Reassessing Risk in Russia: Emerging Confidence in Emerging Markets
5th CFO Summit Emerging Europe & CIS October 17, 2012
Alexey Kornya, Vice President and Chief Financial Officer
Contents
MTS at a glance
▪ MTS at a glance
Emerging confidence in emerging markets Russia: local liquidity and financing
2
MTS at a glance +34%
The leading telecommunications provider in Russia and the Commonwealth of Independent States (CIS)
Total Group Revenue
12 318.7
13 181.0
2010
2011
2012E
106.1
105.6
2010
2011
Q2 2012
2010
2011
Q2 2012
(USD mln)
MTS one of the BRANDZ™ Top 100 Most Powerful Brands ‐ MTS included in the ranking in 2008, 2009, 2010, 2011 and 2012 ‐ 85th brand overall with a brand value of $9.5 bln
9 867.3
11 293.2
2009
108.1
Total Subscribers* 102.4
(millions)
Level III ADRs (NYSE:MBT) have been publicly traded on the New York Stock Exchange since June 2000
2009
Subscribers, Russia
MTS is majority-owned by Sistema JSFC (LSE:SSA), the largest diversified public financial corporation in Russia and the CIS
2009
Mobile (millions)
69.3
71.4
70.0
69.6
HH passed, 000s
7 502
9 890
11 433
11 507
BB Internet, 000s
1 298
1 805
2 152
2 285
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
Contents
MTS at a glance Emerging confidence in emerging markets Russia: local liquidity and financing
▪ ▪ ▪ ▪ ▪ ▪
Emerging markets are drivers of economic growth Budgetary discipline and ample reserves Low indebtedness Sovereign ratings fail to reflect economic reality Corporate credit ratings lagging Volatile stock market
4
Emerging markets are drivers of economic growth GDP growth forecast
Emerging markets are growing and consuming ‐ IMF forecasts about 4% GDP growth for 2012-2013 in Russia ‐ Higher growth rates in developing Asia ‐ Consumption growth in BRIC markets markedly higher than developing markets ‐ Russian market characterized by moderate growth and high disposable income
11% 9% 7% 5%
3.7%
3.8%
1%
Emerging markets are working ‐ Unemployment in emerging markets generally lower than developed markets ‐ Russia boasted a moderate unemployment rate of 5.2% in August 2012
4.3%
3%
-1%
4.3%
2010 Russia OECD
2011
2012E USA Developing Asia
2013E Europe Latin America
Source: IMF, OECD data and forecast
Real consumption growth forecast 12% 10%
Inflation is under control ‐ Russia’s inflation rate of 4.6% for January-August 2012
8% 6%
4.8%
5.2% 4.4%
4% 2% 0% -2%
2011 USA Brazil Source: Citi Bank
2012E Russia China
2013E Europe India
5
Russia: budgetary discipline and ample reserves Russian Central Bank international reserves (USD bln)*
Fiscal balance (% of GDP)** 4%
600
530*
500
448 464 456
400
483 511
289
300 200 100
28
37
48
68
0% 2011
2012E
2013E
-2%
168 117
-4% -6%
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Russian Central Bank; *as of October 2012
World reserves of foreign exchange and gold as of 2011 Country
2%
Foreign exchange and gold reserves, USD bln
China
3,236
Japan
1,259
EU
813
Russia
499
Brazil
352
India
298
-8%
Europe
USA
Russia
China
Brazil
Source: Citi Bank
Russia has budgetary discipline – Minimal government budget deficit as a % of GDP compared to developed world and BRIC countries
Russia has substantial international reserves* – ≈$530 bln in international reserves as of October 2012 – 19-fold increase since 2000 – Trending upward
Source: CIA World Factbook
6 *Includes hard-currency reserves, gold, IMF , supplementary foreign exchange reserves held with IMF
**The balance of a government's tax revenues, plus any proceeds from asset sales, less government spending
Russia: low indebtedness Government debt (% of GDP) 120%
Among leading global economic regions, Russia boasts low government debt ‐ Russia has a very low government debt as a % of GDP in comparison with the USA and Europe ‐ Debt level to remain stable
100%
94%
87%
80%
112%
107%
103%
69%
69%
54%
60%
94% 69% 55%
54%
40% 16% 9%
15% 8%
20%
16% 8%
0% 2011 USA Europe
2012E India Brazil
China
2013E Russia
Source: Citi Bank
Household debt (% of GDP) 0%
Household resilience ‐ Russian households are virtually unleveraged, in particular when compared to household debt in Western markets ‐ Russia has the lowest household debt among the BRIC countries
20%
40%
60%
80%
100%
UK
98%
US
88%
Spain
82%
Japan
68%
Germany
59%
France Italy
49% 46%
China
29%
Brazil India Russia
15% 9% 8% Source: McKinsey, 2012
7
Russia: Sovereign ratings fail to reflect economic reality
Unlike developed market peers, merging market governments have maintained debt levels while adjusting to lower-growth environments Russian sovereign ratings, although investment grade, remain relatively low compared to the developed countries despite a demonstrable track record of: ‐ ‐ ‐ ‐
Strong hard currency reserves Budgetary discipline Low household indebtedness Low governmental indebtedness
Since before the crisis, S&P has actually reduced the sovereign debt rating for Russia despite stable GDP growth and fiscal discipline
Country
S&P rating/ outlook 2007
Gov’t debt 2007 (% of GDP)
GDP Growth 2007
Current S&P rating/ outlook
Gov’t debt 2012F (% of GDP)
GDP Growth 2012F
Germany
AAA/stable
65%
3.3%
AAA/stable
83%
0.9%
USA
AAA/stable
69%
1.9%
AA+/neg
107%
2.2%
Spain
AAA/stable
46%
3.5%
BBB+/neg
91%
-1.5%
Italy
A+/stable
95%
1.7%
BBB+/neg
129%
-2.3%
China
A/positive
20%
14.2%
AA-/stable
16%
7.8%
Russia
BBB+/pos
7%
8.5%
BBB/stable
9%
3.7%
Brazil
BB+/pos
55%
6.1%
BBB/stable
54%
1.5%
India
BBB-/stable
79%
9.8%
BBB-/neg
69%
4.9%
Source of forecasts: IMF, Citi bank
8
Russia: corporate credit ratings lagging
S&P credit ratings of leading telecommunications companies Post-Crisis 2009 – 2011
Rating agencies continue to attach too much risk to Russian issuers despite profitable growth, stable cash flows and low debt levels
Russian companies remain undervalued compared to other EM and European ‘problem’ market peers despite stronger or comparable growth prospects, higher profitability, stable FCF generation and a stronger balance sheet
Company
S&P credit rating/outlook 2009
FCF (USD mln)* 2009
Net Debt/ LTM OIBDA 2009
Current S&P credit rating/ outlook
FCF (USD mln)* 2011
Net Debt/ LTM OIBDA 2011
Telecom Italia
BBB/stable
1,296
3.1
BBB/negative
3,361
2.3
Bharti
BBB-/stable
-304
0.4x
BB+/stable
1,508
3.1x
Portugal Telecom
BBB/stable
1,084
2.4x
BB+/negative
987
2.9x
MTS
BB/stable
1,264
1.2x
BB/stable
1,265
1.3x
Multiples of leading publicly traded telecommunications companies Company
EV/EBITDA 2009
P/E 2009
EV/EBITDA 2012
P/E 2012
Revenue Growth 2009 – 2012E
OIBDA margin 2012E
Vodacom
5.1x
10.9x
6.8x
13.1x
19%
35%
Turkcell
4.8x
11.7x
5.4x
12.1x
13%
31%
Portugal Telecom
4.8x
7.4x
5.0x
12.0x
stable
33%
MTS
4.6x
14.7x
4.4x
9.8x
15%
41-42%
Source: Goldman Sachs. FCF is calculated as OPCF minus Capex
9
Russia: volatile stock market Russian RTS Index dynamics vs. other stock markets 120 100
Russian stock market is vulnerable to global turmoil, as the major capital investments come from abroad
80 60 40
RTS
FTSE100
DJI
S&P500
Bovespa
Nikkei225
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
20
Hang Seng
Capital outflow from Russia during 2008 crisis 12% 10% 8% 6% 4% 2%
Russia as % of MSCI Source: HSBC
Allocation of GEM funds to Russia
10
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
0% Jul-07
‐ Russia places no restrictions on capital; minimal currency and FOREX controls enable capital to move freely in and out of the Russian market
14%
Apr-07
At the end of 2008 major capital outflows from the Russian market were recorded
Jan-07
Contents
MTS at a glance Emerging confidence in emerging markets Russia: 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
Russia: emergence of local liquidity and financing
Since 2009, the Central Bank of Russia has taken leading role in stimulating local capital markets ‐ Liquidity support has enabled Russian corporates to take advantage of reasonable borrowing rates through multiple debt instruments ‐ Capital infusion has attracted other investors and enabled leading banks to increase their credit portfolios ‐ Emergence of local markets enabled many leading Russian corporates to access credit when Western markets were frozen
Interest rate of CBRF operations %
Mosprime
24 22 20 18 16 14 12 10 8 6 4 2 0
CB Repo
CPI %
Ref Rate
24 22 20 18 16 14 12 10 8 6 4 2 0
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 ‐ CPI growth rates vs. forecast ‐ Risks of an economic slowdown ‐ Control of interest rates and forex volatility
Central Bank increases volume of refinancing ‐ Current volume of refinancing reaches RUB 2.5 trillion ‐ More than 1.5-fold potential increase is announced ‐ The largest volume of liquidity provided is offered on the weekly repo auctions, which volumes have increased substantially in the last year
CBRF balance for liquidity RUB bln 900 700 500 300 100 -100 06.08 -300 -500 -700 -900 -1 100 -1 300 -1 500
12.08
RUB bln
06.09
12.09
06.10
12.10
06.11
12.11
06.12
900 700 500 300 100 -100 -300 -500 -700 -900 -1100 -1300 -1500
Source: CBRF 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
Growth in financing Volume of assets of typical Russian bank
Russian banks are increasing in size and scope to service various sectors of economy Sustained volume of lending to companies of various sizes and individuals ‐ 40% growth rate in 2011
Significant gap between large and small banks reflect: ‐ Capital-intensity of Russian economy (e.g. oil/gas, metals/mining and infrastructure sectors prominent) ‐ Consolidation in marketplace ‐ Expansion of consumer credit
Assets growth of large banks is 2-3 times higher than that of medium and small banks
Competition and broader liquidity pool steadily driving rates downward
mln RUB
1 600 000
01.01.2008
1 400 000
01.01.2009
1 200 000
01.01.2010
1 000 000
01.01.2011
800 000
01.01.2012
600 000
01.09.2012
400 000 200 000 0 Source: CBRF
Biggest
Medium
Small
2012 Average4Q rates on short-term loans extended by Russian credit institutions 18 16 14 12 10 8 6 4 2 0
%
%
2008 Source: CBRF
in USD
2009
2010
in EUR
2011
in RUB
2012
18 16 14 12 10 8 6 4 2 0
13
Increase in local funds borrowing Volume of corporate and private loans, RUB trl
Credit volumes are growing at high rates
+39%
+12%
40
+16%* 0.1
Liquidity issues abroad have heightened interest in Ruble-based bonds since 2009
0.1 3.5 2.7
0.1 2.5 3.3
20 10
0.1 4.5 1.7
25.4 15.8
18.0
2009
2010
17.1
0 Legal Entities in RUB Individuals in RUB
Though markets are fickle like in the West, ruble bonds are increasingly being used to finance Russian corporates Overall the Russian bond market has made corporates less depending on Western markets and provide access to liquidity to meet the needs of local companies
5.3 3.0
30
2011
Sep 2012
Legal Entities in Foreign Currency Individuals in Foreign Currency
*Compared to September 2011; Source: CBRF
Volume of corporate bonds, RUB bln 160
160
140
140 +36%
120
120 100
100 80
80
+141%
60
60
40
40
RuBonds
20
Eurobonds
20 0
0 03.2009
09.2009
Source: Cbonds agency
03.2010
09.2010
03.2011
09.2011
03.2012
09.2012
14
bln USD
In years prior to 2008 global financial crisis, Russian corporates began looking at the developing ruble bond market for funding
bln USD
Growth in financing: supporting CAPEX Capital of typical Russian bank
Increasing asset base, government support and more local lending have enabled small, medium and large Russian banks to increase their capital base
Capital growth rates of Russian banks exceeded volumes of lending growth rates during 2009-2011
mln RUB
01.01.2008
180 000
01.01.2009
150 000
01.01.2010
120 000
01.01.2011
90 000
01.01.2012 01.09.2012
60 000 30 000
0 Biggest
Medium
Smallest
Source: CBRF
4Q 2012 Corporate investments (fixed assets) in Russia (RUB trl)
Investments in fixed assets in Russia have been increasing steadily since 2009 driven by more funding on better terms available on the internal market
12
10.8
10 8
+5.5%
9.2
8.7
7.9
2008
2009
6.6
6 4
2 0 2007
Source: GKS, Ministry of Economic Development
2010
2011
2012E
15
Example: MTS migrates debt portfolio from USD to RUB
From 2008 until now, MTS has migrated its primary debt currency from USD to RUB
Currency distribution as of FY2008 RUB EUR
11%
The company has utilized bilateral facilities, ECA-backed facilities, Eurobonds and hedging to more closely align its debt portfolio to its primary currency of revenue
20% 69%
USD
Duration: 2.9 years
At the same time, the Company has succeeded in increase the duration of its financing and lowering its average cost of debt
Currency distribution as of Q3 2012* RUB
EUR 3%
76%
21%
USD
Duration: 3.8 years
*Including Forex hedging in the amount of $300 mln as of Q3 2012
16
Example: MTS optimizes repayment schedule Repayment of major debt instruments since 2009
MTS’s debt payment schedule now features multiple instruments predominantly in rubles to match debt with currency of primary revenue and cash generation, optimize borrowing costs, increase tenor and maximize flexibility in the management of the Company’s debt portfolio
RUB EUR USD 56 bln
$238 mln $630 mln
$300 mln $360 mln
ING Gazprombank ING syndicated syndicated loan loan
$413 mln
$162 mln
$400 mln
18 bln
EBRD, EIB, NIB
ING syndicated loan
Eurobond
Sberbank Gazprombank Eurobond
2009
2010
$400 mln
2012
Debt repayment schedule as of Q3 2012 (USD mln)
730 730
58
323 323 7
2 93
325 325 136 454 318
440 440 246 247
Q4 2012 2013 2014 Loans in other currencies (USD/EUR)
1079 1 281
1079 1 278
1079 1 221
202
199
142
2015 Eurobond
750 750
85 92 2016 2017 Thereafter Loans in rubles Ruble bonds
17