Why is sectoral analysis important?

Hello, I am Umesh Tripathi, and we are learning the concepts of Fundamental Analysis. 
In this video, we will learn what sectoral analysis is and why it is important for us as investors. 
Here, we will also explore how many different approaches there are to evaluate various sectors, what sector-specific frameworks and value chains are, and the variations within sector analysis. 

When we talk about sector-based analysis, we are essentially analysing a specific segment of the economy — whether it is the banking sector, the IT sector, or any other sector. 
A sector is a part of the larger economic ecosystem, and sectoral analysis helps us identify specific trends in that sector. While doing an overall analysis of these sectors, we study opportunities, risks, and financials. 
It also helps us understand how macroeconomic factors impact a particular sector and the businesses within that industry group. 

Basically, sector-based analysis helps us identify high-growth sectors — sectors that are expected to see significant growth over the next 5–10 years. 
It also assists businesses in benchmarking performance and allows portfolio managers to diversify intelligently. 

Approaches to Sector-Based Analysis 

To evaluate different sectors, we can follow: 

1. Top-Down Approach 

2. Bottom-Up Approach 

3. Comparative Sector Analysis, where we compare multiple sectors and try to identify which one is likely to perform better in terms of growth, and then decide accordingly. 

4. SWOT Approach — where we analyse a sector’s strengths, weaknesses, opportunities, and threats. 

We have discussed top-down and bottom-up approaches in earlier videos. In the top-down approach, we first study the overall economy, macroeconomic factors, then move to sector analysis, and finally analyse companies within that sector. 

In the bottom-up approach, the sequence is reversed — we start by identifying fundamentally strong companies without first focusing on the sector. We look for companies with strong revenue and profitability track records and assess whether that performance can continue over the next 5–10 years. 

Sector-Specific Frameworks and Value Chains 

For different sectors, there are specific frameworks and value chains that help us assess their overall performance. 
These frameworks are designed to help analyse the structure, performance, and strategies of companies in a given industry. They help identify value drivers, growth factors, and risks associated with the sector, and also reflect its overall functioning and competitiveness. 

Examples of sector-specific frameworks: 

• Banking & Finance: CAMELS framework (Capital, Asset Management, Earnings, Liquidity, Sensitivity) 

• Manufacturing: Porter’s Value Chain, Lean Manufacturing, Six Sigma — to assess strength and growth potential 

• Retail & FMCG: 4Ps and 7Ps of Marketing, inventory turnover cycle 

• IT & Technology: Agile, DevOps maturity models, Digital Capability Framework 

• Healthcare: Patient Journey Mapping, WHO Health System Framework 

Understanding Value Chains 

A value chain is the range of activities a company undertakes to bring a product or service from concept to delivery and beyond. 

For example, in the IT sector: 

• Gather client requirements 

• Scope the project (define tools/frameworks to be used) 

• Develop and test the product/service 

• Deploy at the client’s end 

• Provide after-delivery support 

The value chain has two parts: 

1. Primary Activities — inbound logistics, operations, outbound logistics, marketing & sales, services 

2. Support Activities — infrastructure, HR management, technology development, procurement 

In manufacturing, before production, companies procure raw materials — this falls under procurement in the support activities. 

Sector-specific value chain examples: 

• Agriculture: Input supply → Farming → Harvesting → Processing → Marketing & Retail 

• IT: Requirement gathering → Project scoping → Development → Testing → Deployment → Support 

• Automobile Manufacturing: Design → Component sourcing → Assembly → Quality control → Distribution → After-sales service (focus on supply chain, automation, and cost control) 

• E-commerce: Product listing → Order management → Warehousing → Delivery → Returns & support (focus on last-mile delivery, user interface, and customer satisfaction) 

Variations Within the Same Sector 

Two companies in the same sector can perform very differently. 
For example, Company XYZ (a large-cap with a market cap above ₹20,000 crore) and Company ABC (a micro-cap) may face very different challenges. 
XYZ might enjoy a monopoly and customer loyalty, while ABC may struggle to sell, convince customers, and acquire new clients. 

Performance variations can be influenced by factors like company size, market leadership, geographical reach, and product/service portfolio. 

Key Takeaway 

Sectoral analysis is a critical tool for making investment decisions. It goes beyond company-level analysis and gives us a macro perspective. 
Always combine financial ratio analysis of companies with sectoral analysis for a complete picture. 

That’s all for this video. See you in the next one. 

Investments in securities markets are subject to market risks. Please read all related documents carefully before investing.