Page 128 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 4: Fundamental Analysis

4.2.2 Classification of Industries Notes

There are different ways of classifying industrial enterprises.
1. Classification by Reporting Agencies: In India, the Reserve Bank of India has classified
industries into 32 groups. Stock exchanges have made a broad classification of industry
into 10 groups.
Business media have their own classification. The Economic Times classifies industry into
10 groups and the Financial Express into 19 groups. The groups are further sub-divided.
2. Classification by Business Cycle: The general classification in this framework is growth,
cyclical, defensive and cyclical growth. Growth industries are characterized by high rates
of earnings expansion, often independent of business cycles. These industries are pioneers
of a major change in the state of the art i.e., innovation diffusing concerns. The ongoing
revolution in the electronics industry and communications equipments is an example of
this kind.
Cyclical industries are closely related to business cycles. Prosperity provides consumers
purchasing power and boom to industry whereas depression adversely affects them. Consumer
durables are subject to these kinds of changes.
Defensive industries are those the products of which have relatively inelastic demand. Food
processing industry is an example.

Cyclical growth industries are those that are greatly influenced by technological and economic
changes. The airline industry can be cited as an example.

4.2.3 Key Indicators in Analysis

The analyst is free to choose his or her own indicators for analyzing the prospects of an industry.
However, many commonly adopt the following indicators.
1. Performance Factors like:
(a) Past sales

(b) Past earnings
2. Environment Factors like:
(a) Attitude of government

(b) Labour conditions
(c) Competitive conditions
(d) Technological progress
3. Outcome Factors like:
(a) Industry share prices

(b) Price earnings multiples with reference to these key factors, evaluations shall be
done to identify.
(c) Strengths and weaknesses

(d) Opportunities and threats
Some relevant questions that may be asked in this connection are given here. They are only
illustrative and not exhaustive.

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