Top Down

I love numbers and use them extensively in analyzing businesses..

Big numbers, Small numbers, Growing numbers, Consistently growing numbers, Falling numbers, numbers product numbers, numbers by numbers, old numbers, new numbers, projected numbers, actual numbers… I simply love them all!

However, number are best when used practically and with common sense. My love for them begins to fade away the moment they become too complex (getting to 2'nd / 3'rd decimal places or getting into complex integrals and derivatives)

For a business in an unorganized, unexplored or immature sector or market, I like to start with Top Down analysis to evaluate Market Potential and the size of Opportunity and then narrow it down to the specific business based on its target Market Share, Customer Segmentation etc... This approach is particularly good for market leaders in upcoming/fast growing sectors… and what better place to start than our population ~1.1 billion or ~6.5 billion if you plans for globalization :)

Note: What follows in top down analysis is usually very crude maths.

There are lot of things that are left open in this Top Down analysis

• How much Capital Investments, Debt or Equity dilution is required to get there
• What will be the competitive environment in a matured market. Can the market share and margins be protected?

I like to track things like growth, profitability, equity dilutions (shareholder value) etc more regularly through the course of the journey, Quarter over Quarter or Year over Year… to see if the business is heading in the right direction…

[Note: There can be differences of magnitude in what you estimated and where market lands up]

In fact, from my experience, there will always be. However, you will thoroughly enjoy and learn from the journey as the story pans out.

Further, there may be lots of barriers/influencers ranging from Infrastructure, Government Policies, Regulatory Bodies, Capital constrains etc that not only dominate in determining the scale of the business, but also the profitability equation and the time it takes to scale out...

On the positive side, the business may expand through:

1. Growth in Market share
2. New dimensions for revenue, like Fixed line phones, Internet service provider, Adv's over Mobile, DTH services etc 
3. Mergers and Acquisitions
4. Any new businesses from Cash Flow, like Retail, Reality, Insurance etc

On the negative side, while the market may expand for the sector:

1. The business may lose Market Share
2. Unfavorable equity dilution (Company grows bigger in size, but shareholders become poorer in value)
3. The business may lose its margins and profitability (like Aviation)
1. Intense competition or regulatory barriers
2. Capital constraints / High Debt
4. Lack of tax Benefits / government policies
5. Governing Interest rates, economic situation etc

More to come...