Page 125 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes with similar characteristic can be divided into one industrial group. There are many bases on
which grouping of companies can be done.

Example: Traditional classification is generally done product-wise like pharmaceuticals,
cotton textile, synthetic fibre etc.

Such a classification, through useful, does not help much in investment decision-making. Some
of the useful bases for classifying industries from the investment decision-point of view are as
follows:
Growth Industry: This is an industry that is expected to grow consistently and its growth may
exceed the average growth of the economy.

Cyclical Industry: In this category of the industry, the firms included are those that move
closely with the rate of industrial growth of the economy and fluctuate cyclically as the economy
fluctuates.
Defensive Industry: It is a grouping that includes firms, which move steadily with the economy
and less than the average decline of the economy in a cyclical downturn.

Another useful criterion to classify industries is the various stages of their development. Different
stages of their life cycle development exhibit different characteristic. In fact, each development
is quite unique. Grouping firms with similar characteristics of development help investors to
properly identify different investment opportunities in the companies. Based on the stage in the
life cycle, industries are classified as follows:

Figure 4.2: Industry Life Cycle

Industry Output Introduction Growth Maturity Decline

Pioneering stage: This is the first stage in industrial life cycle of a new industry. In this, technology
and its products are relatively new and have not reached a stage of perfection. There is an
experimental order both in product and technology. However, there is a demand for its products
in the market; the profits opportunities are in plenty. This is a stage where the venture capitalists
take a lot of interest, enter the industry and sometimes organize the business. At this stage, the
risk commences in this industry and hence, mortality rate is very high. If an industry withstands
them, the investors would reap the rewards substantially or else substantial risk of investment
exists. A very pertinent example of this stage of industry in India was the leasing industry,
which tried to come up during the mid-eighties. There was a mushroom growth of companies in
this period. Hundreds of companies came into existence. Initially, lease rental charged by them

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