Defining the industry

An industry is a group of companies that produce similar products or services and compete for the same set of customers. SEBI describes an industry as “a set of enterprises that operate in the same line of business and are affected by similar economic forces”.

The definition matters because it determines the peer group for valuation multiples, benchmarking, and risk assessment. If the industry boundary is too broad, the analysis becomes noisy; if it is too narrow, important competitive dynamics may be missed.

In the NISM exam, you will often be asked to select the correct industry classification for a given security or to justify why a particular firm belongs to a specific industry. Remember that the definition is functional – it focuses on product similarity and common market drivers, not merely on legal or corporate structure.

Analysts rely on standardized classification schemes to ensure consistency across research reports. The most widely used global systems are the North American Industry Classification System (NAICS) and the older Standard Industrial Classification (SIC). In India, the Securities and Exchange Board of India (SEBI) adopts a sector‑based taxonomy that aligns with the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) sector indices.

For equity research, NISM expects you to be familiar with the NSE sector classification (e.g., Banking, FMCG, Information Technology, Telecom) and the corresponding sub‑sectors. These classifications are reflected in the NIFTY indices, which are used as benchmarks for performance attribution.

Exam‑wise, a question may present a company’s primary activity and ask you to pick the correct SEBI sector code. Knowing the key descriptors of each sector (e.g., “deposit taking, loan disbursement” for Banking) helps you avoid common mismatches.

Four attributes help you delineate an industry: product/service similarity, common demand drivers, similar cost structures, and exposure to the same macro‑economic variables (interest rates, commodity prices, regulatory changes).

Size and growth rate are quantitative signals. An industry with a market‑wide CAGR above 10% is considered high‑growth, influencing valuation multiples. Conversely, a stagnant or declining industry often warrants a discount in earnings multiples.

Competitive structure – ranging from perfect competition to monopoly – shapes profitability. The NISM syllabus expects you to recognise whether an industry is fragmented, concentrated, or oligopolistic, as this impacts the choice of valuation method.

Concentration measures how market share is distributed among the leading firms. High concentration often signals pricing power and lower competitive pressure, which influences earnings forecasts and risk premiums.

The most common metric in Indian equity research is the Herfindahl‑Hirschman Index (HHI). SEBI references HHI when assessing market dominance, especially for regulatory filings related to mergers and acquisitions.

For the exam, you may be asked to calculate HHI or interpret a given HHI value. Remember the thresholds: HHI < 1,500 indicates a competitive market, 1,500‑2,500 denotes moderate concentration, and > 2,500 signals high concentration.

Step 1 – Review the company’s primary revenue streams from its annual report and identify the main product or service line.

Step 2 – Map the activity to the most appropriate SEBI sector and sub‑sector using the NSE classification table. Cross‑check with NAICS or SIC codes if the client is an international investor.

Step 3 – Analyse the competitive landscape: list the top 5 competitors, compute their market shares, and calculate the HHI to confirm the concentration level.

Step 4 – Document any cross‑industry exposure (e.g., a conglomerate with both Banking and Insurance operations) and justify the chosen primary industry based on revenue contribution (>50% rule).

Step 5 – Validate the definition against SEBI’s “Research Analyst Code of Conduct” to ensure compliance before publishing the report.

Pitfall 1 – Relying solely on the company’s self‑description. Firms may market‑position themselves in a broader category to attract investors, which can mislead the analyst.

Pitfall 2 – Ignoring revenue thresholds. SEBI recommends using the >50% revenue rule to decide the primary industry; otherwise, a dual‑industry approach may be required.

Pitfall 3 – Overlooking cross‑border operations. For multinational firms, Indian analysts must still align with the Indian classification system for the domestic share of business.

Pitfall 4 – Forgetting to update the classification when the business model evolves (e.g., a traditional bank entering fintech). Regular review ensures the research remains relevant.

SEBI’s Research Analyst Code of Conduct mandates that every research report clearly state the industry definition and the methodology used to select peers. The code also requires disclosure of any concentration metrics such as HHI when the analyst comments on market power.

For mutual fund distributors, the NISM Series XV exam tests whether you can map a security to the correct SEBI sector code, as this determines the fund’s category compliance. Failure to correctly define the industry can lead to mis‑classification of a fund’s investment mandate.

In practice, the compliance team reviews the industry definition section of each report before approval. Understanding the regulatory expectations helps you answer scenario‑based questions that involve compliance checks.