EIC Analysis

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EIC Analysis

CONCEPT

A traditional approach of Economic Industry Company (EIC) Analysis is employed in the

business valuation process. The approach entails the following;

1. Examining macroeconomic conditions in the economy

2. Ascertaining the most promising industries in the light of economic conditions

3. Finding the most attractive companies within the industry

The Top Down approach generally starts with the analysis of the broad economic
environment, then moves to industry analysis and finally to the analysis of the company. In
practice, steps in EIC are not discrete and independent. Economy and Industry parameters
are looked simultaneously. Remember, economy is combination of ALL industries put
together. Industry analysis and company analysis go hand in hand especially while
researching about the competitive landscape in which the subject company operates

PROCESS OF EIC ANALYSIS

1. Economic Analysis

Using the top-bottom approach, we need to begin by first evaluating the overall economy of
a country. The reason is that the national economy is like a tide that affects all the industries
and all the different sectors. Basically, when a country’s economy does well and expands,
then most sectors will thrive, and the different industries will benefit immensely and
experience growth.

However, when the economy is in decline and not performing well, then plenty of
companies in various industries will suffer. In fact, experts of finance and economy believe
that there is a correlation between interest rates and economic contraction or expansion.
Therefore, interest rates are considered by experts in economics and finance as one of the
major catalysts that affect the national economy.

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Another factor that affects the economy of a country is security. When a country is stable
and security is good, then the economy generally performs well. As things are, it is possible
to identify a correlation between interest rates and stock prices. This means that it is
possible to observe that when interest rates are low then stock prices are high and the
reverse is also true.

2. Industry Analysis

Now if an analyst determines that the economy is doing well, the fundamentals are strong
and that it will expand in the course of the year, then there are certain industries that are
likely to benefit a lot more than others.

Investors are able to examine the direction of the economy and determine which industries
are likely to benefit and which ones are likely to miss out. If the analysis shows that a
majority of companies are expected to benefit from the expanding economy, then any risks
to investors are very low. Most companies will then adapt rather aggressive growth
strategies hoping to benefit from the prevailing positive economic conditions. Some of the
growth strategies that investors might adapt include buying stocks in technology,
semiconductors, biotechnology, and perhaps cyclical stocks.

On the other hand, when the economy is predicted to experience a downturn then traders
and investors prefer non-aggressive and more conservative setups and strategies. They tend
to look for companies that are more stable and can promise a regular income. For instance,
companies in the energy sector largely receive income from their customers without huge
growth ambitions. As such, investors in such a market will mostly opt for stocks in utility
companies, energy firms, and similar organizations.

There are certain parameters used by analysts and traders to assess the potential of an
entire industry within an economy. These parameters include market size, overall growth
rate, as well as importance to the general economy. One company maybe important to the

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economy but an entire group of firms within a given industry will have a lot more power
which can be exerted to affect the stock price.

Also, when stocks move either upwards or downwards, they tend to do so together in
groups within an industry. As such, an investor will be safer within the right industry rather
than the right shares. Being in the correct industry is really important depending on the
status of the economy.

3. Company Analysis

After observing the prevailing competitive and business atmospheres within a particular
industry as well as any future trends, comes the critical task of shortlisting the companies.
As an analyst, you will want to investigate the capabilities of each company as well as any
resources that it has. This way, you will be able to note firms that have the capacity to
create and also maintain a distinct competitive advantage over other companies within the
same industry. Also, the examination of factors should pay close attention on identifying
firms with solid management, a serious business plan as well as strong financial outlook.

1. A Sound Business Plan: Every serious company has to have a sound business plan
or model upon which the entire business is premised. Should the business plan
and model be solid then a company will have a solid foundation on which to
grow and thrive. However, if the business model or plan is shaky without a solid
foundation, then the company may be in trouble and a plan should be drawn to
improve on the model.
2. The Management: Analysts and investors should also pay close attention to a
company’s management. It is important to check out top managers especially the
chief executives because they are responsible for implementing a company’s
vision and executing the business plan. Sometimes even some of the greatest
plans go wrong especially in situations where management is not up to task.
Therefore it is crucial to scrutinize top management such as the C-suite
executives. Failure to do so may cause investors to lose money where a company
in a dynamic industry fails due to bad leadership.
3. Financial Information: The final yet also crucial aspect of company analysis is the
financial position of a company. Financial analysis is often undertaken as the final
aspect yet is still as crucial as all others. As such, analyzing the financial
statements of an organization is extremely crucial to understand how the
company has been performing in the past and the expected performance in the
future. There are certain inputs that are considered essential. These include the
following;
a. Assets assessment
b. Business brand
c. Management
d. Current and long-term liabilities

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 e. Amortization
f. Growth prospects
g. Investments
h. Patents
i. Debt structure
j. Product placement
k. Debt to equity ratio
l. Depreciation

Summing it All Up
The final process of analysis is processing of all the available data, analyzing it systematically and
then translating it into information that can be used to make the final choice

Key Macroeconomic Variables:

 GDP (including its components)

 Inflation

 Interest Rates

 Budget Deficits

 Unemployment

 Weather

 Government Macroeconomic Policy

 Business Cycles

 Exchange rate

Business Cycles

Business cycles are recurring patterns of recession and recovery in the economy. The
transition points across cycles are called Peaks and Troughs. A Peak is the transition from
the end of the expansion to the start of a contraction. A Trough occurs at the bottom of a
recession just as the economy enters a recovery. Different stages of business cycles affect
the relative performance of different industry groups such as cyclical industries and
defensive industries

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Examples of Headwinds and Tailwinds impacting an Economy

Example 1

Example 2

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Example 3

Indian Economy- March 2023

Global outlook

 Globally, advanced economies continue to battle very high inflation. In the US,
average CPI inflation has breached 40-year high levels, forcing the US Fed to increase
interest rates at a record pace.
 Interest rates have been on the rise across the world in the face of soaring inflation.
Given the situation, the Indian economy has remained largely resilient, despite a 250
bps rise in repo since Q1 2022. In the US, interest rates have increased by 450 bps in
the same period.
 The "Global Uncertainty Economic Index" has been trending upwards over the last
few years, and policymakers will have to contend with higher levels of uncertainty in
the future

Domestic outlook: Strong macro fundamentals

 India’s growth in real GDP is expected to be 6.5% (our economic survey estimates)
this fiscal, but with some downside risks. IMF estimates India’s trend growth at 6%.
 India’s merchandise and services exports are growing, and remain at all-time highs.
While Current Account Deficit was a major worry till a few months back, in the
backdrop of higher oil prices, that is less of a concern now.
 Private capex continues to show good revival. There has been a pickup in corporate
investments in H1 FY23, rising above FY20/pre-COVID levels.

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  Government expenses have significantly shifted towards capex, which is now 22% of
budgetary allocation, compared to 12% till a few years back
 Direct tax collections have been much higher than the previous years, estimated to
reach Rs 5.9 lakh crore in FY23. GST collections have remained above the Rs 1.5 lakh
crore threshold in the last few months, indicating the robustness of the economy.

Why growth will be better this decade?

 Simplification of regulatory frameworks through Insolvency and Bankruptcy Code

(IBC), RERA, National Single Window System among others have led to improved
investor sentiment, ease of doing business and better governance
 Enablers of formalisation such as Aadhaar, E-Shram Portal, SVANIdhi, Udyam portal
and GSTN, FASTag have had commendable outcomes.
 Domestic conditions remain conducive for an investment cycle recovery
 Banks now have much cleaner Balance Sheets. This has led to good credit growth to
MSMEs.

Despite the global headwinds, India is on track to become a $5 trillion economy!

Stages in Industry Life Cycle (pls give a read, no memorization)

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1. Embryonic stage, the industry has just started. The characteristics of this stage are as
follows:

Slow growth: customers are unfamiliar with the product.

High prices: the volume necessary for economies of scale has not been reached.

Large investment required: to develop the product.

High risk of failure: most embryonic firms fail.

2. Growth stage, industry growth is rapid. The characteristics of this stage are as follows:

Rapid growth: new consumers discover the product.

Limited competitive pressures: the threat of new firms coming into the market peaks during
the growth phase, but rapid growth allows firms to grow without competing on price.

Falling prices: economies of scale are reached and distribution channels increase. Increasing
profitability: due to economies of scale.

3. Shakeout stage, industry growth and profitability are slowing due to strong competition.
The characteristics of this stage are as follows:

Growth has slowed: demand reaches saturation level with few new customers to be found.

Intense competition: industry growth has slowed, so firm growth must come at the expense
of competitors.

Increasing industry overcapacity: firm investment exceeds increases in demand.

Declining profitability: due to overcapacity.

Increased cost cutting: firms restructure to survive and attempt to build brand loyalty.

Increased failures: weaker firms liquidate or are acquired.

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4. Mature stage, there is little industry growth and firms begin to consolidate. The
characteristics of this stage are as follows:

Slow growth: market is saturated and demand is only for replacement.

Consolidation: market evolves to an oligopoly.

High barriers to entry: surviving firms have brand loyalty and low cost structures.

Stable pricing: firms try to avoid price wars, although periodic price wars may occur during
recessions.

Superior firms gain market share: the firms with better products may grow faster than the
industry average.

5.Decline stage, industry growth is negative. The characteristics of this stage are as follows:

Negative growth: due to development of substitute products, societal changes, or global

competition.

Declining prices: competition is intense and there are price wars due to overcapacity.

Consolidation: failing firms exit or merge.

Typical Steps in Industry Analysis

Step 1: Define the relevant industry:

 What products are in it? Which ones are part of another distinct industry?
 What is the geographic scope of competition?

Step 2: Identify the participants and segment them into groups, if appropriate: Who are

 the buyers and buyer groups?

 the suppliers and supplier groups?
 the competitors?
 the substitutes?
 the potential entrants?

Step 3: Assess the underlying drivers of each competitive force to determine which forces
are strong and which are weak and why.

Step 4: Determine overall industry structure, and test the analysis for consistency:

 Why is the level of profitability what it is?

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  Which are the controlling forces for profitability?
 Is the industry analysis consistent with actual long‐run profitability?
 Are more‐profitable players better positioned in relation to the five forces?

Step 5: Analyze recent and likely future changes in each force, both positive and negative.

Step 6: Identify aspects of industry structure that might be influenced by competitors, by

new entrants, or by your company.

Tools used in Industry Analysis

The three tools used are

1. PORTERS 5 FORCES ANAYSIS: Porter’s Five Forces analysis is a framework that

helps analyze the level of COMPETITION within a certain industry. It includes:
a. Bargaining Power of Buyers
b. Bargaining Power of Suppliers
c. Threat of Substitutes
d. Threat of new entrants
2. PESTEL ANALYSIS: A PESTEL analysis is a framework or tool used by marketers to
analyze and monitor the EXTERNAL factors that have an impact on an industry. It
incorporates factors pertaining to
a. Political
b. Economic
c. Social
d. Technological
e. Environmental
f. Legal
3. SWOT ANALYSIS: SWOT is used to help assess the internal and external factors
that contribute to an industry’s relative advantages and disadvantages. SWOT
stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is
generally used in conjunction with other assessment frameworks, like PESTEL
and Porter’s 5-Forces

EXAMPLES (Can use any examples)

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Elements that should be covered in Company Analysis
1. Firm overview, including information on operations, governance, and strengths and
weaknesses.
a. Industry characteristics.
b. Product demand.
c. Product costs.
d. Pricing environment.
e. Financial ratios, with comparisons to other firms and over time.
f. Projected financial statements and firm valuation.
2. A firm’s return on equity (ROE) should be part of the financial analysis. The ROE is a
function of profitability, total asset turnover, and financial leverage (debt).
3. Analyzing the firm’s financial condition, products and services, and competitive
strategy. Competitive strategy is how a firm responds to the opportunities and
threats of the external environment. The strategy may be defensive or offensive.
4. Porter has identified two important competitive strategies that can be employed by
firms within an industry: a cost leadership (low-cost) strategy or a product or service
differentiation strategy. According to Porter, a firm must decide to focus on one of
these two areas to compete effectively.
5. Differentiation strategy, the firm’s products and services should be distinctive in
terms of type, quality, or delivery. For success, the firm’s cost of differentiation must
be less than the price premium buyers place on product differentiation. The price
premium should also be sustainable over time. Successful differentiators will have
outstanding marketing research teams and creative personnel.

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