Size of Opportunity

Q&A: Questions & Answers
1

Many good investors mention that one should also look at the size of the opportunity (how big the market is for the products of the company). What are some good ways to gauge that? Making general assumptions like India has shortage of power, so there is a huge opportunity. But thinking on these lines may not be a good way to gauge the size of the opportunity as its not a very objective analysis and on similar lines we can find shortage of almost anything like affordable homes, infrastructure etc. Recently one investor made a pertinent remark in favor of United Spirits that India is a young country and alcohol is one thing which can’t be digitized and is immune from Chinese imports. So its a huge market for USL. But these are very subjective ways to understanding the market size.

In my opinion some of the methods to fine tune or to bring more objectivity to measure the market size are-

  1. One way is to get this information from the Annual Reports. Usually the good ARs contain the market size of the product in which they are competing and their position.

  2. Reading reports from some good consulting firms like the below link focuses on consumer spending in India

https://www.bcgperspectives.com/content/articles/consumer_products_retail_the_tiger_roars/

What are the other ways to gauge the opportunity size? Also how important is to focus on opportunity size?

2

Hi Neerav,

If measuring size of opportunity is so easy as feeding data like growth rate, discount rate to excel sheet, and getting a value, every single value investor would have been using it. The problem is that it is not easy to deduce, not easy to quantifiable, and not so easy to verify quickly.

Scuttlebutt can be an easy way to find size of opportunity. But again, just doing scuttlebutt cant give you the complete idea.

To feel the size of opportunity, one need to develop bird-eye/macro view of the economy. Which in turns requires hell a lot of reading, developing a complete different set of mental model.

I shall give you one single example : In the book " Making the Modern World: Materials and Dematerialization by Vaclav Smil" (which I am yet to read) The author has shown how China has consumed more cements in 5-10yrs, which USA consumed in last 80-100yrs. So, you get a feel how much cement would be needed by India, if it wishes to be like China of 2014 in say next 10-15yrs.

Another alternative can be what Donald calls “doing Phd in the stock”. You need to study all competitor/macro for the stock, and than you will have the gauge of “oppurtunity size”. But again, you cant choose 100s of stocks, dozen of sectors to do a Phd type research. It will be a too much effort exercise.

3

Interesting topic. Size of opportunity is one of the first things I personally look for in a stock. But as you have rightly put, there is no easy way to put a number on it. Neither is it an absolute number.

Does the industry have perpetual (or atleast very long term) demand? e.g. medicines, food, education etc are areas where demand is unlikely to change drastically in a short period. When (& if) a change does come, it will be gradual and I should be able to make out that things are deteriorating.

Is the industry growing or stagnant? If growing, then why is it growing? e.g. the aggregate food demand in the world will grow at the rate of population growth. Components of it will vary as people move up the income chain so more of proteins will replace carbs etc etc.

** Can the industry be replaced by happenings / inventions that can be envisioned in the future? **e.g. I find it difficult to believe that the cable TV / DTH industry will survive in its current form as people will start moving to “on-demand, always-on” entertainment on the personal devices (mobiles / tabs / wearable glasses etc). So, unless there is a very compelling business case, I will not put money in DTH companies.

Once I am clear about these points, then comes the other aspects like who can benefit from this, is it a regulated industry (like in the example of power companies, they are regulated entities with a pre-determined RoE), management quality, competitive landscape and valuations.

To answer all these questions, as Subhash has already suggested, one of the key is to read as much as possible about the companies and industries - books, trade journals, blogs (of reputed or known bloggers), magazines, consulting reports, annual reports of companies in the industry and allied industries (both Indian and global…for example, if you want to invest in say the increasing consumption of mobile data theme, then read ARs of Bharti, Idea, Vodafone UK, AT&T, Ericsson, Siemens etc). That’s a lot of reading :wink: But slowly you will start getting a feel of the industry.

4

Hi Neerav

One example to gauge the size of opportunity is below:

If housing is to be provided to everyone by 2025 around 1 crore houses need to be built every year and almost all of them will take housing loan. Considering an average home loan size of Rs 15 lakh total market size is Rs 15 lakh crore and if we assume that 3% spread as profits then Rs 45000 crore profit is possible. Considering a PE ratio of 20 total market cap of allhousing financecompanies can be Rs 9 lakh crore. Current market cap is around Rs 2 lakh crore only. The above figures are just back of the envelope calculations for an approximate idea and actual figures can be higher or lower due to various other factors.

Regards

Naveen

5

Hi Neerav

One example to gauge the size of opportunity is below:

If housing is to be provided to everyone by 2025 around 1 crore houses need to be built every year and almost all of them will take housing loan. Considering an average home loan size of Rs 15 lakh total market size is Rs 15 lakh crore and if we assume that 3% spread as profits then Rs 45000 crore profit is possible. Considering a PE ratio of 20 total market cap of allhousing financecompanies can be Rs 9 lakh crore. Current market cap is around Rs 2 lakh crore only. The above figures are just back of the envelope calculations for an approximate idea and actual figures can be higher or lower due to various other factors.

Regards

Naveen

6

Pharma sector has the biggest opportunity size imo.

People of the world are getting old, will get older (median age will rise), people of developing world will get wealthier (will spend more on healthcare and medicines), will get medically insured etc

So this is one sector which is most promising.

IT sector is also an evergreen sector. It comes 2nd after Pharma sector in the opportunity size.

7

3rd in the ranking order imo is the retail lending sector )- home loans, vehicle loans, personal loans etc. This sector is specific to India.

8

Another sector which looks promising although known is Agriculture.

How are we going to mechanize the farming needs in India. With growing rural India and govt push to reduce poverty, who is going to do the farming. Farmer’s don’t want to do it, educated don’t want to do it.

Opportunity size is huge. Only two listed company’s - Escorts and VST Tillers.

International agriculture mechanizing companies have market cap in billions.

Someone will have to manufacture the mechanized machines to farm the land and feed billions of Indians.

It is going to be very troublesome.

Then there is Seeds, Irrigation - Every part of agriculture is going to be troublesome and tremendous push needed if we are to feed billions of Indians and export after that.