According to Maslow’s theory (Hierarchy of Needs), need for foodstuff has always been one of the main necessities of human society. Therefore, in most cases companies that are active in the field of food supply, face adequate demand in case of absence of any substitute commodities and unexpected price volatilities.
There are numerous companies within Tehran Stock Exchange that are active in this field, resulting in the industry’s share of 1.9 percent of the market value. Companies active in the food industry are categorized into different groups including: cooking oil production, beverage, chocolate, agriculture products, Animal Feed, dairy products and other food products. These categories are demonstrated in the following table:
Presence of food industry in the capital market has encouraged companies to raise the quality of their products and maintain a stability in production quality within standards. Moreover, transparency in economic activities and further access to companies’ information lead to better knowledge for the clients and increasing their sense of trust for investment in this area. As mentioned above, food industry is part of non-periodical industries.; i.e. during all seasons and in various economic conditions, producers face demand for their products. However, during the past years some companies couldn’t attract investors due to their low profitability and even loss in some cases, low volume of transactions and unfavorable financial situations. But in the past two years, food industry has become one of the most popular industries within the stock market and brings a high profitability for its shareholders. Another reason for the promising attitude from shareholders towards this industry is their low capital in comparison to other companies, leading to a higher price/earnings ratio for these companies.
Status of Food Industry within the Stock Market:
As mentioned briefly in the above section, current market value of companies that are active in the food industry is roughly 65 thousand billion IRR, representing less than 2 percent of total market value. Furthermore, within the past year, value of transactions of this industry within the capital market has been equal to 32 billion IRR with a 5% share of total value of transactions. This industry, without considering raising capital, has realized more than 250 percent return for its investors within the period of Ordibehesht 1391 and Ordibehesht 1396(Solar Year). Considering raising capital, this number rises to 280 percent. Diagram below demonstrates changes in the food industry index during the past 5 years:
Examining the Trend of the Price/Earnings Ratio:
Currently, the average P/E ratio of shares of the companies active in this field is equal to 11.3, which was equal to 7.4 during Ordibehesht of 1391, indicating positive view of investors within this time span. On the other hand, market’s average ratio of 7.5, is a testament to above mentioned statements regarding market conditions for companies active in this industry.
Effective Parameters in Financial Statements:
An important element regarding companies active in this industry, has been the significant reduction in equity within the mentioned 5-year time span. This element from one side can indicate the reduction in operating profit of the companies and on the other side demonstrates the significant increase in non-operational assets. At times, regarding companies’ sales plan and determining the non-operational assets in them, these assets have resulted in a substantial and sharp increase in share prices, but had no important effect on main operation of the company.
The average of the net profit margin for the examined time span in food producing companies has been 7 to 8 percent in the stock market, which is the result of the high level of costs. Considering the growth in financial costs for many of these companies during the past five years, a considerable portion of the realized income, has been spent on repayment of the principal and interest of financial facilities. On the other hand, the substantial increase in general and administrative costs due to inflation have placed additional pressure on these companies. Nevertheless, it should be noted that during the last year and considering implemented policies to control inflation by officials, trend in profitability of companies has slightly improved and assuming stability in these conditions, it seems that in the near future we will witness an improvement in financial situation of companies active in this industry. In the following table, we can observe a summary of most important financial ratios within the three production categories of cooking oil, dairy and other food products.
Major Risks of the Industry:
Exchange Rate Volatility Risk: Since a part of raw materials required by companies that are active in this industry is provided through imports, cost of goods sold is strongly related to the market value of the US Dollar and in many cases to the allocated value of this currency. As a result, unified exchange rate or variations in USD/IRR in the market can lead to significant reduction or increase in profitability of food producing companies.
Risk of Providing Primary Materials: As mentioned in above sections, many companies that are active in this industry provide their required raw materials from abroad. Therefore, political conflicts such as sanctions have substantial impact on profitability of these companies.
Pricing Risk: Pricing of many food products is performed by consumers support organization, which hampers flexibility in pricing for companies and in case of abnormal volatility in cost of goods sold, this element has even resulted in bankruptcy for many companies.
Interest Rate Risk: Since financing of companies within the food industry is accomplished through banks, an increase in banks interest rates will impose substantial financial costs on companies and result in numerous problems for their operations.
Examining the Industry Atmosphere:
A major variable that has great influence on the atmosphere of this industry is population growth as well as the age pyramid of the population. Considering that a large segment of the country’s population is comprised of young people, it seems that this market is still attractive for further investment by companies. By comparing the variety of products of domestic versus foreign companies, the most important issue that comes to the mind of any analyst is low variety in our country’s products. This factor has probably been the reason why international companies have been showing strong inclination to acquire a share of their own in Iranian market. Nevertheless, it is worth noting that presently the atmosphere of this industry is highly challenging, since the large number of illegal companies as well as legal and illegal imports has caused these companies to constantly face instability in their profitability.
Iran’s vast soil, four seasons nature and strong workforce has led this industry to enjoy significant potentials and perhaps the only factor that may be the source of risk is the weakness to benefit from modern global technology. In spite of all this, we have witnessed a non-homogeneous in subsectors of this industry, so that many of the sectors that have significant added value have remained untapped while in sectors including production of cooking oil, tomato paste and condiments like chips and cheese puffs we face numerous products. As a result, due to the lack of sufficient supply in many fields of food production, imports are adequate for domestic demand.
On the other hand, the atmosphere of the food industry is not just limited to food production; it consists of a vast range of other activities as well, including agriculture, packaging, distribution, marketing and retail trade. This results in providing numerous investment opportunities in this industry for the private sector as well as the public sector. Considering that economic decision makers have paid much attention to creating jobs during recent years, by investing in these sectors they can attract large number of specialists in this area. For example, in England 500 thousand jobs are created yearly in the food industry which equals 15 percent of created jobs in their entire economy.