Business Analysis Working

8/2/2019 Business Analysis Working

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Tea Others - cleaning, hom

Competitive landscape (and

identification of

com etitive advanta e

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

FMCG


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Tea Others - cleaning, ho

FMCG

Pricing stability Pricing seems to be poor and has dropped

from 1999 by 4-5 %

Industry structure type Dominated by a few key players like Tata tea,

HLL, nestle and some smaller player. However

key segment is the loose , unorganised tea

market which has done well in the past few

years

Key Industry products or segments

Segment and company mapping

Identification of companies

possessing competitive advantage

(sequence from strongest to weakest)

Economic model DetailsReturn on capital : 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 % f


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Tea Others - cleaning, h

FMCG

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

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 around0.5:1

5. ROE is dropping due to the above reasons

FA Intensity 1. Asset light model ?

2. High on intangible asset ( R&D /

Customer relations / Brand / patent )

High FA TO in the in

outsourcing of man

suppliers

WCAP Intensity 1. Which component of WCAP is high -

inventory / recievables and why

High Ratio as payab

Recievable are most

WCAP component is

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 mo

cyclical. Structural r

RM as % of sales and implication


4/199


FMCG

Key Industry ratios and

statistics

Business units

Business modelKey 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

3. Down trading happ

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

2. Global pricing determined by international

demand

1. Price of LAB / Oils

Shareholder Value creation drivers Important Drivers which which would

enhance the long term value

1. Strong brands

2. Distribution infrast

3. NPD pipeline and asuccessful new produ

4. Innovation capabil

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 b

changing due to loca

increasing


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FMCG

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 grow

categories due to h

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

inflation (Pricing power)

1. Is the business able to increase price

easily ? This is a strong indicator of CA

1. Poor for unbranded. Depends on demand /

supply situation

2. Moderate for the branded. However

demand growth is low and moving towards

unbranded and hence poor pricing power

Was high. Has got i

players and intense

major players. Food

have moderate pric

Some sort of monoploy or Oligopoly 1. Is consolidation happening ?

2. 80 % market share controlled by how

may firms ?

None Multiple co.s . Multi

Does the company have a recurring

revenue stream

Yes . Due to FMCG nature of product Yes.

Does the business have franchise /

brands or is it commodity

1. What has been the trend in the last few

years

1. Brands are present. Poor pricing / Franchise

levels

The business has fr

Commoditisation ha

Does the industry enjoy high growthrates ? For how long

No. Growth is negative due to migration tocoffee

Low growth in genein niche categories


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FMCG

Key industry variable which drive

the performance

1. Distribution depth

2. Ad spend / Brand

3. Net margins

Source of competitive

advantage

Strong competitive advantages create entry

barriers for incumbents, preventing entry of

competition and enables incumbents to

earn high returns

Customer advantage Factors -

resulting in moat (customer captivity)

Higher durability than production

advantage factors

1. Habit forming and High Differentiation -

No. 1

2. Experience goods (brand effect,

trademarks) - No. 2

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)

1. Habit forming, but low differentiation.

Although companies are moderately

successfully in branding part of the market

1.Habit forming and

through branding an

2.Brand effect strong

such as cold drinks,

etc

Presence of Network economics -

customer advantage factor

Presence of network effect increases

switching cost for the customerRadial or combitorial network

economics

a) Scale economics due to network effects

b) Barriers to entry due to network effect

NA NA

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

NA NA


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FMCG

A. Process economies (resulting in 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

A. Not much process economies A.

2. Complexity and p

certain categores su

B. Scale economies

Purchasing, Advertis

brand and reducing

B. Scale Economies ( In conjuction with

demand captivity result in very sustainable

competitive advantages )

1.Distribution

2. Purchasing

3. Advertising

4. R&D

B. Scale economies exist for Distribution /

Advertising and moderately for production in

farms

b. Scale economies v

customer based adv

competitive advanta

1. Distribution - stro

2. Purchasing efficie

3. Information based

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

Strong know how fro

Strategic assets Distribution network / plant / license

monopoly / natural reserve /Patents /

Media Properties/ Network effects /

Switching costs

- analyse with target market

1. Distribution network for retail

2. Tea gardens

3. Brands

Strategic assets in th

network

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


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FMCG

Innovation R&D / Innovation history /NPD

- Disruptive innovations ?

- Sustaining innovations ?

None Moderate innovation

currently

Cost Low Cost position Important in the industry Costs structure are o

Financial strength Strong Balance sheet NA Companies are finanflows and low debt

Reputation Brands / trademarks Important in the industry Strong brands for ev

Porter's model : 5 factor for

industry attractiveness

Industry attractiveness sumarry and

reasons for low high returns

Low industry returns due to low entry barriers,

commodity nature of product and lower

pricing strenght of brands and unorganizedsector. Also falling demand and shift of tea

drinking to coffee (substitute) has resulted in

falling returns. High rivarly and presence of

substitute and falling demand has reduced

returns in the industry

ENTRY BARRIER - No. 1 Factor

deciding industry profitability

1. The Brand pull should create prevent the

customer from switching to competitor due

to price. Else a know brand will not

translate to a profitable franchise

2. Strategic assets above can also create

entry barrier thus maintaining a profitablefranchise

Entry barriers exist in the form of scale,

branding and distribution strenght. However

unorganised market has made impact on

growth and pricing

Entry barriers are hig

Brands

Asset specificity High, especially for backward integrated

companies having their tea gardens

Economies of Scale Important - in production, distribution and

marketing

Distribution economi

economies of scale


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FMCG

Proprietary Product difference Low Minimal

Brand Identity Moderate Strong brand differe

Switching cost Low Low

Capital Requirement High only if integrated backwards to tea

gardens

High, due brand bu

infrasturcture

Distribution strength High High. Getting erode

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


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FMCG

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.

intense. Due to high

brands and distribut

the industry is weak

Industry growth Low for organised sector Low now

Fixed cost / value added ?? Low

Intermittent overcapacity High High now as these p

Product difference Low Medium. Quality ->

Differentiation is ma

and brandsInformational complexity Low Low

Exit Barrier moderate. Low for unorganised Medium . BusinessDemand variability Low

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

Differentiation of input Low Low

Switching cost of supplier Low Low

Presence of substitute Yes, from other tea gardens Yes

Supplier Concentration Low No

Imp of volume to supplier High High

Cost relative to total purchase High Low

Threat of forward v/s Backward

integration

Low Low

BUYER POWER Low as the final consumer is the final buyer Buyer power on ind


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FMCG

Buyer conc. v/s firm concentration Low Buyer conc. Is low a

Buyer volume Low Buyer volume is low

Buyer switching cost Low Buyer switching cost

Buyer information High, mostly priced based other than brand

and taste

Good, although not

Ability to integrate backward None No

Substitute product Coffee Brand substitution h

detergents / oral car

Price sensitivity Yes High and hence sub

happen

Price / Total Purchase Low LowProduct difference High Medium to low now

Switching cost Low LowBuyer propensity to Subsititute Low, new generation moving toward coffee High

Intangible assets 1. Brands - requiring high ad spends for

maintenance

2. Patents / Knowledge asset- requiring

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

Valuation model


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FMCG

Valuation approach 1. P/E

2. Cash flow

Hi h PE

Low PE for the industrAvg PE for the industry

Valuation drivers

Avg ROC numbers of industry

Av Growth for industrAvg CAP assumptions

Maintanance capex (approximate) as

% of sales / Dep as % of sales


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identification ofcom etitive advanta eList of companies (by size) with

names - By sales


ROE

Market share stability analysis

Automobiles - cars / HCV Auto components Batteries

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 %

1. Exide - 80 % OEM

1. Eicher - 50.5 %

2. Tata - 19.8 %

3. Maruti - 13.2 %

4. Ashok - 12.9 %

5. Force - -10%

1. Bharat forge - 28 %

2. Rico auto - 15 %

3. MICO - 12 %

4. SRF india - 10 %

5. Exide - 8 %

6. SRF/ Amtek - 7 %

7. Sundaram fastner - 4 %

8. Wheels india - 2 %

Stable and competitive

AUTO AND ANCILLARIES


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Pricing stability

Industry structure type






Economic modelReturn on capital :



Low stability due to competition

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

1. Cars

2. 2 wheelers

3. Trucks and heavy vehicles

1. Maruti

2. Tata motors

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


15/199

Dupont analysis

FA Intensity

WCAP Intensity

Capital intensive ?

Margin intensive ?


Automobiles - cars / HCV Auto components BatteriesAUTO AND ANCILLARIES

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, theROA 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 4-7 %

range

3.Return on asset has improved from 5-6 %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

Moderate TO ratio. Generally > 2.

Moderate. Auto companies have reduced the

WCAP requirements and increased the TO

ratios

High capital intensity due to high FA and

moderate WCAP requirements

Yes. The Ratios have improved from < 1 to

almost 2 times TO ratios. Asset efficiency has

improved the ROC

Very low margins currently. Low margins

causing poor return on capital. Margins are

cyclical in nature

14-17 % Avg OPM. NPM has increased from

3-4 % to 8-9 %. Major improvement

achieved through debt reduction

65-70% of sales. RM cost has high impact.

Cost of steel, aluminum, rubber etc has high

impact on margins


16/199


statistics

Business units




Key supply drivers

Shareholder Value creation drivers

Degree / nature of change



1. Market share

2. New model launches

1. Consumer demand for cars. Depends on

general affluence level.

2. Commercial vehicle demand depends onindustrial activity

3. Availability of finance and interest rates

1. Driven by demand for commerical and cars

2. Some parts also driven by industrial

demand

1. Driven by OEM sa

and Tractors

2. Replacement dem3. Industrial deman

1. Steel prices

2. Metal prices such as Aluminium, rubber etc

1. Steel prices 1. Price of key raw

Plastics ( both toget

75 % of RM cost )

1. Strong brands

2. Enduring low cost position

3. NPD pipeline and ability to launchsuccessful new products

4. Innovation capability

1. Patents / Technology skills

2. Strong R&D capability

3. Ability to develop new products to meetthe demands of the auto industry

1. Patent / Technolo

2. Strong R&D and

3. Distribution for a4. Relationship with

Moderate.Smaller life cycle of a product.

Changes in technology

High. Smaller product life due to continous

improvement in technology and change in car

models

1. Low driven mainl

technology


17/199

Predictability of business

Cyclical nature ?



Some sort of monoploy or Oligopoly


revenue stream





high. Due car buying by consumer and

Commercial vehicle for Goods movement

High especially if long term contracts are

being signed. Auto component companies are

moving to higher end items improving the

predictability of the business

High. Low level of

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 volatilit

1. OEM business is

2. After sales follow

less cyclical

Poor 1. Poor for the OEM except for long term

contract. Depends more if technology is able

to drive costs low

2. Much higher for the spare parts business

1. Poor for the OEM

contract and inbuil

Depends more if te

costs low

2. Much higher for

Though lower than

Low in india. High competitive intensity

especially in mid segment

Multiple companies. Very high market s

Yes. High value purchase with long cycle Yes. However from limited customer Yes - From OEM co

Franchise / branding is strong in india 1. No brands. Franchise is more production

(cost driven) in OEM

2. For service market brands and pricing

power is present (moderate)

1. No brands. Fran

(cost driven) in OE

2. For service mark

power is present (

strong brand.

Overall batteries ha

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

Yes. Trend towards good growth due changein global dynamics

1. High currently. D2. Later to be drive


18/199


the performance


advantage




advantage factors


customer advantage factorRadial or combitorial network

economics

Network taxonomy

Network profits based on


1. Brands

2. Cost of manufacturing

3. R&D

4. Exports

1. R&D

2. Long term contracts

3. Cost of mfg ( Cost competitiveness)

4. Ability to deliver on quality and service

levels

1. R&D

2. Long term contra

3. Cost of mfg ( Co

4. Ability to deliver

levels

5. Distribution and

Relationship with O

share in each )

1.High differentiation among products

2. Brand effect is strong

3. Moderate lockins due long purchase cycle

1. Switching cost / Locking exist moderately

due to technology transfers and long term

contracts

1. Moderate differe

Network effect for after sales service and

repairs. Companies with higher market share

get better maintenance infrastructure such as

maruti, Tata motors

None None

None None None

None None Economies of scale

manufacturing and


19/199


analysis

Architecture

Strategic assets






licenses )
















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

A.

1. Value chain indiv

cost. Lead procurem

manufacturing cost

2. Complexity and

impact

3. Moderate benefit

knowhow

B. Scale economies in production/

Purchasing/ Ad/ R&D

B. Scale economies exist for purchasing,

distribution (for retail) and R&D

B. Scale economies

purchasing , Ads an

1. Relationship with suppliers is important

2. Process/ knowledge base important to

keep cost of production low

3. Internal process important for car

companies

1. Relation with OEM

2. System / process to apply technology for

lower cost production of the Auto

components

1. Distribution network is important - dealers

are important

1.Patents

2. Switching cost of OEM , though not too

high


20/199

Innovation

Cost

Financial strength

Reputation







Asset specificity

Economies of Scale


Important - but technology is mainly

imported

1. Sustaining innovation

Important Very important. Main trend driving

outsourcing from india

Very important as Auto companies have largescale

Important as auto companies globalise

Very importan as Auto purchase depends on

brands and reputation

Important only in retail

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.

Returns are high fo

on the market. How

OEM reduces return

less due to high ma

Supplier power and

high impact

Entry barriers are high and hence maruti and

other first movers have a higher advantage.

high entry barriers due to

1. Economies of scale

2. Customer relationship and contracts

3. Tech knowhow and R&D assets

High entry barrier d

in the OEM and afte

High. An automobile plan is capital intensive high Moderate

High for manufacturing/ Purchasing/

Marketing etc

1. Purchasing / Manufacturing and marketing

economies of scale

1.Purchasing / Man

and Advertising eco


21/199

Proprietary Product difference

Brand Identity

Switching cost

Capital Requirement

Distribution strength

Cost Advantage

Government Policy

Expected Retaliation

Production scale

Anticipated payoff for new entrant

Precommitment contracts

Learning curve barriers


incumbents


Moderate. New technology is being added.

But it gets copied quickly

1. High due to employement of technology /

R&D spend

1. Moderate. Brand

meaningfull differe

High 1. Medium to low (if supplying OE vendors) 1. Strong. Gives pr

marketmoderate. New buyers have tendency to stick

to their brand.

1. High for the OE Low

High for the industry High to achieve global scale economies ??

Critical 1.Not critical as many supplier are located

close to OE

2. Important only if the company is a

domestic retail la er

Critical, especially f

High 1. Critical component between players due

technology difference, Advantages of scale

??

Moderate 1. Low impact NA

High high, especially in the lower end of spares

market

??

High High for achieving cost effciences Important, especia

where price is very

Moderate Low as capacity / Technology / Customer

relationship needs to be establised

??

No Yes. Extremely critical Important for the O

volumes, but lowe

High High ??

Moderate None None


22/199




RIVALRY DETERMINANT

Industry growth

Fixed cost / value added

Intermittent overcapacity

Product difference

Informational complexity

Exit BarrierDemand variability

SUPPLIER POWER

Differentiation of input

Switching cost of supplier

Presence of substitute

Supplier Concentration

Imp of volume to supplier

Cost relative to total purchase


integrationBUYER POWER


Low concentration ratio for all segments

except entry level. Maruti and Tata motors

dominate specific segments

1. Intense competition due to a no. of small

companies

2. Some companies building scale to global

levels - would result in lower com etition

High market share

Rivarly is high due to high fixed investments.

Muted currently due to good demand growth

Low rivalry among major competitor as most

of the autocomponent companies operate in

different product lines

Low, due to domin

High High in india due to high exports Moderate

High High ??

Moderate currently low for specific product due to shift

in global model

Not very critical

Moderate High due to technology input and

Manufacturing processes

Moderate. Driven m

OEM relationship

Moderate High due to R&D Moderate.

High High ??High Low Low. Reduced by r

Low Low. Main supplier are steel/ metals company

where the cost depends on the commodity

cycle

Low, due to comm

Low Low Low

Moderate Medium - Only if some special RM type is

required

Low

High None Yes

Low Low No

High Low ??

High High ??

Low Low Low

Low High high for OEM resu

for Replacement m

mar ins


23/199

Buyer conc. v/s firm concentration

Buyer volume

Buyer switching cost

Buyer information

Ability to integrate backward

Substitute product

Price sensitivity

Price / Total PurchaseProduct difference

Switching costBuyer propensity to Subsititute

Intangible assets

Valuation model


Low High High for OEM, low

market

Low 1. OE buyer is high from a company and

hence high impact

2. Retail is low individual volume and retail

does not add to a large component of

business

High for OEM, low

market

Low 1. High as lot of companies invest in

developing their vendors

Low

High 1. High as key vendors are important for the

auto makers in their total cost structure

High for OEM, low

marketNone 1. Low. Most top auto companies are trying

to out source as much as possible

Low

Public transport - not really a key factor Low None, except for b

High High

Low LowHigh. Taken care through vendor selection

process

Moderate

High LowLow if quality and cost is maintained Low

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

standpoint3. Distribution and after sales service

infrastructure is critical

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 only4. Customer relationships very important for

the OEM market and can result in moderate

lockins

5. Technology tie-ups are also important

1. Brands - importa

2. R&D and knowh

products and to im

reduce cost

3. Distribution infra

markets

4. Customer relatiorelationships


24/199

Valuation approach

Hi h PE


Valuation drivers






1. P/E

2. Cash flow

1. P/E

2.DCF

1. PE

2. DCF - normalise

18

10-1212-16

1. New product launches

2. RM pricing

3. Growth

4. ROC

5. Cash flow

20% +

10% + reducin now1-2 years


25/199


identification of

com etitive advanta eList of companies (by size) with

names - By sales

Profitability pool analysis - ranking byROE


Tyres Hardware BPO

1. CEAT 1. HTMT

Technolo


26/199

Pricing stability




Identification of companiespossessing competitive advantage



Tyres Hardware BPOTe

Poor. In the region of 7 - 12 % . OPM drop

has resulted in drop to 7 %. Asset efficiency

is steady


27/199

Dupont analysis

FA Intensity

WCAP Intensity

Capital intensive ?

Margin intensive ?


Tyres Hardware BPOT

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

Very low margins for the last 6 years inspite

of boom in the auto industry

In the range of 7 - 12 %. Reduction to 7 %

in the recent years . This has resulted in

further drop in NPM and depressed ROE


28/199


statistics

Business units




Key supply drivers



Tyres Hardware BPOTech

1. Driven by OEM sales of cars, two wheelers,

and Tractors

2. Replacement demand

1. Offshoring of servic

1. Price of key raw material - rubber 1. Educated mapowe

2. Continous skill enh

3. Exchange rate - ru


29/199


Cyclical nature ?





revenue stream




Tyres Hardware BPOT

1. Poor for the OEM except for long term

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

None ?? None

Yes - From OEM contracts and retail sales ?? Yes, but only after

signed

1. No brands. Franchise is more production

(cost driven) in OEM

2. For service market brands and pricing

power is present (moderate)

Brand power results in moderate pricing. Not

very attractive customer franchises

Weak to moderate

due to Switching c

Yes - From OEM contracts and retail sales Yes, due increasing penetration by computers Yes, very high due


30/199


the performance


advantage




advantage factors


customer advanta e factorRadial or combitorial network

economics

Network taxonomy


Tyres Hardware BPO

Te

1. Moderate differentiation due to brands 1. Moderate brand effect. Commoditisation

happening now

2. From some electronic products such as

consumer electronics brand effect is

increasing for the high end

1. Lock or high swit

vendor company du

sharing with the ven

None None None

None Network effect for some consumer electronics

(but not in india)

None

None None None


31/199


analysis

Architecture

Strategic assets






licenses )














Tyres Hardware BPOTe

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 econom

1. Complexity and f

BPO kind of operat

end than the vanilla

2. Process cost red

3. Acess to quality

B. Scales economies in manufacturing,

distribution, purchasing , R&D and

moderately in R&D

B. Scale economies in

1. Production

2. Distribution which is critical for electronics

3. Purchasing of components

4. Advtg

4. R&D for new products (non existent in

india)

B. Scale economies

1. manpower availa

2. Sales and marke


32/199

Innovation

Cost

Financial strength

Reputation







Asset specificity

Economies of Scale

Tyres Hardware BPOTec

Extremely attractive

demand and high va

Entry barrier have nolarger firms have bec

destructive due to h

is not very high and

Substitute does not i

the industry currentl

industry

1. Entry barriers exis

- economies of scale

- Strong customer re

- learning curve barr

Low

High. High volume h

meeting new deman

training costs / Fixed


33/199


Brand Identity

Switching cost

Capital Requirement


Cost Advantage

Government Policy


Production scale





incumbents

Tyres Hardware BPOT

None

Low

High

Moderate to low. C

critical

None

High

Low

Moderate to low

NA

Good

Highly critical in th

High

None


34/199




RIVALRY DETERMINANT

Industry growth



Product difference


Exit BarrierDemand variabilit

SUPPLIER POWER

Differentiation of in ut







inte rationBUYER POWER

Tyres Hardware BPOT

Multiple players

Industry growth is

growth mode and

internal competitio

High

Low

None

Low

Moderate

LowLow

None

None

None

None

None

None

None

None

High, especially fo


35/199


Buyer volume


Buyer information


Substitute product

Price sensitivity



Intangible assets

Valuation model

Tyres Hardware BPO

Te

High for each firm.

High for new firms

Moderate

High

Moderate

No product substitu

Vendors can be su

technologies can m

obsolete

NA

NANA

NANA

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 relationshipimportant for retail

1. Customer relatio

IT services

2. Knowledgement


36/199

Valuation approach

Hi h PE


Valuation drivers





Tyres Hardware BPOT


37/199



names - By sales


ROE


IT services BANKS Rating agency

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

account for 80 %. Total no. of banks is 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 %

1. Crisil -

2. ICRA -

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

NA Cannot analyse. However accquisition

mergers should reduce the no. of players.

Financial instituiton


38/199

Pricing stability








IT services BANKS Rating agencyFinancial instituiton

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 oligpo

companies

Fragmented. But consolidating at the Top and

to specialist vendors

Very fragmented. Should consolidate through

M&A

oligopoly between

1. CRISIL

2. CARE

3. ICRA

1. Retail lending

2. Corporate lending

3. Treasury operations

4. Fee based incomes

1. Ratings

2. Market research

1. SBI

2. ICICI

1. CRISIL

2. CARE/ICRA

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 cycle.

High in last few years due to reducing int

rates. Better for private and some psu due

better lending and risk management

processes

1. Very high to stro

( > 50 %)


39/199

Dupont analysis

FA Intensity

WCAP Intensity

Capital intensive ?

Margin intensive ?



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 cashrich

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

1. High Asset TO r

2. NPM 15-20 %

3. ROA is high. 30-

4. Low to no debt

5. High ROE in the

High FA TO as business requires only Building

and IT infrastructure

Not relevant : FA is mainly branches and IT /

ATM infra

1. Asset light mode

Very Low WCAP - Main WCAP is Debtors, no

inventory, Low creditors. Tier 1 companies

have debtors days of 30 days. Tier 2 has 60-

90 days of Debtors

Not relevant : 1. WCAP needs are

Low capital intensity Very capital intensive. Operates with high

level of leverage ( 10:1)

1. Low intensity of

ratios

High margins due to GDM model. To go down

over long term due to competition

Low margins (NII and other income). ROE is

good due to high leverage.

1. High margins -

Salary cost. Currently under pressure due to

labor shortage

Cost of funds. Depends on interest rate. Does

not impact as long as the bank can manage

the asset liability durations

1. High margins - 3


40/199


statistics

Business units




Key supply drivers





1. Interest rates and yield curve

2. GDP performance

3. NPA

4. NIM

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 c

2. No. of companies

and getting rated

1. Educated mapower at reasonable cost

2. Continous skill enhancement of employees

Demand deposit / Time deposit and cost of

deposit

None

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 rates2. Other income streams as Fee based

income , treasury income, Distribution income

Brand name,FCF

High degree of change - due to technology

changes / high competition

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

Low level of change


41/199


Cyclical nature ?





revenue stream





Predicability is low due fast technology

changes. Clock speed for the Business is

high. Changes in the environment every 2-3

years

Medium - Change due to disaggregation of

channel / Change due to IT / Price shopping

Highly predictable

Not yet as the model is moving to offshore Cyclical based on economy . Low now due to

Retail loans / Retail business which depends

on the growing affluence

Not cyclical

Very moderate. More demand supply gap

driven. Commoditisation at lower end and

moving up the value chain

1. Not very high due low differentiation levels

for retail services

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 curve

1. Very high for th

crisil / ICRA etc

None at all - close to perfect competition. None at all Restricted competi

firms - CRISIL , IC

Yes Yes, high recurrence of reveneues Yes , if new debt is

crisil have develop

like Risk assesmen

research etcWeak to moderate brand.No franchise.Lock in

due to Switching costs

Moderate branding - Not resulting in a

franchise

Branding / Franchi

good pricing powe

High growth currently due model shifts.Looks likely for the next few years

High growth currently as banking not toodeveloped in india

No, moderate in th


42/199


the performance


advantage




advantage factors


customer advanta e factorRadial or combitorial network

economics

Network taxonomy



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 custo

2. Margins

3. Other income - o

other than rating se

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 branding

and distribution network / size

2. Brand effect is high

3. Moderate lockin for retail customer

1. High brand effec

2. High lockin (High

None Scale economies come due to bigger network none

None None none

None Network profits are based on economies of

scale as banks with large network can

expand their retail business and also access

low cost deposits

none


43/199


analysis

Architecture

Strategic assets






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

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

High customer adv

regulation . Rating

of fixed co.s - CRIS

B. Scale economies not too high other than

staffing

B. Scale economies in securing low cost

deposit

Scale economies in fee based income from

retail

Scale economies in Advertising

No significant proce

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 / knowle

details / industry e

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 li

agency as any com

capital market have


44/199

Innovation

Cost

Financial strength

Reputation







Asset specificity

Economies of Scale


Weak to none Low None

Currently low cost position. Endurability ? Imp - Depends on access to low cost deposit

/ Credit management and Risk management

rocesses

Not critical

High .1. Relevance in outsourcing

2. Relevance in Acquisitions

V Imp . CAR decide the growth capability ofthe bank

Not critical

Moderate to low. India brand stronger than

individual company brands

Brand / strenght important for accessing low

cost deposit

V imp. Any compan

capital market has t

companies - like a t

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

Very high returns d

barriers, low rivarly

competition. No buy

or substitutes

- 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

- Economies of scale important for

Distribution (retail), advertising and for

getting low cost deposit

- Switching cost moderate especially as

consumers generally stay with the bank

1. Entry barrier very

brand (Franchise)

Low Moderate Low. Limited to bui

Economies important at low end - epecially

for outsourcing

High Low


45/199


Brand Identity

Switching cost

Capital Requirement


Cost Advantage

Government Policy


Production scale





incumbents


None - IPR / knowledge base for vertical is

the only differentiator

Low high. Credit rating

will not have enou

new agency

Specific for verticals Medium High

High Medium High

Low Capital requirement is high and essential Low

NA Important in the retail Low

High - but applicable to all Imp for all banks Low

NA Critical as banking license is controlled by RBI Low. Can have an

decides to create a

credibility

High High. Extremely fragmented and competitive

industry

Not likely to happe

Other streams of w

com etitionNA Not applicale Low

High Moderate Low

High for loans high. Being leverag

revenue

High Medium High

None High. Higher no. of branches is critical in the

industry

Low


46/199




RIVALRY DETERMINANT

Industry growth



Product difference



SUPPLIER POWER










Intense competition Intense competition now Limited number of

Medium rivalry. However firms in the industry

due to low exit barriers do not engage in

destructive competition. Expected to increase

with growth in the US companies in india

Intense competition now Low due to limited

High High Medium. New strea

Low High Low

Low NA Low

Low Low Low

Medium to Low Low High

Low High LowLow High to medium Low

None - Input is manpower Supplier is essential deposit holder who

provides low cost deposit. 1. Branch

infrastructure 2.Brand image imp for low cost

de osits

Not relevant, excep

financial backgroun

None None NA

None None NA

None None NA

None None NA

None None NA

None None NA

None None NA

% Sales contributed by Top 5 account. High

for smaller companies

Imp in wholesale a/c. Retail not critical Not too high


47/199


Buyer volume


Buyer information


Substitute product

Price sensitivity



Intangible assets

Valuation model


Varies for companies. Tier II companies have

higher Buyer conc

Low Low

High for Tier II companies Low Low

High for buyers Low to medium High

High High NA

Low. The reverse is happening None Not possible !!

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

High for low end work High

High HighLow Low

Medium LowHigh High only for corporate. Retail none

1.Customer relationships important

2. Knowledgement management important.

3.Branding important more from recruitement

point of view. Branding becoming critical for

the top vendors

4.Research for creating IP for high end is

gaining importance

1.Brand critical on the deposit side

2. Distribution infra important for deposit side

/ for retail sector for other products such as

insurance , mutuals etc. Distribution also

important for retail business

3. Customer relationship important for

corporate business.4.Risk management systems important for

keeping NPA low and for treasury income

1. Brand very impo

three main agencie

2. Customer relatio

clients for the ratin

3. Distribution now

provide research se


48/199

Valuation approach

Hi h PE


Valuation drivers






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

max of 3

1. DCF

40

515

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 withoutmore equity

1. Cash flow

2. No. of clients

3. Non ratings reve

10% +

10% +4-5 years 8-10 years

NA Low ..< 5%


49/199



names - By sales


ROE


Cement steel Metals

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. Hindalco - 36 %

2. Sterlite - 24 %

3. NALCO - 15 %

4. NMDC - 12 %

5. Sesa Goa - 5 %

1. ACC - 22 %

2. Guj ambuja - 11 %

3. Birla cement - 11 %

4. Grasim - 5 %

5. Ultra tech cement (L&T) - 2 %

6. Jaiprakash associate - 31 % (?)

7. India cement - -7%

1. SAIL - 20 %

2. TISCO - 32 %

3. JSW steel - 90 %

4. Ispat industry - -81%

5. Jindal steel - 2

6. Jindal saw - 2 %

7. Bhushan - 5 %

1. Hindalco - 4.4 %

2. Sterlite - 0.2%

3. NALCO - 16.3 %

4. NMDC - 80 %

5. Sesa Goa - 50%

A lot of variation in

analyse specifics. Is

industry ?

Market share changes show consolidationhappening 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

Market share lossed by SAIL/ TISCO andbeing captured by smaller players

1. SAIL has lost 2% to 59.5 %

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

Aluminum - NALCOCopper - Hindalco -

COMMODITY


50/199

Pricing stability








Cement steel MetalsCOMMODITY

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

Currently a lot of companies. Top 4

companies comprise of 55 % of industry. A

lot a poor profitablity regional players.

Consolidation likely in the next downturn

cycle

Kind of a duoploly with 74 % industry

between SAIL and TISCO and top 3

companies 82 % of industry. Not too much

left to consolidate

Industry is mainly d

copper. As a result

more stable

1. Poor return on capital. Less than 10 %

over complete business cycle

2. A few companies with cost advantage can

have 15 % plus ROC over business cycle

1. Poor return on capital. Less than 10 %

over complete business cycle

2. A few companies with cost advantage can

have 15 % plus ROC over business cycle

1. Good return on

5-6 years

2. Cyclical to an ex

between 13 % and


51/199

Dupont analysis

FA Intensity

WCAP Intensity

Capital intensive ?

Margin intensive ?



1. Not much of an improvement in asset TO

ratios for the industry. Small improvement

from 0.8 to 0.9. Industry not becoming any

more efficient

2. Margins have expanded from 1-2 % to

almost 10 %. Margins do not look sustainable( to analye as margins may have come

through cost cutting and not price hikes )

3.ROA have gone from 1-2 % to 9 %. again

ROA is not too good

4.Debt levels have dropped marginally. Ratio

has come down from 2.7 to 2.2

5. ROE is poor (< 10 %). has improved only

in the last 2 years to improvement in

margins. not sustainable and purely

dependent on demand supply gap. Also the

poor ROE is due to the smaller players

1. High improvement in Asset TO. As the

industry is cyclical, any upturn has high

tendency to increase the TO ratios as

operating leverage is high

2. NPM has gone to 10% + from -ve margins

due to high commodity nature of the industry3. Return on asset depends on 1 and 2 has

turned +ve due to upturn in the cycle

4.Debt levels down from 2.3:1 to 1.6:1 . But

still high

5. ROE very cyclical. gone up during upturn.

Can come down drastically during downturn.

Not a high amount of value creation in the

industry

1. Asset TO ratio h

1.1. On an average

2. NPM between 1

3. ROA is also cycl

12 % in 2000 to l

current high of 20 4. Average DE rati

5. ROE is cyclical a

% to 27 % with th

Low FA TO ratio. Typical FA TO ratios are : Low FA TO ratio. Typical FA TO ratios are : Asset heavy mode

1

Low WCAP intensity for Co. like GACL , others

have poor WCAP ratios

Low WCAP intensity

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

Highly capital inten

capital investment

network (sales / pu

distributors etc

Poor margins during Demand supply

mismatch. In excess supply scenario the

margins come under pressure.

Poor margins during Demand supply

mismatch. In excess supply scenario the

margins come under pressure.

High margins, typi

due to the duopoly

AL and copper

28 % plus for TIER one companies. Other

companies which are not low cost producer

have lower OPM

28 % plus for TIER one companies. Other

companies which are not low cost producer

have lower OPM


52/199


statistics

Business units




Key supply drivers




1. Demand supply mismatch due to excess

supply can put pressure on margin

2. Infrastructure growth / HousingConstruction demand especially in higher

urbanisation areas

1. Demand supply mismatch due to excess

supply can put pressure on margin

2. Infrastructure growth / HousingConstruction demand especially in higher

urbanisation areas

3. Performance of downstream companies

1. Price of coal/ limestone

2. Energy price such as oil / coal etc

1. Price of iron ore

1. Enduring low cost position 1. Enduring low cost position

1. Low. Strongly dependent on business cycle

and demand supply gaps

2. Industry consolidation would help in

improving returns and reduce competition

1. Low. Strongly dependent on business cycle

and demand supply gaps


53/199


Cyclical nature ?





revenue stream





1. Medium 1. Medium

1. high 1. high

1. Only if there is supply shortfall, else poor 1. Only if there is supply shortfall, else poor 1. Only if there is s

1. None

2. Consolidation would result in better pricing

power

1. None ??

Yes. Yes. ??

Commodity with poor brand / franchise value Commodity with poor brand / franchise value Commodity with p

Medium growth rates especially in india.However growth would add value only if

there is industr consolidation

Highly cyclical industry Cyclical


54/199


the performance


advantage




advantage factors


customer advantage factorRadial or combitorial network

economics

Network taxonomy


Cement steel Metals

COMMODITY

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)

1. Demand supply mismatch

2. Global demand and pricing

3. Production cost (cost of goods sold as %

of sales)

1. Demand supply m

2. Global demand a

3. Production cost (

of sales)

Low customer advantage except for

moderate brand effect

None None

None None

none none None

none none None

none none None


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analysis

Architecture

Strategic assets






licenses )















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 econom

1. Value chain indiv

2. Process complex

important for some

3. Process cost red

5. Resource access

high important

B. Scale economies in purchasing,

distribution(logistics)

B. Scale economies in purchasing,

distribution(logistics)

B. Scale economies

and purchase of ra

1. Process capabilities can help achieve low

cost position. Difficult to sustain

1. Process capabilities can help achieve low

cost position. Difficult to sustain

1. Process capabilit

cost position. Diffic

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

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 distributio

market . May not b

2. Tie up of RM fro

Ownership of mine

can add to low cos


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Innovation

Cost

Financial strength

Reputation







Asset specificity

Economies of Scale


None. None. Would be limited to new processes /

practises

None. Would be lim

practises

Very critical factor Very critical factor Very critical factor

Critical for continous capital investment intothe Business

Critical for continous capital investment intothe Business

Critical for continouthe Business

Low Low Low

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 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

High High

High High


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Brand Identity

Switching cost

Capital Requirement


Cost Advantage

Government Policy


Production scale





incumbents


None None

None None

None None

High High

Medium Medium

Low - only for some Low - only for some

Low Low

High High

High High

Moderate Low

Low Low

Moderate Moderate

None None


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RIVALRY DETERMINANT

Industry growth



Product difference



SUPPLIER POWER










High. 60 % capacity with top 6. Too many

players

High. Too many players such mini mills ,

Integrated steel plant etc

high competitive intensity causes poor

profitability of industry. Fragmented industry -

now consolidating

high competitive intensity causes poor

profitability of industry. Fragmented industry -

now consolidating

Medium. Dependent on demand supply gap Medium. Dependent on demand supply gap

High (upto 5 usd per tonne ) High

High High

Low Low

Low Low

High HighHigh High

Medium Medium - Ore suppliers / Coal / Lime is

controlled by government or few suppliers

and can have impact on the prices

Low Low

Low Low

None. Cost escalation of RM has impact on

Margins

None. Cost escalation of RM has impact on

Margins

Medium - For coal and fuel Medium - For coal and fuel and iron ore

Low Moderate

High High

None None

Low Low


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Buyer volume


Buyer information


Substitute product

Price sensitivity



Intangible assets

Valuation model

Cement steel Metals

COMMODITY

Low Low

Low Low

Low Low

Medium Medium

None None

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

High High

High HighNone Low

None NoneNone High

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

2. Process innovations / improvements for

cost reductions

1.Brands also do no

2. Process innovatio

cost reductions


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Valuation approach

Hi h PE


Valuation drivers






1. Price to book

2. DCF ( based on normalised earnings )

3. Re roduction costs

1. Price to book

2. DCF ( based on normalised earnings )

3. Re roduction costs

1. Price to book

2. DCF ( based on

3. Re roduction co


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names - By sales


ROE


Business Analysis Working

Documents