such relationships

Tourism

Shipping

Engg. And Industrial Mach Power , capital goods etc

Valuation approach

1. DCF 2. Shipping rates

1. DCF based 2. Open order book for revenue visibility

High PE Low PE for the industry Avg PE for the industry Valuation drivers

8-10 3-4 5-6 1. Frieght rates 2. % of pre-fixed contracts 3. Asset value 4. P/B

30-40 10-12 20 1. Open order book 2. Debtors days 3. Inventory TO 4. WCAP TO 5. Asset TO 6. Margins

Travel and tourism services

Avg ROC numbers of industry

20-30%

Avg Growth for industry Avg CAP assumptions

10-20% 10 Yrs

Maintanance capex (approximate) as % of sales / Dep as % of sales

Equal

Textiles

Retail Lifestyle and Value retailing etc

Chemical Fertilizer

Competitive landscape (and identification of competitive advantage) List of companies (by size) with names - By sales

Fragmented industry. 20 companies make the 80 % (Total industry is 26200 Cr) 1.Century Textile - 10% 2.Aditya Birla Nuvo - 9% 3.Raymond - 9% 4.Mahavir Spinning Mills - 7% 5.Indo Rama Synthetics - 7% 6.Arvind Mills - 6% 7.Alok Industries - 5% 8.Century Enka Ltd - 4% 9.Rajasthan Spinning - 3% 10.Garden Silk Mills - 3% 11.Abhishek Industries - 3%

1. Pantaloon ( 655 cr) 2.Trent (150 cr) 3. Shopper's stop (500 Cr) 4. Titan 5. Metro AG 6.Provogue india

Fragmented industry. Around 20 companies in industry size of 33000 Cr and 12 companies making 80 % 1.National Fertilizers - 11% 2.Tata Chemicals - 11% 3.RCF - 9% 4.GSFC - 9% 5.Chambal Fertilizers - 8% 6.SPIC - 7% 7.Zuari Industries - 7% 8.GNFC - 6% 9.Coromandel Fertilizers - 6%

Profitability pool analysis ranking by ROE

Most companies earning below cost of capital (< 13 %) 1.Century Textile - -2% 2.Aditya Birla Nuvo - -3% 3.Raymond - 5% 4.Mahavir Spinning Mills - 9% 5.Indo Rama Synthetics - -6% 6.Arvind Mills - -3% 7.Alok Industries - 23% 8.Century Enka Ltd - -10% 9.Rajasthan Spinning - -1% 10.Garden Silk Mills - -9% 11.Abhishek Industries - -1%

Poor industry economics. Very few companies make more than cost of capital due to pricing controls 1.National Fertilizers - -5% 2.Tata Chemicals - 2% 3.RCF - -2% 4.GSFC - 13% 5.Chambal Fertilizers - 4% 6.SPIC - -13% 7.Zuari Industries - 5% 8.GNFC - 10% 9.Coromandel Fertilizers - 5%

Market share stability analysis

Complete data not available. However companies like mahavir spinning mills, Rajasthan spinning and sangam india are gaining share in the cotton yarn space

Steady market shares Urea - national fertilizer @ 26 % RCF @ 13 % Chambal has gained share from 8 % to 14 % 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

Textiles

Retail Lifestyle and Value retailing etc

Chemical Fertilizer

Pricing stability

Commodity product (part is branded). Industry has seen rising pricing (which in turn depends also on cotton prices)

1. DAP has seen good pricing improvement by around 10 % (controlled by government?) 2. Urea has had substaintail improvements in pricing ( by 30 % +). Check why NPM are still poor ?

Industry structure type

Extremely fragmented, due to government policy of looms and not allowing large vertically inetgrated compaines. Export opportunities should see consolidation and larger mills

Mainly segmented to two segments. A few companies dominating the DAP segment. The rest in the urea market

Key Industry products or segments

1. DAP 2. Urea

Segment and company mapping

1. DAP 2. Urea

Identification of companies possessing competitive advantage (sequence from strongest to weakest)

Economic model Return on capital :

1. Poor ROE for the last 6 years . Less than 10 % and negative sometimes

1. Currently in mid teens (10-15 %) Extremely poor economics. ROE consistenly 2. Fairly uniform as the industry is in in single digits with some loss years a growth phase

Textiles

Dupont analysis

Retail Lifestyle and Value retailing etc

1. Asset TO less than 1 or at 1 2. Low margins at 1-2 %. Have improved to just under 5 % 3. ROA also poor at below 5 % 4. High debt equity at 1:1 . Has seen reduction from 1.3:1 . 5. Poor ROE at 9 % now due to above reasons

1. Asset TO low at 1.2. Has improved from 0.8 to 1.2 2. Poor margins at 3-4 %. Less than 5 % and sometimes negative too 3. ROA poor to due 1 and 2 4. Debt levels high. Debt equit at 1.2 :1 5. ROE poor due to poor margins, low ROA. 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

RM as % of sales and implication

Chemical Fertilizer

Textiles

Retail Lifestyle and Value retailing etc

Key Industry ratios and statistics

Chemical Fertilizer 1. 2. 3. 4.

Industrial production index Capacity utilisation Inventory to sales ratio Producer price index (PPI)

Business units

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Domestic demand 2. Major export demand to overseas market due to quota removal

1. Location, pricing and branding are 1. Performance of the agricultre important 2. Demographics and rising disposable income

Key supply drivers

1. Cotton price 2. Skilled low cost labor 3. Low cost design resources

1. Cost of rentals ( Property ) at the required locations 2. Overhead costs 3. supply chain cost - Difference between GPM and NPM (sourcing efficiency) 4. Inventory and merchandising 5. Financing options

Shareholder Value creation drivers

1. Fully integrated with economies of scale 2. Strong customer relationship

1. Overhead costs 2. Brand - in house would give higher margins 3. Economies of scale 4. Logistics and sourcing infrastructure and scale

Degree / nature of change

1. Product stable, but due opening of quotas , industry undergoing change

1. High degree of change due to lack of protection of process (any one can copy ) 2. Branding may help in some categories 3. Threat of entry from foreign majors

Textiles

Predictability of business

Retail Lifestyle and Value retailing etc

Chemical Fertilizer

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 Oligopoly

none

1. None

Does the company have a recurring revenue stream

yes. But dependent on a few large buyers in the export market

Yes

Does the business have franchise / brands or is it commodity

commodity for the high growth export market. However vertically integrated companies have branded products which give some pricing strenght

1. Moderate Brand in some categories such as - Garments, Restaurant

Does the industry enjoy high growth rates ? For how long

yes currently due to the removal of the Yes for now quotas in international markets

Low. Related to mainly agricultre

Textiles

Key industry variable which drive the performance

1. Scale - high production capacities 2. Design capabilities 3. Managing relationship / order for global retailers like walmart, JC penny etc 4. Execution capability

Retail Lifestyle and Value retailing etc

Chemical Fertilizer

1. Inventory turns. FA turns 2. NPM ( over head costs = GPM NPM ) 3. Store expansion plans 4. Per store stats - sales , profit etc

Source of competitive advantage

None Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

1. Differentiation important - can be in the form of brand, pricing or experience etc 2. Low switching cost if differentiation is based on cost 3. Network effect not important

Commodity product with no brand differentiation

None

NA

None

Network taxonomy

None

NA

None

Network profits based on

None

1. Mainly based on economies of scale

None

Presence of Network economics - customer advantage factor network Radial or combitorial economics

Textiles

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

A. 1. Indivisbility of value chain to small extent as backward integration helps in reducing costs 2. Process cost changes are moderate over time 3. Resource access in the form of cotton and manpower has some advantage in india

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies in production and competitive edge if the ratio of purchasing. advertising to a small fixed cost / Variable cost for the extent for branded product companies market is high. For ex: high distribution expense (wide distribution network), product investment ( R&D and technology) etc. Growing markets will reduce this ratio can weaken the edge of the incumbent

Retail Lifestyle and Value retailing etc 1. Value chain indivisibility and fit of process very important to keep cost down (as retail is low margin business) 2. Process cost change in india is currently high 4.Not copyright protection. Medium term advantage of location and long term leases 5. Not much resource uniqueness, expect high management skill is imp in this business

Chemical Fertilizer A. Process economies are crucial for profitability 1. Value chain indivisibility is imp for cost reduction 2. Process filt and complexity is moderate 3. Process cost change is moderate and has impact on total cost 4. No patent / R&D assets 5. Resource uniquness is limited to access of potash

B. Scale economies very crucial for B. Scale economies very crucila for all the factors (with merchandising at production and pruchasing the local level)

Distinctive capability analysis

Architecture

1. Process/ knowledge base to develop low cost position 2. Relationship with global retailers such as walmart etc for repeat business

1. Relationship with supliers Process knowldege resulting in low cost supplier management is a key production is the only differentiator capability 2. Inventory management / Merchandising / Procurement process is crucial

Strategic assets

1. Distribution network for retail 2. Plant for mfg 3. Access to low cost Raw material is important

1. Distribution network is important. But can be built

None

Textiles

Innovation

Low

Cost

Very important due to commodity nature

Retail Lifestyle and Value retailing etc

Fertilizer

Chemical

1. Low and can be copied

None

1. Not easy to maintain . Requires constant effort on part of management Important, due to attempt by companies 1. Very critical for managing growth to capture global markets and supply to global retailers such as walmart, target etc Low, only for retail 1. critical in some categories

V. Imp

Industry attractiveness sumarry and reasons for low high returns

Poor returns due to fragmented nature of industry, commodity nature of product and price competition. Also entry barriers are not too high and competition is high. Buyer power is high for the large global contracts and from other countries. Supplier and subsititute does not have an impact

Sunrise and growth industry. Entry barriers are coming up. Early mover adavantage for the companies which scale up. Rivarly is expected to intense in future and from foreign competiton too. This will drive down returns. Other factors do not have a large impact

Poor industry returns due to low growth, govt controlled pricing, high competition and low entry barriers. Supplier power is moderate as there is some conc. Of supplier. Buyer power and substitute are low impact.

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Entry barriers are low for retail. For global business scale is critical and hence barriers could be high to get contracts and develop relationships

1. Economies of scale is critical Low entry barrier. However due to low 2. Brand is critical in some demand growth and poor returns, not too categories. Franchise - profitable is many new entrants. 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 vacated , sold

High

Economies of Scale

High

1. Very critical as the business is based on low profit margins

High

Financial strength

Reputation

Imp for capacity additions

None

Porter's model : 5 factor for industry attractiveness

Textiles

Retail Lifestyle and Value retailing etc

Fertilizer

Chemical

Low

Proprietary Product difference

Moderate to low

1. Low for most companies

Brand Identity Switching cost

Important only for branded retail local market medium to high for the global buyers

1. Relevant to some categories such Low as restaurant, garments 1. Low Low

Capital Requirement

High

1. High especially in case of rapid store expansion. Low if franchise route is taken.In such case brand / Franchise related costs are incurred

High

Distribution strength

Relevant moderately only for the local retail market. Not very important though

1. High

High

Cost Advantage

Important especially for the Export market

Moderate

Government Policy

important.

1. High if the economies of scale exist 2. High is integrated logistics and procurement is in place 1. Critical in india - FDI / Land laws etc 2. Entry of retail to foreign competition

Expected Retaliation

??

1. high

High

Production scale

Very crititcal

NA

High

Anticipated payoff for new entrant

Moderate to low

High currently

Low

Precommitment contracts

High

Low. More so on the supply side

Low

Learning curve barriers

??

High especially in indian context

??

Network effect advantages of incumbents

None

1. Moderate to an extent that the incumbent can setup the retail channel and support infrastructure

NA

High

Textiles

Retail Lifestyle and Value retailing etc

Chemical Fertilizer

No. of competitors - Monopoly / high competition ologopoly or intense competition (concentration ratio )

1. High. Expected competition from 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

High

Product difference

Low for suppliers

Can be high in local areas - like metros Low in most cases

Informational complexity

Low

Low

Low

Exit Barrier Demand variability

High ??

High Low Low

High High

SUPPLIER POWER

Low

supplier power is a low competitive threat

Low, driven by Petroleum industry

Differentiation of input Switching cost of supplier

1. Low 1. Low except in case of some branded goods. Still low

None moderate - to check

Presence of substitute

1. Yes

None

Supplier Concentration

1. Low in most categories

To check, for gas high

Imp of volume to supplier Cost relative to total purchase

1. High ?? 1. High. But low in each category v/s High total sales 1. Low Low

Threat of forward v/s Backward integration BUYER POWER

High for global contracts

Buyer power is a very low competitive threat

high competition

Low

Low

Textiles

Retail Lifestyle and Value retailing etc

Chemical Fertilizer

Buyer conc. v/s firm concentration

High

Low

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 Product difference

1. High in most categories 1. Low in most

High Low

Switching cost Buyer propensity to Subsititute

1. Low 1. High

Low High

Intangible assets

Valuation model

1. Brands have a moderate impact only for companies involved in selling finished product 2. Distribution has a bit importance for companies involved in selling branded products 3. Customer relation / contracts / agreements very important for the export market

1.Logistics infrastructure None 2. Store brands are relevant for garments 3. Overall Brand for the retail company is important to pull in traffic 4.Distribution infrastructure is critical - no. and location of outlets

Textiles

Valuation approach

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

Retail Lifestyle and Value retailing etc 1. PE 2. NPM / ROE 3.DCF

Chemical Fertilizer

Chemical Basics - organic / inorganic and speciality

Power PAINTS

Power generation and associated activity

List of companies (by size) with names - By sales

1. Asian paints - 42% 2. Goodlas nerolac - 18 % 3. Berger paint - 18 % 4. ICI - 16 % 5. Shalimar - 4 % total industry - 5490 Cr

1. NTPC - 55 % 2. Tata power - 10 % 3. Reliance power - 9 % 4. PTC India - 7 % 5. Nyvelli Lignite - 6 % 6. CESC - 5 % 7. Torrent power - 3 % 8. Gujarat industries Total industry size - 45000 cr

Profitability pool analysis ranking by ROE

1. 2. 3. 4. 5.

All companies have 12-13 % ROE. Must be due to regulation.Only PTC has 19 % ROE and Torrent has 23 %

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

Competitive landscape (and identification of competitive advantage)

Asian paints - 18% Goodlas nerolac - 22 % Berger paint - 20 % ICI - -4 % Shalimar - -5 %

Chemical Basics - organic / inorganic and speciality Pricing stability

Industry structure type

Power Power generation and associated activity 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 PAINTS

95 % of organised industry controlled by top 4 players. Also the unorganised sector is now shrinking and being taken up with the top organised players

Key Industry products or segments

Top 4 players have 80 % of market. National player is mainly NTPC. Tata power also has some presence across country. Reliance power has presence mainly in bombay and some circle. Most of these companies are generation and in some cases distribution companies 1. Domestic 2. Industrial/ commercial

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

Not applicable

Economic model Return on capital :

1. Below tens (10%), but has increased in the last 3 years to 10% + due improvement in margins and asset TO

High. High only for APIL / GNP/ Berger

1. Mid tens ( 10-15 %) 2. Fairly uniform (not cyclical ) 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

Dupont analysis

FA Intensity

Chemical Basics - organic / inorganic and speciality 1. Generally greater than 1 and has increased from 1.1 to 1.4 in the last few years 2. Fairly low. Was in 2-3 % range and has increased to 6-7% driving the ROE 3. Has seen improvement from 2-3 % to 8-9 %. However is below 10 %. 4. Debt / equity ratio is generally 1:1 and has reduced a bit recently. not a very conservative number 5. ROE is < 10 % and has improved recently mainly due to improvement in NPM

1. Not an asset light model. Asset TO seem to be 1-1.3 times sales

PAINTS 1. Asset TO steady at 2.2 to 2.3 2. NPM have been steady at 5.8 - 5.7 %. Reduction to around 4 % in 2005 due to petroleum prices. Should recover to 5.5 % + in future 3. ROA is consitently in double digits 10 % + 4. Debt equity is low at 0.5 : 1 5. ROE has come down for industry from 20 % + to around 10 % , mainly to reduction in margin due to petroleum prices and also due to poor profitability of players like ICI and shalimar and collapse of J&N

High FA TO.

Power Power generation and associated activity 1. Asset TO is fixed at 0.5 2. Margins are very stable at 16-18 % 3. ROA are fixed between 8-9 % 4. Debt equity is stable around 0.5 : 1 5. ROE is stable around 13-14 % These steady numbers are mainly due to pricing controls by government based on fixed ROE for these companies and due to high % share of NTPC which is owned by governmnet

High FA TO . Greater than 1 in most 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 low

Margin intensive ?

RM as % of sales and implication

The business does not have high Low margins . NP < 10 %. cyclical for margins. Also the margins appear to be industrial paints. cyclical dependent on the industrial growth. Also as the business is commodity, margins would be dependent on the demand supply scenario

Capital intensive for New projects, and poor recievables. Cash flow is tied into SEB bonds for government companies. Companies like reliance do not have recievables issue Fixed returns due to government pricing controls

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

Key Industry ratios and statistics

Chemical Basics - organic / inorganic and speciality 1. Industrial production index 2. Capacity utilisation 3. Inventory to sales ratio 4. Producer price index (PPI)

Power PAINTS

Business units

Power generation and associated activity 1. ROC 2. PLF factor 3. T&D losses for distribution

1. Power generation 2. Power distribution 3. Power trading

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

Key supply drivers

1. Performance for end industry such as 1. Rural demand 1. Industrial activity auto for rubber, consumer durables / 2. Conversion from lime to Distemper to 2. No. of retail customer consumer goods for plastics etc Paint 3. GDP growth 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 1. Petroleum prices 1. Fuel prices 2. Tio2

Shareholder Value creation drivers

1. Strong brands 2. Distribution infrastructure 3. NPD pipeline and ability to launch successful new products 4. Innovation capability

1. Low T&D losses 2. Low operating cost - via fuel and others

Degree / nature of change

Low. 90 % controlled by the top 4 companies

Low

Chemical Basics - organic / inorganic and speciality

Power PAINTS

Power generation and associated activity High

Predictability of business

High. Depends on the economy / Rural demand

Cyclical nature ?

Moderate

Moderate

Ability to increase price ahead of inflation (Pricing power)

Moderate, especially for the mid to top end product range. Products like primers etc have poorer pricing power

1. Regulated companies. Pricing decided by Return on asset. More 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 Oligopoly

??

Yes. Consolidation happening in industry Monopoly in each area, but pricing fixed by government. Electricity act 2003 is introducing competition for bulk consumers

Does the company have a recurring revenue stream

??

Yes. However re-purchase cycle is long. Yes , from retail / industrial / Rural customer

Does the business have franchise / brands or is it commodity

??

The business has franchise / brands. 1. No franchise at all. Regulated Commoditisation reducing due to tinting monopoly at best where return are machines. decided by government

Does the industry enjoy high growth rates ? For how long

Moderate. Related to economic growth. Moderate. Being led by new categories, High. Major power deficiet cyclical in nature auto & housing boom

Chemical Basics - organic / inorganic and speciality Key industry variable which drive the performance

Power PAINTS 1. 2. 3. 4.

Distribution depth Brands Net margins / Wcap management No. of Tinting machines

Competitive advantage limited to licensing. Additional returns made via more efficient operations

Source of competitive advantage

Customer advantage Factors Commodity product with no brand resulting in moat (customer differentiation. Speciality chemical has captivity) lockin with customer Higher durability than production advantage factors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

Power generation and associated activity 1. Government regulation 2. Fuel pricing

1.Brand effect is strong 2. Lock-in at dealer level due to tinting machines

1. Switching not possible for retail. For industry difficult to switch to cogen. Larger consumers tend to setup own power generation and new electricity act could allow for more competition

None

1. Network economies exist due to the None distribution network. Barrier due to this network

Network taxonomy

None

none

Network profits based on

None

1. Mainly due to economies of scale and None entry barriers of the distribution network

None

Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of 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 will reduce this ratio can weaken the edge of the incumbent

Chemical Basics - organic / inorganic and speciality A. Process economies are crucial for profitability 1. Value chain indivisibility is imp for cost reduction 2. Process filt and complexity is moderate 3. Process cost change is moderate and has impact on total cost 4. No patent / R&D assets for basic chemical. R&D and patent are important for speciality chemicals

PAINTS A. 1. Value chain fit important as production, logisitics and distribution is important cost differentiator 2.Protection through contract on color machines 3. (Analyse process cost change)

Power Power generation and associated activity A. 1. Value chain linkage important to keep costs low 2. Protection mainly though license 3. Access to fuel such as coal, gas is crucial

B. Scale economies very crucial for B. Scale economies are critical in production and pruchasing for basic distribution, purchasing, Ad, and R&D chemical. Not so important for speciality chemicals

B. Scale economies in production (scale of power plant), distribution (although T&D is not with the producers), purchasing (for fuel)

Architecture

1. Process knowldege resulting in low cost production is the only differentiator for basic chemicals 2. Process knowledge / patent and R&D assets help for speciality chemicals

1. Relationship with SEB to supply power 2. Process/ systems to manage power plants and distribution systems to keep costs under control

Strategic assets

Patent / R&D on speciality chemical is - distribution network the only asset. For basic chemical none - Brands such asset - Knowledge base to manage processes / value chain

Distinctive capability analysis

- Strong relationship with distribution network through tinting machines - Strong process / IT to control costs and manage distribution

1. 2. 3. 4.

Plant License Access to low cost Rawmaterial Switiching cost due to license

Innovation

Chemical Basics - organic / inorganic and speciality R&D and innovation important for speciality chemicals

Power PAINTS

Power generation and associated activity Low

sustaining innovation. Product innovations and also delivery innovations such tinting machines, pack 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 High importance now to expand Important to sustain recievables and internationally for growth opportunities

Cost

V important for basic chemicals

Financial strength

Imp for capacity chemicals

Reputation

Brands have moderate role for speciality Brands / trademarks very crucial in chemicals domestic market to get strong pricing

NA

Porter's model : 5 factor for industry attractiveness Industry attractiveness sumarry and reasons for low high returns

High industry return due high entry barriers, good demand and moderated competition (top 4 company account for a big share). Also supplier, buyer power and substitutes have low impact

Returns are fair, mandated by government. Entry barriers are more due to economics of the business and government control. Rivalry is 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 deciding industry profitability

Entry barriers are high due to distribution and Brands

1. Limited competition with 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. Purchasing economies of scale

High economies of scale

Chemical Basics - organic / inorganic and speciality

Power PAINTS

Proprietary Product difference

Moderate

Power generation and associated activity None

Brand Identity

High

None

Switching cost

Low.

Low if available

Capital Requirement

High, due brand building and Distribution infrasturcture

High

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 high. Distribution/ advertising economies more imp

Important for being a low cost provider in this commodity industry

Anticipated payoff for new entrant

Low.

High. However the industry is 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 incumbents

High. Distribution network is of big advantage

None

Chemical Basics - organic / inorganic and speciality

PAINTS

Power Power generation and associated activity Currently monopolies / Duopolies at best

No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio )

Very few competitiors

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 Demand variability

Low. Low.

None None

SUPPLIER POWER

Low

coal / Gas - low to none

Differentiation of input Switching cost of supplier

Low. Low.

None high

Presence of substitute

No. Rutile has to be used

Low

Supplier Concentration

Low

moderate

Imp of volume to supplier Cost relative to total purchase

High High

High High

Threat of forward v/s Backward integration BUYER POWER

moderate

Low

Low

Low, due to restricted competition

Chemical Basics - organic / inorganic and speciality

Power PAINTS

Buyer conc. v/s firm concentration

Low

Power generation and associated activity Low

Buyer volume

Low

Low

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 Product difference

High Medium

Depends on the nature of buyer Low

Switching cost Buyer propensity to Subsititute

Medium ?? Low to medium. Painter are key decision ?? maker

Intangible assets

Valuation model

2. Patents, knowledge asset important for speciality chemicals 4. Customer relationships 6. Customer lockins for speciality chemicals

1. Brands critical and add to consumer 1. Local monopoly in the form of advantage - results in pricing strenght distribution rights for the company 2. Process based innovation to create 2. Distribution infrasture critical in terms a low cost structure for the company 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 approach

High PE Low PE for the industry Avg PE for the industry Valuation drivers

Chemical PAINTS Basics - organic / inorganic and speciality 1. Price to book 1. P/E 2. DCF ( based on normalised earnings ) 2. Cash flow 3. Reproduction costs

Power Power generation and associated activity 1. Price to revenue ratio - bench mark is 0.5-0.6 times revenue 2. DCF approach or multiple of assets 17-19 12-13 13-15 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 Avg CAP assumptions

10-12 % 6-8 years

Maintanance capex (approximate) as % of sales / Dep as % of sales

Maintenance capex ~ Deprecitation expense

Logistics Power Power cables

Paper

Logistics - goods

Competitive landscape (and identification of competitive advantage) List of companies (by size) with names - By sales

1. 2. 3. 4. 5.

KEI industries - 31% Diamond cables - 16% Nicco - 21% Universal - 19% Torrent - 10%

Top 6 players control 80 % of industry 1. Ballarpur industry - 31 % 2. TN news print - 13 % 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 ranking by ROE

KEI / Torrent most profitable in last 23 years (25 %+) Others have returns between 1015%. Prior to 2004, most companies were in losses and KEI has single digit returns

Poor ROE of the industry. Currently at 1. Concor 13 % 2. GATI 1. Ballarpur industry - -2 % 3. Maersk 2. TN news print - 0% 3. Orient paper - losses 4. JK paper - 5 % 5. West coast paper - 10 %

Market share stability analysis

??

Data not available

Logistics Power Power cables

Paper

Logistics - goods

Data not available

Pricing seems to be good with margins being maintained. However pricing could get impacted for trucking companies during a downturn

Pricing stability

Low. Decided by demand and RM pricing scenario

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 segments

1. 2. 3. 4.

Power Industry Oil and gas Realty

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

KEI seem to have better competitive advantage than other companies

Economic model Return on capital :

1. 20%+ lately due to high demand in the power, industry and infrastructure 2. Normative return is lower (cannot put a number) due to cyclical nature of the industry

1.Poor ROE , usually below 10 %. As 1. 20 % + ROE for the companies the industry is commodity in nature , ROE is cyclical depending on the net margins

Logistics Power Power cables

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Logistics - goods

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 companies is around 3-4 times sales

1. Asset heavy

WCAP Intensity

High WCAP requirement. Especially for inventory and debtors in the recent past

1. Very Low WCAP intensity. Some companies work with -ve WCAP

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 Power cables

Key Industry ratios and statistics

1. Order book 2. Demand/ growth in power, industry, retail

Business units

1. Institutional sales 2. Retail sales 3. Exports

Paper

Logistics - goods

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Growth in the following sectors - power - industry - realty - exports

1. GDP growth . Industrial growth 2. Inter-regional trade 3. Export growth

Key supply drivers

1. Price of RM such copper, steel , aluminum and insulation material

1. Fuel prices for the Road / Rail transport 2. Container availability 3. Steel / cost of equipment such as Trucks/ Cranes etc

Shareholder Value creation drivers

1. Volume growth 2. Order booking 3. Exports 4. Low cost of operation via scale, backward integration and RM cost management

1. Asset utilisation level 2. Margins ( depending on industrial growth )

Degree / nature of change

Moderate - demand is variable and dependent on the other industry - cost are highly variable and account for 70% of sale price

1. Low. Movement happening to containerised transport. 2. Multi-modal business model 3. Service component / Logisitics service increasing

Logistics Power Power cables

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Logistics - goods

Predictability of business

High, but demand is cyclical or variable

High

Cyclical nature ?

yes, but for some time there could be high growth in the sector

Less for multimodal companies like Concor, high for trucking companies

Ability to increase price ahead of Not for current project, but for new inflation (Pricing power) contracts the pricing can be negotiated

1. Fair pricing power especially for companies like concor which have a sort of monoply 2.Trucking companies ??

Some sort of monoploy or Oligopoly

No

None. Intense competition in trucking business

Does the company have a recurring revenue stream

Yes, from EPC company/ retail network

yes

Does the business have franchise / brands or is it commodity

Commodity. Weak brand pull in retail

Brand important for certain segment.

Does the industry enjoy high growth rates ? For how long

High for the next couple of years

Low. Related to economy. Cyclical in Yes. Especially multimodal nature companies for 3-5 years

Logistics Power Power cables Key industry variable which drive the performance

Paper

Logistics - goods

None

4. Network effect exists

1. Growth in the following sectors - power - industry - realty - exports 2. RM prices

Source of competitive advantage

None Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None None

None

a) scale economies due to network. 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 Power cables Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses )

A. Process economies - value chain indivisibility - complexity and value chain fit - Small benefit from learning curve

- Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide B. Scale economies from competitive edge if the ratio of - Production 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 will reduce this ratio can weaken the edge of the incumbent

Paper

Logistics - goods

A. Process economies 1. Value chain indivisibility helps drive down cost 2.Rate of change in process cost is moderate

A. Substantial process based economies 1. Value chain has high indivisbility through distribution hubs, transport vehicles etc 2. Process complexity and fit is crucial 3. Rate of change in process cost is high. Longer the time spent in building the network, lower the cost can be driven 5. Only concor had a unique access to railnetwork. But this unique access beeneconomies taken away B. Scale economies in manufacturing, has B. Scale in logisitics distribution and purchasing network, distribution and purchasing too

Distinctive capability analysis

Architecture

1. Relationship with key customers such EPC, power companies etc 2. Knowledge base / experience to implement turnkey projects

1. Relationship with pulp suppliers, distributors etc 2. Process knowledge for speciality products 3. Relationship with export customers

1. Customer relationship 2. Systems / Processes to manage the large fleet / network and deliver low cost

Strategic assets

1. Plant 2. Distribution network for retail 3. Marketing team

None which add to competitive advantage

1. Large fleet or containers 2. Depots at key locations

Logistics Power Power cables

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Logistics - goods

Innovation

None

Sustaining innovations at best

NA

Cost

V imp

Important as it is a commodity industry

Critical

Financial strength

Imp

Important to expand capacity and add asset to reduce cost

Critical factor

Reputation

Important - both for institutional and Not too important retail

Brands / image in form of reliability / Location served / Low cost provider

Industry attractiveness sumarry and reasons for low high returns

Low to moderate returns due to weak compeptitive advantage. Weak to moderate entry barrier, high rivalry, strong buyer power and no control on input cost results in cyclical and weak returns

High returns due to high entry barriers. High competition for the road/ trucking industry, low for multimodal. Buyer power, supplier power is less. Interchange of traffic between different transport modes based on cost situation

ENTRY BARRIER - No. 1 Factor deciding industry profitability

Moderate entry barriers mainly due to economies of scale, customer relationship

1. High asset specificity 2. High economies of scale resulting 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

Economies of Scale

High

High asset specificity - Wagons, containers etc can be used by this industry only High economies of scale advantages. Companies with large no. of trucks, wagons, containers have advantage over smaller players

Porter's model : 5 factor for industry attractiveness

Logistics Power Power cables

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Logistics - goods

Proprietary Product difference

Low

Brand Identity

Moderate

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.

Expected Retaliation

High

High

Production scale

High

NA

Anticipated payoff for new entrant

Low

Low initially till scale is realised and new contracts signed

Precommitment contracts

High

Important for the larger players. Important asset even for the smaller players

Learning curve barriers

Moderate

Network effect advantages of incumbents

None

High. As it results in higher capacity utilisation and lower costs Not much

Difference in the form of service and reach of the network. Higher value added service and bigger network can be provided by the bigger players Moderate to high

Logistics Power Power cables

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No. of competitors - Monopoly / None ologopoly or intense competition (concentration ratio )

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

Fixed cost / value added

Low

Intermittent overcapacity

Moderate

Product difference

Low

Moderate. Depends on EXIM and inter-region trade. More towards containerised trade High - hence utilisation rate is critical. V imp in the transport business High especially in the trucking busines Low. Difference is in the value added service / No. of locations serviced

Informational complexity

Moderate

Exit Barrier Demand variability

Moderate High

SUPPLIER POWER

Supplier power is low. However RM pricing depend on metal prices in the global markets which the companies cannot influence

Low for Multimodal business for wagons / Containers. Moderate for Trucks

Differentiation of input Switching cost of supplier

None Low

Presence of substitute

None

Low Medium to low. In some regions cost is very high if TELCO has high market share None

Supplier Concentration

Low

High

Imp of volume to supplier Cost relative to total purchase

Low High

NA High

Threat of forward v/s Backward integration BUYER POWER

None

Low

High especially for institutional customer

High for trucking business especially for small operator.Low for large companies like Concor

High as the asset have to be managed efficiently High due to asset specificity Low

Logistics Power Power cables

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Buyer conc. v/s firm concentration

High

High for trucking. Low for multimodal

Buyer volume

High

High for trucking for large companies. Moderate for multimodal companies

Buyer switching cost

Low

Low

Buyer information

High

High

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 sensitivity

High

High

Price / Total Purchase Product difference

Low Low

High for some industries Low

Switching cost Buyer propensity to Subsititute

Low High

Low to moderate 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 and instutional sales 2. Customer relationship

Valuation model

1. Moderate advantage through R&D 1. Brand to moderate extent, mainly and distribution infrastructure for long term relationship with big customers 2. Customer relationship and contract - especially long term contract with big customers

Logistics Power Power cables Valuation approach

DCF

High PE Low PE for the industry Avg PE for the industry Valuation drivers

12-14 5-7 9-10 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 the weaker player 15% 1 yr for strong players, 0 for weaker

Avg Growth for industry Avg CAP assumptions

Maintanance capex ?? (approximate) as % of sales / Dep as % of sales

Paper

Logistics - goods

1.DCF 2.PE

25 % + 12-13 % 7-9 years Maintenance cap is roughly equal to Dep due to high FA TO and negative Wcap

Logistics Courier - documents

Telecom services

Sugar

** - Reliance infocomm missing. Some private companies missing in the analysis

Competitive landscape (and identification of competitive advantage) List of companies (by size) with names - By sales

1. Bharati televentures - 44 % 2. Reliance infocomm 3. VSNL - 15 % 4. MTNL - 21 % 80 % of industry controlled by 5-6 players (some private players like Reliance , IDEA, hutch etc are missing)

Fragmented industry . 15 companies forming top 80 %. Also due to the nature of industry (sugar company have to be located close to supply of RM). Top 2 in the list to be checked. Not sure 1. Bajaj Hindustan - 10 % 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 ranking by ROE

1. Bharati televentures - 31 % 2. Reliance infocomm 3. VSNL - -5 % 4. MTNL - -8 % Only Bharati is profitable among listed companies. Details not available for non listed companies. Some small operators like shyam telecom are profitable

All companies have a very High ROE currently (avg ROE is over 20%) . However ROE is very cyclical and has to analysed by company over entire business cycle

Market share stability analysis

Logistics Courier - documents

Telecom services

Sugar

Pricing stability

Pricing in this industry is continously down. Prices due to competition and technology are continously going down

Pricing has improved in the last 5 years. Increase of 15-20 %. Also due to supply shortage and low imports, capacity utilisation and hence margins/ Profits are high

Industry structure type

Intense competition among major players. Consolidation among major players may happen

Fragmented. Companies are located in UP, bihar close to cane growing areas where supply can be procured easily.

1. Reducing from 20 % + (pretelecom opening up ) to current 9 %. Drops mainly due to compeition and also due to -ve profitability of several players such as MTNL, VSNL and smaller players

Poor return on capital. Improvement in the last few years ( from 3-4 % to 9 %). Improvement has happened due to interest expense reduction. Operating profits roughly the same. ROC is highly cyclical

Key Industry products or segments

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

Economic model Return on capital :

Logistics Courier - documents

Dupont analysis

Telecom services

Sugar

1. Asset TO fairly stable at 0.7 to 0.8 as this industry requires constant investment due to high obsolence 2. Continuous slide in margins from 15 % + to < 10 % 3. ROA has gone down from 10 % + to below 10 % ( and < 5 % ) 4. Debt equity is same 0.4 : 1 . Not too high debt scenario. most financing may be through equity 5. ROE due to margin pressure (dropping price) is also sliding down

1. Asset TO ration not high at 1-1.2 2. Low NPM @ < 5 %. Lately have gone up due to tight supply and dropping inventory 3.Return on asset low due to poor NPM. Improvement recently due to tight supply 4. Ratio is high (> 2.5) , showing high debt levels in industry. Companies raising equity to bring this down 5. ROE low during down cycle. Has 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 obsolence

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

High capital intensity. Mainly a commodity industry. Asset TO in the range of 0.8 - 1.2

Avg profit margins are 15 %. High Depreciation and interest expenses due to high debt component

Logistics Courier - documents

Telecom services

Sugar

Key Industry ratios and statistics

Business units

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Basic food commodity

Key supply drivers

1. Cane prices

Shareholder Value creation drivers

1. Enduring low cost position

Degree / nature of change

Very low change

Logistics Courier - documents

Telecom services

Sugar

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 inflation (Pricing power) added services have more pricing strenght 2. Low end document services have lower pricing power

1. Constant drop in pricing for most services

1. Close to none. Depends on supply demand

Some sort of monoploy or Oligopoly

None

No monoply. Each license area has 3- None. Commodity industry 4 operators. Competition from alternate technology / new business model too

Does the company have a recurring revenue stream

Yes , from retail and corporate customers

Yes. From retail and corporate customers

Does the business have franchise / brands or is it commodity

1. Moderate brand / franchise exist. Brands like DHL/ Bluedart are able to charge higher prices for the value added service. 2. Low end document movement has become commoditised

1. Moderate brand / pricing power. 1. No Brand / Franchise . Pricing More due to lockin (or network based on demand supply effects). 2. Telecom companies trying to improved pricing through innovation and lockins

Does the industry enjoy high growth rates ? For how long

Very high due increase in telecom penetration

yes

Moderate growth. Based om GDP growth

Logistics Courier - documents

Key industry variable which drive the performance

Telecom services

Sugar

1. Demand supply level 2. % revenue from alcohol / Power 3. Cane prices

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

None

None

Network taxonomy

None

Network profits based on

None

Logistics Courier - documents

Telecom services

Sugar

Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of 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 will reduce this ratio can weaken the edge of the incumbent

Distinctive capability 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. 2. Network effects very strong and critical 3. Distribution is very crucial to get subscribers

access to raw material at favorable terms

Logistics Courier - documents

Innovation

Cost

Telecom services

Sugar

None Disruptive innovation has high impact in this industry and can effect long term economics 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 intensive industry

Important for capacity expansion

Reputation

None Branding is important for getting customers. However cost of service is also important

Porter's model : 5 factor for industry attractiveness Industry attractiveness sumarry and reasons for low high returns

Good returns due high growth industry. Entry barriers due to high initial cost and scale effect. Also licensing has an impact. Entry barriers also due to network effect and early mover advantage. Rivalry is intense due to multiple player in the industry. also competition is also driven by price. buyer power, supplier and substitutes do not impact the industry much

cyclical returns driven by demand and supply. Government intervention. Low entry barrier and high competition between firms due to fragmented industry. Other factors do not impact much. As a result poor industry returns

ENTRY BARRIER - No. 1 Factor deciding industry profitability

High entry barriers due to fixed costs Moderate entry barriers. and scale effects

Asset specificity

Very high

High

Economies of Scale

High

High. Depends more on availability of raw material (captive supply)

Logistics Courier - documents

Telecom services

Sugar

Proprietary Product difference

Low

None

Brand Identity

Moderate

Very low

Switching cost

Low

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 entrant

??

Low

Precommitment contracts

Low

Low

Learning curve barriers

High

moderate

Network effect advantages of incumbents

High

None

Logistics Courier - documents

Telecom services

Sugar

No. of competitors - Monopoly / ologopoly or intense competition (concentration ratio )

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

Fixed cost / value added

High

High

Intermittent overcapacity

Not yet

High

Product difference

Low

Low

Informational complexity

Low

Low

Exit Barrier Demand variability

High Not yet

Moderate Low

SUPPLIER POWER

Low

Very low

Differentiation of input Switching cost of supplier

Low Low

None Farmers cannot switch

Presence of substitute

High

None

Supplier Concentration

Low

None

Imp of volume to supplier Cost relative to total purchase

High High

High High

Threat of forward v/s Backward integration BUYER POWER

Low

None

Low

Low

Logistics Courier - documents

Telecom services

Buyer conc. v/s firm concentration

Low

Buyer volume

Low

Buyer switching cost

Low

Buyer information

High

Ability to integrate backward

NA

Substitute product

None

Sugar

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

Valuation model

None

Logistics Courier - documents

Valuation approach

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

Telecom services

Sugar

1. DCF

Pharma

Competitive landscape (and identification of competitive advantage) List of companies (by size) with names - By sales

Top 25 companies form 80 % of 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 ranking by ROE

Fairly variable. But all top players (25) have ROE higher than 15 % and most more than 20 %

Market share stability analysis

Managed Health care

Construction

Pharma

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

Key Industry products or segments

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

Economic model Return on capital :

1. ROC capital trend is upwards with avg ROC at 15 % + 2. Not much cyclicality. ROC is increasing

Managed Health care

Construction

Pharma

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)

RM as % of sales and implication

Managed Health care

Construction

Pharma

Key Industry ratios and statistics

1. No of ANDA applications filed 2. No. of molecules in various stages of development

Business units

Business model Key Demand Drivers : 1. Why would there be a continued demand for the product / service

1. Health care is a basic need. Rising income level also raising need for higher level of health care 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 drivers

1. Patents 2. Effective R&D spends 3. Ability of indian companies to effectively challenge off patent drugs 4. Operational effectivenes/ scale economies for generics High

Degree / nature of change

Managed Health care

Construction

Pharma

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

Managed Health care

Construction

High due increased demand for healthcare

Very high, due to real estate boom

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 Oligopoly

High competition based on price for generic. Monopoly scenario only in patented or complex product. Less in case for indian companies

Does the company have a recurring revenue stream

Yes, from retail customers and hospitals

Does the business have franchise / brands or is it commodity

Franchise or brands especially for prescription medicine. For generics , it is commodity business, hence cost of production is important

Does the industry enjoy high growth rates ? For how long

Yes, but low drug usage in india. Pricing is still controlled by government - Via the DPCA

Pharma

Key industry variable which drive the performance

1. DPCO controlled pricing 2. Government policy on patent, new products etc 3. New product introductions by industry 4. Export market - generics growth

Source of competitive advantage

Customer advantage Factors resulting in moat (customer captivity) Higher durability than production advantage factors

Presence of Network economics - customer advantage factor network Radial or combitorial economics

1.High switching cost especially for patented drugs (once prescribed by docs they stick to it) 2. Habit forming from doctor prescription point to view 3. Brand effect for doctors especially for critical drugs

Network taxonomy

Network economics have an impact. Once a drug is prescribed and favored by majority of doctors, the other doctors will prescribe the same drug None

Network profits based on

None

Managed Health care

Construction

Pharma

Production advantage factors - resulting in moat (cost based advantages). Weaker than customer based advantages expect in case of patents or government regulation (like licenses ) - Scale economies very relevant for local market - both geo and product based ( ex: operating system is a specific local product market). Scale economies more sustainable and provide competitive edge if the ratio of 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 will reduce this ratio can weaken the edge of the incumbent

Process economies mainly through 1. Patent protection 2. R&D effectiveness 3. Learning curve in production processes

Scale economies for branded products (customer captivity) mainly for specific product lines 1. Advertising / sales benefit for large companie as the same fixed cost can be distributed across multiple products 2. R&D expense can averaged out over multiple products 3. Scale economies depend on product lines (cardio, neurologicals) and sometime the product line combined with Geo. (economies to scale exist in product segment)

Distinctive capability 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

Managed Health care

Construction

Pharma

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

Porter's model : 5 factor for industry attractiveness Industry attractiveness sumarry and reasons for low high returns

high returns due to very high entry 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 deciding industry profitability

Very high barriers due to patent, 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

Managed Health care

Construction

Pharma

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 entrant

High, but difficult to develop new molecules. Indian companies entering through generics

Precommitment contracts

Low

Learning curve barriers

High

Network effect advantages of incumbents

Low

Managed Health care

Construction

Pharma

No. of competitors - Monopoly / Moderate to high for generics ologopoly or intense competition (concentration ratio ) 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 Demand variability

Low Low

SUPPLIER POWER

Low

Differentiation of input Switching cost of supplier

Low Low

Presence of substitute

Low

Supplier Concentration

Low

Imp of volume to supplier Cost relative to total purchase

High / Low Low

Threat of forward v/s Backward integration BUYER POWER

Low Low. High is the company is contract manufacturer

Managed Health care

Construction

Pharma

Buyer conc. v/s firm concentration Buyer volume

Low. Except for companies in government contracts for generics/ or MNC customers for Local 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

Price sensitivity

High for contract. None for consumer 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 supplier High

Price / Total Purchase Product difference

High High

Switching cost Buyer propensity to Subsititute

Low if generic exist 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

Substitute product

Valuation model

Managed Health care

Construction

Pharma

Valuation approach

1.DCF

High PE Low PE for the industry Avg PE for the industry Valuation drivers

25 10 18 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 Avg CAP assumptions

8-10 % 7-10 years

Maintanance capex (approximate) as % of sales / Dep as % of sales

Managed Health care

Construction

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 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

Question

Others Answer

PAINTS Question

1. Are their process cost efficiencies in some companies

Answer

AUTO A Automobiles Question Answer

Auto components Question 1. Percentage of OEM to total business

AUTO AND ANCILLARIES Batteries Answer Question

Answer

Tyres Question 1.Why are NPM low for the industry

Technology Answer

Hardware Question

BPO Answer Question

Answer

Financial instituiton IT services Question

BANKS Answer Question

Answer

nstituiton Rating agency Question 1. What is the % of the new lines of business like advisory / Equity research and their growths

1. Check extent of rivalry among existing companies. Is there price competition ?

Cement Answer Question

COMMODITY steel Answer Question 1. Why is TISCO lowest cost producer 2. What is the difference between cost per ton forTISCO v/s others

DITY Metals Answer Question

TV / Films Answer Question

Media Publishing ( including papers ) 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 ?

Refinery Answer Question

Oil and Gas Marketing company Answer Question

Answer

Tourism Lubricants Question 1. Do some brands higher pricing power. Check operating profit margin / Average selling price for companies

Hotels and Travel Answer Question

Answer

rism

Telecom Travel and tourism Question

Answer Question 1. Do telecom companies have pricing power

Shipping

Capital goods

Answer Question Answer Question

Answer

Textiles Question Answer Question

Retail

Power Answer Question

Answer

Logistics

Chemical

Telecom services

Question Answer Question Answer Question 1. Do trucking companies have pricing power

Answer

Sugar Question 1. Why has return on capital improved in the last few years

Answer