In this article, considering the predicted adjustments in both official exchange rate and market exchange rates in the first section, we will now study the effect of this element on major industries within Tehran Stock Exchange. For the year 1396 (20th March 2018 year-end) two scenarios are expected for the exchange rate:
Scenario One: Assigning a unified rate for the exchange rates which is expected to be determined close to or higher than the current free exchange rate.
Scenario two: The growth rate of both market exchange rate and official exchange rate would be adjusted according to the inflation rate (the growth of these two rates can be different)
Based on these two scenarios, profitability of various industries can be different as described below:
Petrochemical Industries: Prices for petrochemical and chemical products are determined based on market exchange rate of US Dollar, however the prices of the feed stock for these industries are different. Some of these companies obtain their feed stock with official rate of exchange and some others based on the market exchange rate. In the first scenario considering growth in the cost of goods sold of petrochemical companies and a constant income comparing to the past, the profitability of these companies will decline compared to the previous fiscal year. However, in the second scenario it is the amount of change in each of these exchange rates that determine whether the profitability of the companies will increase or decrease; if these rates change by the same amount, the profitability of these companies will rise, the reason being that their entire sale will change under the influence of changes in the exchange rate, but the rate of feed stock of these companies which constitutes a portion of the cost of goods sold will increase by a lesser mount (in Rial terms). On the other hand, assuming the same growth in the exchange rates, the percentage of sale and cost of goods sold of both will grow but their resultant in terms of Rial will be positive for the companies.
Base Metals and Metal Ore Industries: In the base metal industry, sale and cost of goods sold are determined according to the market exchange rate. It is worth mentioning that the price of iron ore and iron conglomerate in Iran are determined based on prices of Khuzestan steel bullion bars. The price of bullion and other metallic products are based on market exchange rate which, in case of any growth in the price of these products, the price of iron ore and conglomerate will also increase. Now considering the first scenario, the sale of these companies will stay constant; this is while we will witness growth in overhead costs and direct wages which will eventually lead to a decline in the profitability of these companies. However, in the second scenario, these companies will experience a growth in their sales and as in the case of companies within the petrochemical industry the value sale will grow at a rate higher than the cost of goods sold which in the end will lead to a growth in the profitability of these companies. Companies in the metallic ore industry have a similar situation.
Pharmaceutical Industry: One of the industries that use official exchange rate for its production is the pharmaceutical industry. Now either a unified exchange rate is implemented or both the market exchange rate and the official exchange rate experience growth by the same amount, this industry will experience growth in the cost of goods sold of its products. During previous years, these companies have constantly obtained permission to increase the price of their products, which have always been higher than the growth in the exchange rate. If this repeats again, these companies will still experience growth in their profitability or in the worst case scenario will face a stagnant profit. In case of no growth in sale prices of this industry, profitability of these companies will decline.
Refinery Industry and oil products: Prices at which feed stock are purchased and products of these companies are sold are both determined based on official exchange rate. In both scenarios considered above and bearing in mind the growing nature of the exchange rate, profitability of these companies will be raised.
Other industries within the Iranian capital market will be affected indirectly by the rate of exchange, which will not be studied in this article. It is worth mentioning that in the above analysis, foreign investors should modify companies’ profitability based on the invested exchange rate (exchange rate risk), which has been pointed out in the previous articles.