201201017 cfo summit

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201201017 cfo summit

  1. 1. Reassessing Risk in Russia: Emerging Confidence in EmergingMarkets5th CFO Summit Emerging Europe & CISOctober 17, 2012Alexey Kornya, Vice President and Chief Financial Officer
  2. 2. Contents MTS at a glance ▪ MTS at a glance Emerging confidence in emerging marketsRussia: local liquidity and financing 2
  3. 3. MTS at a glance +34% The leading telecommunications provider in Total Group 11 293.2 12 318.7 13 181.0 9 867.3 Russia and the Commonwealth of Independent Revenue States (CIS) (USD mln) MTS one of the BRANDZ™ Top 100 Most 2009 2010 2011 2012E Powerful Brands ‐ MTS included in the ranking in 2008, 2009, 2010, 108.1 Total 106.1 2011 and 2012 Subscribers* 105.6 ‐ 85th brand overall with a brand value of $9.5 bln 102.4 (millions) Level III ADRs (NYSE:MBT) have been publicly 2009 2010 2011 Q2 2012 traded on the New York Stock Exchange since June 2000 Subscribers, Russia 2009 2010 2011 Q2 2012 MTS is majority-owned by Sistema JSFC Mobile (millions) 69.3 71.4 70.0 69.6 (LSE:SSA), the largest diversified public HH passed, 000s 7 502 9 890 11 433 11 507 financial corporation BB Internet, 000s 1 298 1 805 2 152 2 285 in Russia and the CIS Pay TV, 000s 1 762 2 580 2 987 2 937 *Including subscribers of Mobile TeleSystems LLC, a mobile operator in Belarus, in which MTS owns a 49% stake and CDMA subscribers in Ukraine. 3
  4. 4. Contents MTS at a glance Emerging confidence in emerging ▪ Emerging markets are drivers of economic growth markets ▪ Budgetary discipline and ample reserves ▪ Low indebtednessRussia: local liquidity and financing ▪ Sovereign ratings fail to reflect economic reality ▪ Corporate credit ratings lagging ▪ Volatile stock market 4
  5. 5. Emerging markets are drivers of economic growth GDP growth forecast 11% Emerging markets are growing and consuming ‐ IMF forecasts about 4% GDP growth for 2012-2013 9% in Russia 7% ‐ Higher growth rates in developing Asia 5% 4.3% 4.3% 3.8% ‐ Consumption growth in BRIC markets markedly 3.7% higher than developing markets 3% ‐ Russian market characterized by moderate growth and high disposable income 1% -1% 2010 2011 2012E 2013E Russia USA Europe OECD Developing Asia Latin America Emerging markets are working ‐ Unemployment in emerging markets generally Source: IMF, OECD data and forecast lower than developed markets ‐ Russia boasted a moderate unemployment rate of Real consumption growth forecast 5.2% in August 2012 12% 10% Inflation is under control 8% ‐ Russia’s inflation rate of 4.6% for January-August 6% 5.2% 2012 4.8% 4% 4.4% 2% 0% 2011 2012E 2013E -2% USA Russia Europe 5 Brazil China India Source: Citi Bank
  6. 6. Russia: budgetary discipline and ample reservesRussian Central Bank international reserves (USD bln)* Fiscal balance (% of GDP)** 4%600 530*500 2% 483 511 448 0%400 464 456 2011 2012E 2013E300 289 -2% 168200 117 -4% 68100 48 28 37 -6% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -8% Europe USA Russia China Brazil Source: Russian Central Bank; *as of October 2012 Source: Citi BankWorld reserves of foreign exchange and gold as of 2011  Russia has budgetary discipline – Minimal government budget deficit as a % of GDP Country Foreign exchange and gold reserves, USD bln compared to developed world and BRIC countries China 3,236 Japan 1,259 EU 813 Russia 499  Russia has substantial international reserves* – ≈$530 bln in international reserves as of October 2012 Brazil 352 – 19-fold increase since 2000 India 298 – Trending upward Source: CIA World Factbook 6*Includes hard-currency reserves, gold, IMF , supplementary foreign exchange reserves held with IMF **The balance of a governments tax revenues, plus any proceeds from asset sales, less government spending
  7. 7. Russia: low indebtedness Government debt (% of GDP) 120% 112% 103% 107% 100% 94% 94% Among leading global economic 87% 80% regions, Russia boasts low 69% 69% 69% 54% 54% 55% government debt 60% ‐ Russia has a very low government debt as a % 40% of GDP in comparison with the USA and 15% 16% 16% Europe 20% 8% 9% 8% ‐ Debt level to remain stable 0% 2011 2012E 2013E USA Europe India Brazil China Russia Source: Citi Bank Household debt (% of GDP) 0% 20% 40% 60% 80% 100% Household resilience UK 98% ‐ Russian households are virtually unleveraged, US 88% in particular when compared to household Spain 82% debt in Western markets Japan 68% ‐ Russia has the lowest household debt among Germany 59% the BRIC countries France 49% Italy 46% China 29% Brazil 15% India 9% 7 Russia 8% Source: McKinsey, 2012
  8. 8. Russia: Sovereign ratings fail to reflect economic reality Unlike developed market peers, S&P Gov’t debt GDP Current Gov’t debt GDP rating/ S&P merging market governments have Country outlook 2007 Growth rating/ 2012F Growth maintained debt levels while adjusting (% of GDP) 2007 (% of GDP) 2012F 2007 outlook to lower-growth environments Germany AAA/stable 65% 3.3% AAA/stable 83% 0.9% Russian sovereign ratings, although USA AAA/stable 69% 1.9% AA+/neg 107% 2.2% investment grade, remain relatively Spain AAA/stable 46% 3.5% BBB+/neg 91% -1.5% low compared to the developed countries despite a demonstrable Italy A+/stable 95% 1.7% BBB+/neg 129% -2.3% track record of: ‐ Strong hard currency reserves ‐ Budgetary discipline China A/positive 20% 14.2% AA-/stable 16% 7.8% ‐ Low household indebtedness ‐ Low governmental indebtedness Russia BBB+/pos 7% 8.5% BBB/stable 9% 3.7% Since before the crisis, S&P has Brazil BB+/pos 55% 6.1% BBB/stable 54% 1.5% actually reduced the sovereign debt India BBB-/stable 79% 9.8% BBB-/neg 69% 4.9% rating for Russia despite stable GDP Source of forecasts: IMF, Citi bank growth and fiscal discipline 8
  9. 9. Russia: corporate credit ratings lagging S&P credit ratings of leading telecommunications companies Post-Crisis 2009 – 2011 Net Debt/ Rating agencies continue S&P credit FCF LTM Current S&P FCF Net Debt/ to attach too much risk to Company rating/outlook (USD mln)* credit rating/ (USD mln)* LTM OIBDA OIBDA 2009 2009 outlook 2011 2011 Russian issuers despite 2009 profitable growth, stable Telecom BBB/stable 1,296 3.1 BBB/negative 3,361 2.3 Italia cash flows and low debt Bharti BBB-/stable -304 0.4x BB+/stable 1,508 3.1x levels Portugal BBB/stable 1,084 2.4x BB+/negative 987 2.9x Telecom MTS BB/stable 1,264 1.2x BB/stable 1,265 1.3x Russian companies Multiples of leading publicly traded telecommunications companies remain undervalued EV/EBITDA P/E EV/EBITDA P/E Revenue OIBDA compared to other EM Company Growth 2009 margin 2009 2009 2012 2012 – 2012E 2012E and European ‘problem’ Vodacom 5.1x 10.9x 6.8x 13.1x 19% 35% market peers despite stronger or comparable Turkcell 4.8x 11.7x 5.4x 12.1x 13% 31% growth prospects, higher Portugal profitability, stable FCF 4.8x 7.4x 5.0x 12.0x stable 33% Telecom generation and a stronger MTS 4.6x 14.7x 4.4x 9.8x 15% 41-42% balance sheet Source: Goldman Sachs. FCF is calculated as OPCF minus Capex 9
  10. 10. Russia: volatile stock market Russian RTS Index dynamics vs. other stock markets 120 100 Russian stock market is vulnerable to 80 global turmoil, as the major capital investments come from abroad 60 40 20 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-08 Apr-08 Jan-09 Apr-09 Jan-10 Apr-10 Jan-11 Apr-11 Jan-12 Apr-12 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 RTS FTSE100 DJI S&P500 Bovespa Nikkei225 Hang Seng Capital outflow from Russia during 2008 crisis At the end of 2008 major capital 14% outflows from the Russian market 12% 10% were recorded ‐ Russia places no restrictions on capital; 8% minimal currency and FOREX controls 6% enable capital to move freely in and out 4% of the Russian market 2% 0% Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jan-07 Apr-07 Jan-08 Apr-08 Jan-09 Apr-09 Jan-10 Apr-10 Jan-11 Apr-11 Jan-12 Apr-12 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Russia as % of MSCI Allocation of GEM funds to Russia 10 Source: HSBC
  11. 11. Contents MTS at a glance Emerging confidence in emerging marketsRussia: local liquidity and financing ▪ Emergence of local liquidity and financing ▪ Growth in financing ▪ Increase in local funds borrowing ▪ Growth in financing: supporting CAPEX ▪ MTS migrates debt portfolio from USD to RUB ▪ MTS optimizes repayment schedule 11
  12. 12. Russia: emergence of local liquidity and financing Interest rate of CBRF operations Since 2009, the Central Bank of Russia has % Mosprime CB Repo Ref Rate CPI % taken leading role in stimulating local capital 24 24 markets 22 22 20 20 ‐ Liquidity support has enabled Russian 18 18 corporates to take advantage of reasonable 16 16 borrowing rates through multiple debt 14 14 instruments 12 12 ‐ Capital infusion has attracted other investors 10 10 and enabled leading banks to increase their 8 8 credit portfolios 6 6 4 4 ‐ Emergence of local markets enabled many 2 2 leading Russian corporates to access credit 0 0 when Western markets were frozen 06.08 12.08 06.09 12.09 06.10 12.10 06.11 12.11 06.12 Source: CBRF, GKS Key factors impacting Central Bank decisions CBRF balance for liquidity ‐ CPI growth rates vs. forecast RUB bln RUB bln ‐ Risks of an economic slowdown 900 900 700 700 ‐ Control of interest rates and forex volatility 500 500 300 300 Central Bank increases volume of refinancing 100 100 -100 -100 ‐ Current volume of refinancing reaches RUB 2.5 -300 06.08 12.08 06.09 12.09 06.10 12.10 06.11 12.11 06.12 -300 trillion -500 -500 ‐ More than 1.5-fold potential increase is -700 -700 -900 -900 announced -1 100 -1100 ‐ The largest volume of liquidity provided is -1 300 -1300 offered on the weekly repo auctions, which -1 500 -1500 volumes have increased substantially in the last Source: CBRF year Balance of transactions is calculated as a net worth between Bank of Russia liabilities to the banking sector and Bank of Russia claims on the banking sector 12
  13. 13. Growth in financing Volume of assets of typical Russian bank mln RUB Russian banks are increasing in size and 1 600 000 01.01.2008 scope to service various sectors of economy 1 400 000 01.01.2009 1 200 000 01.01.2010 Sustained volume of lending to companies 1 000 000 01.01.2011 of various sizes and individuals ‐ 40% growth rate in 2011 800 000 01.01.2012 600 000 01.09.2012 Significant gap between large and small 400 000 banks reflect: 200 000 ‐ Capital-intensity of Russian economy (e.g. 0 oil/gas, metals/mining and infrastructure Biggest Medium Small sectors prominent) Source: CBRF ‐ Consolidation in marketplace ‐ Expansion of consumer credit Average4Q 2012 short-term loans extended by Russian credit rates on institutions % % Assets growth of large banks is 2-3 times 18 in USD in EUR in RUB 18 higher than that of medium and small banks 16 16 14 14 12 12 Competition and broader liquidity pool 10 10 steadily driving rates downward 8 8 6 6 4 4 2 2 0 0 2008 2009 2010 2011 2012 Source: CBRF 13
  14. 14. Increase in local funds borrowing Volume of corporate and private loans, RUB trl Credit volumes are growing at high rates 40 +12% +39% +16%* 0.1 In years prior to 2008 global financial 30 5.3 crisis, Russian corporates began looking 0.1 0.1 3.0 0.1 at the developing ruble bond market for 20 2.5 3.5 4.5 2.7 1.7 funding 3.3 25.4 10 18.0 15.8 17.1 Liquidity issues abroad have heightened interest in Ruble-based bonds since 2009 0 2009 2010 2011 Sep 2012 Legal Entities in RUB Legal Entities in Foreign Currency Though markets are fickle like in the Individuals in RUB Individuals in Foreign Currency West, ruble bonds are increasingly being *Compared to September 2011; Source: CBRF used to finance Russian corporates Volume of corporate bonds, RUB bln 160 160 Overall the Russian bond market has 140 140 made corporates less depending on 120 +36% 120 Western markets and provide access to 100 100 liquidity to meet the needs of local bln USD bln USD 80 80 companies +141% 60 60 40 40 20 RuBonds Eurobonds 20 0 0 03.2009 09.2009 03.2010 09.2010 03.2011 09.2011 03.2012 09.2012 Source: Cbonds agency 14
  15. 15. Growth in financing: supporting CAPEX Capital of typical Russian bank Increasing asset base, government support mln RUB and more local lending have enabled small, 01.01.2008 180 000 medium and large Russian banks to increase 01.01.2009 150 000 their capital base 01.01.2010 120 000 01.01.2011 90 000 01.01.2012 Capital growth rates of Russian banks 60 000 01.09.2012 exceeded volumes of lending growth rates 30 000 during 2009-2011 0 Biggest Medium Smallest Source: CBRF 4Q 2012 Corporate investments (fixed assets) in Russia (RUB trl) Investments in fixed assets in Russia have 12 10.8 +5.5% been increasing steadily since 2009 driven 10 8.7 9.2 7.9 by more funding on better terms available 8 6.6 on the internal market 6 4 2 0 2007 2008 2009 2010 2011 2012E Source: GKS, Ministry of Economic Development 15
  16. 16. Example: MTS migrates debt portfolio from USD to RUB Currency distribution as of FY2008 From 2008 until now, MTS has migrated its primary debt currency from USD to RUB RUB EUR 20% 11% The company has utilized bilateral facilities, 69% ECA-backed facilities, Eurobonds and hedging to more closely align its debt portfolio to its primary currency of revenue USD Duration: 2.9 years At the same time, the Company has Currency distribution as of Q3 2012* succeeded in increase the duration of its financing and lowering its average cost of EUR RUB debt 3% 76% 21% USD Duration: 3.8 years 16 *Including Forex hedging in the amount of $300 mln as of Q3 2012
  17. 17. Example: MTS optimizes repayment schedule Repayment of major debt instruments since 2009 MTS’s debt payment RUB schedule now features EUR multiple instruments USD 56 bln predominantly in $238 mln rubles to match debt $630 $300 mln with currency of $360 $413 $162 mln $400 18 bln $400 mln mln mln mln mln primary revenue and ING Gazprombank ING EBRD, EIB, ING Eurobond Sberbank Gazprombank Eurobond cash generation, syndicated syndicated NIB syndicated loan loan loan optimize borrowing costs, increase tenor 2009 2010 2012 and maximize flexibility in the management of the Company’s debt Debt repayment schedule as of Q3 2012 (USD mln) portfolio 730 730 58 323 323 7 1079 1079 1079 325 1 278 1 221 325 440 1 281 750 136 440 750 2 454 318 246 202 199 85 93 247 142 92 Q4 2012 2013 2014 2015 2016 2017 Thereafter Loans in other currencies (USD/EUR) Eurobond Loans in rubles Ruble bonds 17

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