List of useful assumptions / margins by industry - for paper DCF / LBOs in interviews

LOL... your break out is too broad.

TMT as in Tech and Telecom are 180s from each other in terms of operations. Tech is a high growth and high multiple industry where most of the assets are software and intangible related where as Telecoms are more-or-less a utility and are low marging (especially compared to Tech).

You can't assess margins and such broadly. These types of questions and this stuff isn't something you just study and memorize. If you get questions like this in an interview its because they want to see how you relate finance knowledge to how you approach something or think about it.

LOL at "luxury." I assume that covers caviar, Rolls Royces and fur coats?

I understand where you are trying to go with this.. If you are looking for this kind of information check out the Ibis industry reports since they have industry average margins and profitability information or check out something like yahoo finance where it looks at relative metrics of x company vs its industry.

A lot of it ends up being pretty common sense the more you learn... Like a EBITDA margin makes sense for an industrials or chemicals business where as something tech based is a complete shot in the dark based on how broad the sector is, but something 30% and up is expected.

I'd break it down into a more broad view on EBITDA margins, being:

• Commodity products and services tend to achieve EBITDA margins somewhere between 5 - 15%
• The larger the scale of the business, the higher the margin I'd expect, as fixed cost overheads are spread over larger number of units
• Moving out of ordinary commodities, the more specialised end of what are otherwise be commodities tend to attract 15 to 30% EBITDA margins
• As you move into more specialised goods and services where there are stronger competitive forces at play (refer to Porter's 5 forces), you can will see higher margins

The key here is thinking of margins as a product of competition. This is not strictly true, but will suffice for an interview.

The logic is that the higher the margins in an industry segment, the more people will be attracted to enter into that segment and the increase in competition and increase in supply will lead reduced prices, which reduces margins.

What is the level of competitive threat, then? Off the top of my head, that's a product of:

• What stage the industry segment is in eg early stage growth? mature?
• The Porter's 5 forces model ie barriers to entry/threat of new entrants, supplier bargaining strength, customer bargaining strength, threat of substitutes, competition between existing segment players
• The extra forces impacting competition not Porter's five eg risk of deregulation, globalisation, new technology

Also think about product differentiation within the segment (eg Coke vs Pepsi - both can maintain premium pricing).

Using this sort of analysis, you can look at a business and an industry segment and come up with a fairly good instinctive guess at what the margins should be.

At an interview level where you're not expected to be an expert in any industry segment, this sort of analysis is better than memorising a whole swath of segment data.

It also demonstrates that you have analytical abilities rather than just having memorised a scorecard without any understanding of the WHY of the memorised numbers.

An example of the competition-based view on margins - I was looking at a company that produced specialised packaging products earlier this year.

Although it and some of the key specialised packaging comps were achieving >20% EBITDA margins, my DD into the packaging tech indicated it was not that difficult for the more commoditised producers to move into the higher margin segment. The commoditised players were suffering from low margins, had scale and some were listed, so had the incentive and access to funding to buy the tech necessary to move into the higher margin production.

Bargaining power of customers was mainly a concern about customer's ability to switch to competitors' products. There were a few stickiness factors, but those could be overcome by competitors in a 6 - 18 month timeframe.

Also, the state of the market was pretty green, I suspected there would be a lot of price competition in trying to win first time customer contracts. In turn, that would impact pricing for the company's existing contracts, which didn't provide strong pricing protection for the company.

Bargaining power of suppliers (mainly plastic resin) wasn't a big concern, as industry standard practice was to pass through resin price changes to customer pricing, with pass throughs built into the contracts.

Threat of substitutes wasn't a big concern, as market trends were favouring the type of packaging I was looking at.

Globalisation and threat of cheap competing goods from China was low, as the plastic resin price is pretty globalised and resin makes up much more of COGS than labour, so cheap Chinese labour plus transportation costs would produce a higher price than onshore production in the US. US producers were also better able to handle JIT production that reduced customer warehousing costs compared to imports from offshore.

Using this competition analysis, I took the view that there was significant risk of new entrants (commoditised players entering the specialised space), which would lead to price competition. As a result, the current >20% EBITDA margins were only sustainable for 2-3 years and that we should model margin deterioration over the next 5 years, ending up at around 15 - 17% levels by year 6.

My useless comment above notwithstanding, I really think everyone here is approaching this wrong.

If I am interviewing you, I'm not necessarily looking for you to come up with a bunch of assumptions on the spot, nor am I expecting you to be an industry expert. Rather, I'd be looking for you to ask the right questions which allow you to build your assumptions. In fact, even if you were to come up with some accurate assumptions on your own, I'd be troubled by your lack of curiosity and the fact you just assumed this company is like any other. Doing that gives me no insight into your thought process.