Tehran Stock Exchange has been on the downturn for almost one and a half year. Currently, there are 316 companies listed on TSE with a combined market capital of around 2,980 trillion rials ($91 billion). From the listed companies’ perspective, the lifting of sanctions will have three major effects:
Imports, Exports to Normalize
The sanctions made the import of most equipment and industrial machinery very difficult if not impossible. Most public companies have faced severe difficulties trying to maintain or expand their fixed capital. These difficulties came in the form of bypassing the sanctions through shipping equipment across several intermediate destinations, or transferring money through several agents, which increased their procurement costs and reduced their transparency and ultimately led to the formation and spread of corruption among some of these companies.
However, most companies were not able to dodge the sanctions even at the high expenses mentioned. For example, the National Iranian Copper Industries Company, with a market cap of $2.5 billion, plans to raise its production level to 700,000 tons of copper cathode per annum pending for several years. This is the case for most leading segments of TSE.
The sanctions have also affected the inventory and working capital of many public companies. The best example of this case is the auto manufacturing segment. A company like Pars Khodro used to have contracts with Nissan and Renault. Pars Khodro manufactured CKD cars before the sanctions crippled its operations.
Iran has one of the largest auto markets in the region, which can gain momentum right after the lifting of sanctions. Another example is the pharmaceutical segment of TSE, where listed companies rely on imports in their inventory inputs.
In addition to imports, there is the case of exports. Public companies listed in TSE have lost significant shares in international markets. Prior to sanctions, Glencore used to buy 40% to 50% of NICICO’s copper, which later reduced to 5% to 10%. Other companies such as North Drilling Company or MAPNA have similar difficulties with regard to their foreign customers.
The lifting of sanctions can resolve such issues almost immediately, since most of them will be simply settled by signing a contract.
Overhaul of Ownership Structures
The second major impact is to do with the ownership of TSE listed companies. Many institutional shareholders of public companies are willing to unload their shares and give up their seats on the companies’ boards since these companies no longer serve their mission as a parent company. But when share prices are lower than the company’s liquidation value, they avoid realizing a loss on their holdings.
As soon as market prices reach their minimum required levels of return, they will sell their holdings and a widespread modification in the ownership structures of many listed companies is expected. This will largely improve the management of these companies. A Ferrari is a Ferrari after all, but its performance on the track largely depends on who is driving it. The lifting of sanctions will eventually put good drivers behind the wheels of listed companies, which will lead to large improvements in their profitability and competitiveness.
Unloading Non-Operating Assets
Many listed companies are facing a liquidity crisis, while holding significant illiquid non-operating assets mostly in the form of land. Since the real-estate market is in recession, these companies are facing difficulties trying to sell their non-operating properties at fair value and using the cash to finance their operating budget.
As sanctions relief proceeds, the risk of running a business will substantially decrease, thus many investors will opt for starting new businesses. Typically, starting a new business means setting a new office, which means demand will grow in the real-estate market. As this new demand enters the market, it will drive the real-estate market out of recession. This enables many listed companies to unload their non-operating land and properties, and use the cash to get their businesses going.
Banks, for example, are holding massive amounts of real estate that cannot be laid off under the current market conditions. Manufacturers that hold land in Tehran are another example, as they are willing to sell their land to get their factories going in other cities.
