This document discusses understanding industry dynamics and their implications for investment. It analyzes the tire industry as an example. Key points include: 1) The tire industry is in a growing stage and has a monopolistic structure, with some players having pricing power. Demand is derived from the automobile industry and is cyclical. 2) Raw material costs like nylon and rubber account for 70% of product costs and 50% of sales, making materials a key profitability driver. 3) The industry is consolidating, becoming more radialized, and facing competition from cheap refurbished tires. Export markets are expanding.

1. 1
Understanding Industry Dynamics
Implications for Investment

2.  What is the need for Industry analysis?
 A company will find it difficult to succeed if the industry
dynamics are unfavorable
 Understanding the stage of the industry
 Stage will define risk and expected return of investment
 Understanding the structure of industry
 Bargaining power of the stakeholders of the industry
 Understanding profitability drivers of the industry
 What is the nature of the demand?
 What affects the profitability of companies with in industry
 Factors that affect all the players
 Understand the role of value migration
 Identify who is the loser and who is the winner
 Identify potential winners
 Companies with differentiated business model
 Companies with significant moat
 Companies with pricing power

3. 3
 What is value migration?
 Shifting of value creating forces
 Value migrate from outdated business model to newly
created business design
 That satisfy better customer need
 Three types of value flow?
 Value flows from one industry to the other
 Value flows from one company to other
 Value flows with in business
 Three stages of value migration?
 Value inflow stage
 Value stability stage
 Value outflow stage

4. 4
Tyres Industry
An Example

5. 5
 What is the stage of the industry?
 Growing industry
 What is the structure of the industry?
 Most likely monopolistic
 Some player may have pricing power
 What is the nature of the demand?
 The demand is derived from demand for automobile
(Derived Demand)
 Source of demand is cyclical in nature
 Two types of demand: OEM and replacement

6. 6
Costing Aspects of the Industry
Raw-material Cost = 70% of cost of product and
50% of sales
 Raw-material cost is the driver of the industry
Major Raw-material
 Nylon tyre cord: 55%.
 Natural rubber: 15%.
 Rubber chemical: 13%.
 Carbon black: 9%.
 Synthetic rubber: 8%
Major costs are petroleum derivative

7. 7
Impact of Cost Increase
Can this industry pass on the cost
Depends on demand situation
Depends on capacity level in industry
Depends price of imported tyres
 Custom duty structure
 Policy on dumping especially on refurbished tyres
Generic substitute
Refurbished tyres with better technology

8. 8
Industry Segmentation
Trucks, buses, and tractor
Higher value
Cars
Higher visibility – More advertisement spend
Two wheeler
Low value and high volume
Cycles
Specialty tyres
Export market
Which company is in which segment?

9. 9
Structural Changes in Industry
Industry in consolidating
Radialisation of tyres
Backward linkages
Availability of cheap re-furbished tyres
Export market is expanding
Composition between OEM vis-à-vis
replacement market
Sign of recovery in automobile industry
Which company is in sweat spot?

10. 10
Who can be potential winner
Which segment is likely to expand more?
Who is present in that segment?
Who has the excess capacity?
Who is least leveraged?
Who enjoy the highest gross profit margin?
Who has the potential to address the need of
higher radialisation?
Who is diversified?
Who exports?