NISM Certifications · NISM-Series-XV: Research Analyst

Industry Analysis: formula sheet

Full chapter guide

Key formulas

Top-down approach: Economy analysis → Industry analysis → Company analysis; Industry analysis is the middle step. It links macro views to company selection.
Bottom-up approach: Company analysis first, with less weight on economy and industry; Do not confuse this with top-down. It is the reverse order.
Classification by economic sensitivity: Cyclical | Defensive | Growth; Cyclical industries move strongly with the economy. Defensive ones are steadier. Growth industries expand faster than the economy for a period.
GICS hierarchy: Sector → Industry Group → Industry → Sub-Industry; Four levels, broad to narrow. Sector is the widest level.
Classification rule: Company is placed by its principal business activity; Usually the main source of revenue. One company gets one classification.
NIC: NIC = India's national classification of economic activities, based on UN ISIC; Used for official statistics, not stock market peer grouping.
Sector vs industry: Sector ⊃ Industry; A sector contains several industries, not the other way round.
Order of stages: Start-up → Growth → Maturity → Decline; Some texts name the first stage pioneering or embryonic. Know the order and the features of each.
Sales growth pattern: Start-up: small base, uncertain | Growth: rapid | Maturity: slow, near GDP growth | Decline: negative; Growth in maturity is described as similar to the broad economy, not as a fixed number.
Profit and competition pattern: Start-up: losses or low profit | Growth: rising profit, new entrants | Maturity: stable margins, consolidation | Decline: falling profit, exits; Use these clues to identify the stage.
Risk and dividend pattern: Risk: highest in start-up, then falls through growth and maturity | Payout: low in growth, higher in maturity; Growth firms retain cash for expansion. Mature firms generate cash and distribute more.
Cyclical industry: Industry growth > economy growth in expansion; industry decline > economy decline in contraction; Demand is postponable or investment/credit linked. Earnings are volatile.
Defensive industry: Demand roughly stable across the cycle; Necessities. Lower earnings volatility, usually lower beta, but it does not always outperform.
Growth industry: Industry growth > economy growth over the long run, driven by industry-specific factors; Linked to the early stages of the industry life cycle, not to the business cycle.
Cycle phases: Expansion → Peak → Contraction → Trough; Cyclicals tend to do best from trough through expansion; defensives tend to hold up in contraction.
Sensitivity idea: Sensitivity = % change in industry sales or profit ÷ % change in economic activity; A value above 1 suggests cyclical; well below 1 suggests defensive. This is an illustrative way to think, not a prescribed formula.
The five forces: New entrants + Supplier power + Buyer power + Substitutes + Rivalry among existing firms; Memorise all five. Exam options often swap in a wrong item such as 'government policy' or 'technology' as a sixth force.
Link between force and profit: Stronger force → lower industry profitability; weaker force → higher industry profitability; This applies to all five forces. It is about the industry as a whole, not one firm.
Entry threat: Higher barriers to entry → lower threat of new entrants; Barriers include scale, capital needs, brands, distribution, licences, switching costs and input access.
Buyer power conditions: Few, large buyers + low switching cost + standard products → high buyer power; Opposite conditions reduce buyer power.
Supplier power conditions: Few suppliers + unique inputs + high switching cost for buyers → high supplier power; Backward integration threat by buyers weakens suppliers.
Demand-supply and price direction: Demand growth > Supply growth → prices and margins tend to rise; Demand growth < Supply growth → prices and margins tend to fall; A tendency, not a guarantee. Policy, imports and price controls can change the outcome.
Capacity utilisation: Capacity utilisation (%) = Actual output ÷ Installed capacity × 100; High utilisation suggests pricing power and the need for new capacity. Low utilisation suggests surplus and price pressure.
Price elasticity of demand: Price elasticity = % change in quantity demanded ÷ % change in price; Ignore the sign when comparing size. A value above 1 in size means elastic demand: sales fall sharply when price rises.
Driver classification: Drivers = Demand factors + Supply factors + Government policy and regulation + Technology + Other (global, social, environmental); Use this list to sort any exam option.
Price to Earnings (P/E): P/E = Market price per share ÷ Earnings per share; Used for stable, profitable companies. Not meaningful when EPS is negative.
Price to Book (P/B): P/B = Market price per share ÷ Book value per share; Preferred for banks, NBFCs and other financials.
Enterprise Value: EV = Market capitalisation + Debt + Preference capital + Minority interest − Cash and equivalents; Captures the value of the whole business, not only equity.
EV/EBITDA: EV/EBITDA = Enterprise value ÷ EBITDA; Neutralises differences in debt levels and depreciation policy.
EV/Sales: EV/Sales = Enterprise value ÷ Revenue; Used when earnings are negative or very volatile.
Relative premium or discount: Premium/(Discount) % = (Company multiple − Peer median multiple) ÷ Peer median multiple × 100; A positive result is a premium. A negative result is a discount.
Implied value from peer multiple: Implied price = Peer multiple × Company's EPS (for P/E); Same idea works with book value per share for P/B.

Quick revision

Industry analysis comes between economic analysis and company analysis in the top-down approach.
Classification groups companies with similar business activities so they can be compared.
Sector indices track the performance of a group of companies in one sector.
Life cycle stages run from start-up through growth and maturity to decline.
Growth industries tend to have fast sales growth but higher risk and uncertainty.
Mature industries tend to have slower growth and steadier cash flows.
Cyclical industries move strongly with the economy; defensive industries are more stable.
Porter's Five Forces: rivalry, threat of new entrants, threat of substitutes, buyer power and supplier power.
Strong forces against an industry reduce its long-term profit potential.
Regulation and policy can change demand, costs and entry barriers for an industry.
Compare a company's multiples with peers in the same industry, not across unrelated sectors.
Read each option fully; negative marking makes careless guesses costly.

Common mistakes

Mixing up top-down and bottom-up order. Fix: Top-down starts with the economy and ends with the company. Bottom-up starts with the company.
Thinking a good company always does well regardless of its industry. Fix: Remember that industry conditions affect all firms in it. Strong firms can still be hurt by a weak industry.
Treating sector and industry as the same thing Fix: Sector is the broad group. Industry sits inside a sector. Banks is an industry within the Financials sector.
Saying NIC is a global standard Fix: NIC is India's national system based on UN ISIC. GICS is the global one used by index providers.
Treating maturity as the same as decline. Fix: Maturity still has positive sales growth, stable profits and strong cash flow. Decline has shrinking sales.
Saying start-up industries have the lowest risk because growth is fastest. Fix: Start-up has the highest risk: unproven demand, losses and many failures. Fast percentage growth is from a small base.
Treating growth and defensive as the same thing Fix: Defensive means stable demand. Growth means faster-than-economy expansion from industry-specific drivers. They are different tests.
Saying defensive industries are unaffected by the cycle Fix: Defensives are less sensitive, not immune. Choose answers with relative wording.
Treating high barriers to entry as increasing the threat of new entrants. Fix: Barriers and threat move in opposite directions. High barriers mean low threat.
Confusing substitutes with direct competitors. Fix: Direct rivals sell the same type of product. Substitutes are a different product meeting the same need, such as a train versus a flight on a route.

Exam tips

Expect direct questions on the order of the top-down approach. Memorise it as economy, industry, company.
Watch for options that overstate the role of industry analysis, such as saying it alone decides the investment.
Know the three bases of classification: sector, product nature and economic sensitivity. Questions often ask you to match examples.
Negative marking applies, so skip only if you cannot remove at least two options. Wrong answers on a 1-mark question cost 25% of that mark.
Expect direct definition questions: levels of GICS, what NIC is, what a sector index tracks.
Watch for options that reverse the sector and industry hierarchy.
Remember the placement rule: principal business activity, mostly revenue.
Wrong answers cost marks in NISM-Series-XV, so skip only if two options are still equally likely after elimination.