The Complete Guide on Sector and Industry Analysis

If you are an investor and planning to invest in stocks, read this before proceeding.

Fundamental analysis is an important part of stock research before making any decision about investment. Fundamental analysis includes sector analysis and industry analysis.

What are sector analysis and industry analysis?

Are sectors and industries different from each other?

Before we move to the definition of sector analysis and industry analysis, we shall understand the definition of sector and industry.

The sector is a broader term than industry, the sector is the group of industries that share common characteristics of business activities whereas industry is a group of companies that are into similar businesses or products.

Let us understand with an example: sectors are classified into four parts primary, secondary, tertiary, and quaternary.  The primary sector includes activities related to the environment or earth such as mining, fishing, agriculture, etc. and industry includes the health industry, software industry, finance industry, etc.

Industry and sector are two terms that are used in the economy, there is a misconception among individuals that industry and sector are synonyms and can be used interchangeably but there is a huge difference in both terms.

In the stock market, both sector and industry analysis is used by analysts to study the market.

Sector analysis is analyzing the financial and economic position of a particular sector of the economy. It helps investors in judgment on how companies in their sector can do so efficiently. It also helps to select some of the unprofitable parts.

Sectors perform differently in different stages of the business cycle. For example, in the expansion phase researchers focus on discretionary sectors as their performance increases during this period, whereas when economic growth slows down it focuses on defensive sectors as they outperform when the economy is slow.

The pandemic has forced everyone to stay at the home, which lead to an increase in demand of the retail sector the market has seen a 25% to 75% increase in order volumes as a result of the increased demand.

At this stage, the demand for health and hygiene products has also skyrocketed, as the focus is on these aspects. Demand for hygiene products such as disinfectants and sanitizers, as well as health care products that increase immunity has increased rapidly.

However, as the focus during lockdown was on food and sanitation, discretionary and non-essential items could be seen as weak in demand.

According to India Ratings and Research (IndRa), domestic organized food and grocery retailers can benefit from continued demand for organized distribution and e-commerce staples, with a 10% year-over-year increase in FY22.

After experiencing an unprecedented 19% decline in the January-March 2020 quarter, the consumer goods industry showed signs of recovery in the July-September 2020 quarter, with a year-on-year growth of 1.6%. The growth of the fast-moving consumer goods (FMCG) industry also reflects the enthusiasm shown in the overall macroeconomic situation in the context of economic opening and relaxation of lockdown restrictions.

Retail is one of the sectors hardest hit by the Covid19 pandemic. According to the Retailers Association of India (RAI), only 7-8% of the retail sector has returned to work after the shutdown selling only essential items.

Industry analysis is used to understand the industry's competitive dynamics, allowing them to gain insight into what is happening in the industry.

Industry analysis provides business entities or investors with the necessary information, which will help develop effective roadmaps. It can help owners understand the various opportunities and threats the business will face so that they can take steps to take advantage of the opportunities effectively.

In Financial Year 20, organized retail contributed approximately11-12% of the total retail industry. This share is expected to grow to 16% over the next 5-6 years, with the organized retail market growing at a CAGR of 20%. Interestingly, over the past5 years, the organized retail market has grown by 19%, increasing the penetration rate from 7% to about 11%.

Before making certain investment decisions, investors perform analysis to have comprehensive knowledge of the sector or industry in which they want to invest. Therefore, it is very important to analyze before making a decision. Because it helps us to assess the economic and financial prospects of an industry, a sector of the economy. By performing an analysis, it helps to identify areas where strategic changes will help maximize profits. It provides us with knowledge of untapped opportunities in the industry and economy.

A sector can have several industries under it, for example, a retail sector can have multiple industries like groceries, clothing, convenience, etc. Therefore, industry analysis will help to understand which industry within that sector is likely to perform better.

Industry and sector analysis helps to assess a company's future outlook and identify strategies that improve the efficiency of a particular sector, not just the industry.

It is a tool for developing competitive strategies that serve as the best defense for these potential candidates.

Sector and industry analysis is subjective and does not guarantee success. However, first understanding the sector and then determining the industry may not work well and you need to perform a bottom-up analysis that is, analyze the industry first, and then analyze the industry.

Analysis of sectors and industries allows investors to identify specific strengths and weaknesses of an organization.

Once you have opened the Demat account perform sector analysis with the help of Ticker where you can get the sector-wise ratios for free and stocks of similar industries categorized under different strategies called bundles. These exclusive features of Ticker are absolutely free.

So, start your investment journey because if you don’t succeed at first failure may be your style.