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Unit 8: Fundamental Analysis 2: Industry Analysis

investing at this stage. But if he is still keen to invest, he should try to diversify or disperse his Notes
investment price the risk. It would be quite prudent on this part to look for companies that are
in the second date i.e., fast growth. This probably explains the prevalent higher stock prices of
the companies of this industry.

Notes From the investment point of view, selection of the industries at the third stage of
development is quite crucial. It is the growth of the industry that is relevant and not its
past performance. There are a number of cases where the share prices of a company in a
declining industry have been artificially hiked up in the market, on the basis of its good
performance. But the fact of the matter is that a company in such an industry would sooner
or later feel the pinch of its decline and an investor investing in such companies experiences
a reduction in the value of his investment in due course.

Having discussed various investment implications, it may be pointed out that one should be
careful while classifying them. This is because the above discussion assumes that the investor
would be able to identify the industrial life cycle. In practice, it is very difficult to detect which
stage of the industry is at. Needless to say, it is only a general framework that is presented
above. One can spangle this analysis with suitable modifications. In order to strengthen the
analysis further, it is essential to outline the features of the industry in detail. Due to its unique
characteristic, unless the specific industry is analysed properly and in depth with regard to
these, it will be very difficult to form an opinion for profitable investment opportunities.
1. There is competition among domestic and foreign firms, both in the domestic and the
foreign markets. How do firms perform here?
2. Many types of products are manufactured in this industry. Are these homogenous in
nature or highly heterogeneous?
3. What is the nature and prospect of demand for the industry? Are these homogenous in
nature or highly heterogeneous?
4. This may also incorporate the analysis of the markets of its products, customer-wise and
geographical area-wise, identifying various determinants of this type of industry its
growth, cyclical, defensive or relative decline industry.

Self Assessment

Fill in the blanks:
1. In Cyclical Industry the firms included are those that move closely with the rate of
………………….... growth of the economy and fluctuate cyclically as the economy fluctuates.
2. Defensive Industry is a grouping that includes firms, which move steadily with the
………………….... and less than the average decline of the economy in a cyclical downturn.
3. ………………….... Industry is expected to grow consistently and its growth may exceed
the average growth of the economy.

8.2 Importance of Industry Analysis

Why should a security analyst carry out industry analysis? To answer this question, logically,
two arguments are presented:
1. Firms in each different industry typically experience similar levels of risk and similar
rates of return. As such, industry analysis can also be useful in knowing the investment-
Worthiness of a firm.

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