In this Post our focus will be on understanding the issues with extracting right estimates of historical Industry sizes & growth. As an analyst needs to take a judgement of future opportunity size while he analyzes a business it becomes extremely important than first to get the right estimates of current & historical industry size and past growth rates.
Sounds so simple right open an Annual report - management would have served industry size data on a platter to you. It's a basic data point why worry about it. Get ready for a fun ride!!!
Case Study 1: Inconsistent estimates between industry players: PI industries Vs Dhanuka Agritech
Even within the same industry you will find different management giving broad ranges of industry. For example in agrochemicals industry according to management of Pi Industries the industry size for domestic market is approx. 40,000-45,000 crores whereas according to the peer Dhanuka Agritech same goes to 60,000 Crores. Even this 60,000 crs number is not obtained straight forward. We reverse calculated it through market share data.
Case Study 2: Historical Data suggest wide ranges: Cera Sanitary ware & modular Kitchen segment
Second let's take example of Cera Sanitary ware which announced it's ambition to enter Molded kitchen Segment. We tried to find relevant industry size of the same. Please see our findings below.
As Per Research & Markets: "The Indian modular kitchen market stood at $206 million (approx 1400 crs) in 2018" (Source:https://www.globenewswire.com/news-release/2019/05/09/1820484/0/en/The-Indian-Modular-Kitchen-Market-Stood-at-206-Million-in-2018-and-is-Projected-to-Grow-at-a-CAGR-of-Over-27-During-2019-2024.html)
Indian Retailer: As per their estimates in 2015 itself the Indian Modular Kitchen Market was 2500 Crores" (Source: https://www.indianretailer.com/magazine/2015/february/Modular-Kitchen-Cooking-up-a-growth-story.m93-1-3/ )
Business Standard at the Time of Asian Paints Acquisition of Sleek in 2013: "According to analysts, Rs 2,000-3,000 crore organized modular kitchen market in India is growing at 25% CAGR (penetration less than 10%)". The organized market itself is 2000 crores with 10% penetration leading to a market size of 20,000 crores in 2013 itself.
(Source:https://www.business-standard.com/article/markets/asian-paints-sleek-acquisition-not-a-game-changer-113032000365_1.html)
So basically the Indian Modular Furniture market can be anywhere between 1400 Crores to 20,000 Crores. Hilarious right 😀😀😀?
Case Study 3: Complex Dataset required to calculate the Industry Size: Case in Point of a molecule/drug in Pharma
Imagine if you are analyzing a US export oriented Indian Pharma company which basically sells generic medicines in US and manufactures them in India. In order to sell a generic medicine in US a Indian pharma company will have to file a ANDA to USFDA details of which will be available in Orange Book. Once a company gets the ANDA approval (after US FDA Audits) they can than produce & sell medicines in USA.
So in Order to just calculate the potential industry size of this company you will have to calculate things
a) Total size of existing generic molecules they sell (obviously focus on the major revenue generator for the company) - try to search for IMS health market size data OR look for a press release of the company which has got the approval of the molecule or current articles on websites like https://www.pharmacompass.com/ to get latest estimates of market size of these medicines
b) The potential market size of the current ANDA's in process (basically ANDA's currently files by the company) - Find out the innovator company selling the patented drug and check the market size of patented molecules mainly in the annual report of the innovator company. Based on that consider the price erosion based on the number of competitors on the first day. Historical analysis should help here.
The general benchmark is: 2-4 players price erosion is 80%, 5-10 competitors price erosion is 95-97%. 10+ players lead to 98%+ price erosion.
Welcome to the practical world of calculating Industry Size 😀😀😀
By any chance you come into the school of though that this might be "analysis paralysis" - Itna research kyun karna hai - isse thodhi paisa banega 😀. Please read the following two https://forum.valuepickr.com/ thread on Natco Pharma (https://forum.valuepickr.com/t/natco-pharma-imminent-growth-cycle/46994) and Laurus Labs (https://forum.valuepickr.com/t/laurus-labs-a-much-bigger-journey-ahead/40104) to understand this hard is actually done even by investors managing India's biggest & finest equity research forum and by people who are veterans investing in the markets for over decades.
Case Study 4: The Connection between Revenue Figures, Market Share & Industry Size Don't make sense: Manpasand Vs Parle
Here let us quote wonderful excerpts from one of the landmark research reports from the perspective of Forensic Accounting in India - The Curious Case of Manpasand Beverages by Amit Mantri of 2point2capital.
On Industry Growth Rates
" Manpasand’s claims of market growth rates also seem to widely differ from those of competition.
On The curious case of Fruits Up’s market leadership
"In July 2014, Manpasand launched its non-Mango products under the Fruits Up and Manpasand ORS brand. Fruits Up comprises (1) fruit-based carbonated drinks (think Appy Fizz, not Mirinda) in grape, orange and lemon flavors (2) fruit drinks with higher fruit content in apple, litchi, guava, orange and mango flavors. Fruits Up and Manpasand ORS together generated over 115 crs in revenues in FY16 (i.e. in less than 2 years of launch). In Q2 FY17 alone, Fruits Up is reported to have generated revenues of over 40 crs.
While Mango Sip’s success has been remarkable, that of Fruits Up is stunning as it comes in a niche product category of fruit-based carbonated drinks. Parle Agro’s Appy Fizz (launched in 2005) was largely responsible for creating this category and is considered the clear market leader. However, if Fruits Up’s numbers are to be believed it is already larger than Appy Fizz. This has been again done without any advertising support while Appy Fizz has run national TV ad campaigns featuring Priyanka Chopra. As per a sell-side analyst report, Fruits Up was present only in Gujarat and Maharashtra till mid-2015. This raises an important question – How did Fruits Up become larger than Appy Fizz without investing in advertising and with a much smaller geographical footprint? That too within 2 years of launch."
Full Blog: https://2point2capital.com/blog/index.php/a2016/12/06/the-curious-case-of-manpasand-beverages/
Case Study 5: Existence of huge unorganized market practically makes it impossible to evaluate the Industry Size
Let's pick up a few industries
a) Tobacco industry the size of duplicate/illicit cigarettes are just a guess.
b) Education Sector/Coaching Industry numbers are just a guess
c) Gold Loan Finance Industry actual industry numbers are just a guess (because unorganized numbers and organized numbers vary drastically from one report to another )
Some industries don't have formal organizations, associations and neither representation of governmental bodies. In such industries if you don't want to shoot in the dark at max you can track the organized markets by totaling revenues or some operational metrics like AUMs in Gold loan of all the listed and major private players.
Case Study 6: Please Don't get us started on industry size for renewables energy. The answer is no one Knows 😫 😣😣
We hope you get the point - even extracting the current industry size might be extremely troublesome.
Sometime all the stars align for you and some industry associations or trade journals or sell side analyst through primary research or consultant have done some real ground work to give you a logical estimate.
For example if you are covering AMC (Asset management company) or Insurance as an Industry then you’ll get Industry size on their association’s website which is AMFI or IRDA respectively. Hence, creating a exhaustive research repository is the first step if you want to conduct quality analysis. (Read our blog on how to prepare a research repository here).