By Mahdi Goodarzi & Navid Kalhor
Have you ever wondered about investing in a market that you do not have deep information on the rules of the game in that market? Did you ask yourself where to start the journey?
As you might know, stock markets are involved with a wide range of intricacies and in this respect EPS estimate is among those underlying components that can guide or misguide you. Studying the performance of the companies on TSE in this article, we can clearly see that the projections on earnings did not come true.
As accurate analysis of Iran’ stock market is the right every foreign investor should have at his/her disposal, this urges the need to find a trustworthy partner from the ones available locally. With this brief introduction, let’s begin our survey.
Listed companies, post a report at the end of each FY, entitled as “earnings preliminary predictions” on SEO’s designated website “Codal”, to disclose their financial results. EPS forecast is one of the basic meters for the investors to make financial decisions. The report, in fact, gives out the managers’ opinion on expenditures, revenues, and profitability of the related business in the coming year.
Investigating the reliability and relevance of this practice, a survey done by one prominent Economic Daily shows that the initial forecasts on earnings, conducted by the respective firms, at the start of the Financial Year, generally deviates much from what is actually realized at the end of the period.
Due to many internal and external economic factors in the last five years, namely currency rate fluctuations, high inflation in the previous administration, global commodities ballooning prices alongside high quantity of idle liquidity in the mentioned period were shortlisted as the major reversing drivers of the projected earnings.
As to the economy of Iran and what this country went through in the five years to the present time, we can list some factors of note, contributing to wild divergences in the sales and revenues of different sectors in the stock market. They are as follows:
- During the calendar years (2012/13-2013/14), currency rate inflation and domestic currency rial devaluation, reinforced by oil-price leapfrogging and gigantic oil revenues, were a big surprise to the economy, never experienced after the Revolution in 1979.
- Poor economic management and lack of scheduled plans to inject the cash windfall derailed the foreign exchange from the appropriate path. American dollar deemed to act as a safe haven to curb the asset price falls for the investors. This escalated exchange prices to register record highs in just a short while.
- Alongside the fundamental changes in the economy, the listed companies in the market in that period were granted price raise permits or saw hikes in the revenues for their exporting products. This brought about tremendous upbeat in their EPS and their price inflation in the equities market plus recurrent earnings adjustments, resulting in demands for many companies on TSE and bullish trends for their respective tickers.
- A short while later, the deposit interest rate went up and the depositors demanded an interest rate higher than the inflation from the bankers. Attractive rates of bank deposits gave rise to abnormal accumulation of funds in the banks and financial institutions.
That said above, the authorities’ measures to supervise and control unbridled average increase in prices came by with some unexpected repercussions like record low liquidity and flagging money velocity, terminating in dramatic high interest rates and establishment of one of the deepest recessions ever in the economic history of Iran.
The chart that comes at the end of this article illustrates the average performances of all sectors in Tehran Stock Exchange.
The studies result indicates that the largest sector in the stock exchange demonstrates the biggest deviation against its predictions. As you can see in the table, the chemicals covered averagely 428 percent of their forecast budget in the five FYs earlier. It has averagely covered shy of 4.3 times more than the earnings initial projections, announced at the beginning of the FY, so to speak.
Also, we can observe a positive correlation between Metal Sector’s performance and global commodities prices. This category has recorded high averages in the earlier 5 years and illustrates considerable deviation from the norm.
The most comprehensive data research in the mentioned time period suggests that sectors such as Banking, Radio communications, Engineering and Technical Services, and Other Financial Intermediaries outperformed their EPS projections. The Banking and Financial Institutions managed to cover 92% of their initial earnings, forecasted in the above time period on average.
Meanwhile, we can truly claim that most car manufacturers’ estimates are not to be much depended on, with Automotives registering the most erratic predictions.
Almost all companies quoted on the exchange market are not able to deliver accurate forecasts on their subsequent financial years. We can see prevalent deviations from the initial EPS announcements and plethora of positive and negative adjustments consequently.
Now, to deeply investigate the reasons giving rise to the deviations appears to be of vital importance. To do so, delving into top-line and bottom-line financial figures of the companies thoroughly, understanding the mechanics of decision making in the country in macro-economic level, and the extent to which the different sectors are impacted by internal and external factors might come handy to shed some light on the divergences witnessed in the earnings per share estimates.
Commodity producers are located among those sectors that are influenced by both global price movements and their own internal pricing policies, set by their respective market regulators. This is considered as another determining driving force behind wild volatility of the companies quoted on TSE.
Basically companies that enjoy government’s supportive pricing rates or are affected by its diverse tariffs on importing and exporting products are among the firms, experiencing the most fluctuations in the period, surveyed.
Now if someone intends to invest their money and capital in the capital market of Iran, it is wise to bear in mind that access to a domestically-located consulting services of a valid financial body supervised by SEO, with ample experience and expertise in the field, is the key to success under such circumstances. This is noteworthy as the investment environment in Iran is such that a person needs to be fully aware of what are highlighted in the following plus all conventional methods and approaches available to them and their advisors. They need to consider issues such as:
- Major shareholder(s)’ behavior with the minority shareholders
- Companies’ top level management’s treatment with beneficiaries
- The major shareholder(s)’ plans for subsidiaries
- Awareness of trading strategies of major shareholder(s) and main practitioners of capital market
- Decision- making mechanism of major shareholder(s)
- Dividend distribution policy of listed companies
What we narrated above, are basic requirements of large- scale trading for the offshore investors interested in investment in Iran’s untapped stock market. It is undeniable that full command of points listed stays at unquestionable monopoly of domestic securities firms and brokers as those are particulars specific to this market and out of touch with investors overseas and their respective non-domestic foreign consultants.
Thus, we can easily say that for portfolio managers, fund managers, asset managers and the like, collaborating with local partners and extending business cooperation with them seems to bear much more fruit.
In fact, different markets ask for different investment tools and this cannot be built up just overnight. It requires long years of acquaintance with local companies and their major shareholders, combined with interpersonal interactions with them. It requires to have sensed the booms and busts of the market, to have worked out its noticeable upbeats and downbeats. It requires deep understanding and analyses of the activities of main players in the market.
Without doubt, you need to test the waters before you decide to step into it. Consequently, there should be there someone as wise and wary as possible to lead you to the intended destination and here in our example a well-positioned local partner not strange with the overall climate of the Iranian capital market and with a good track record, regarding the matter.