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Transcript of Alexey kornya harriman
Russia: Think Differently
The Harriman Institute, Columbia University April 08, 2013
Alexey Kornya, Vice President and Chief Financial Officer, Mobile Telesystems OJSC (MTS)
▪ MTS dynamics
▪ Farewell to alms
▪ Russia is growing
▪ Russia is working
▪ Russia is saving
▪ Russia lives within means
Contents
2
Russia’s untold growth story
Russia as an “unbanked” market
Opportunities in Russia
MTS Dynamics
3 *Including subscribers of Mobile TeleSystems LLC, a mobile operator in Belarus, in which
MTS owns a 49% stake and CDMA subscribers in Ukraine.
In June 2000, MTS launched its IPO on the New York Stock Exchange. Since the IPO, MTS has transformed itself into
the leading integrated telecommunications provider in Central and Eastern Europe, offering mobile and fixed voice, broadband and pay TV services
2011
Mobile carrier Mobile + fixed broadband + cable TV + retail + banking
Presence in 83 of the Russia’s regions and four
countries: Ukraine, Belarus, Armenia, and Turkmenistan
1,139 employees
62,077 employees
514,000 subscribers
101.2* mln mobile subscribers
71.2 mln mobile subscribers in Russia 11.7 mln households passed with broadband in Russia
2.9 million Pay-TV subscribers in Russia
Annual revenues of $354 million Annual revenues of $12.436 bln
Presence in 19 Russia’s regions
2000 Today
Farewell to alms
4
*In current international prices in purchasing power partity terms, World Bank Data **At US prices in purchasing power parity terms, source: Center of Strategic Research http://www.csr.ru/2009-04-23-10-40-41/381-2013-03-28-08-08-08#_ftn5
***According to the World Barometer survey conducted by Romir/Gallup International/WIN
Gross National Income (GNI) per capita in 2000: $6,660*
In 2000, 5% of Russians survived on less than $2 a day
Gini coefficient in 2000: 0.40
MTS’s growth is reflective of Russia’s tremendous dynamics of its economy and society in 2000 – 2013
Early 2000s
Gross National Income (GNI) per capita in 2011: $20,560
Early 2010s
In 2000 – 2010 real disposable incomes of Russians increased 2.5 times. Incomes were increasing across all strata of the Russian population. In 2000 – 2011, the Gini coefficient reflecting relative income distribution increased only slightly – from 0.40 to 0.42 (compared to 0.47 in US)
Gini coefficient in 2011: 0.42
Russia has overcome absolute poverty
In 2011, the percentage of population living on below $2 a day declined 100 times – to 0.057%
“Cat indicator”: every second household in Russia’s largest cities has a pet, most of them are cats. Russians spend twice as much as Americans on cat food - $401 per year and $220 per year respectively
In 1999, 64.4% of the population had incomes below the US poverty line – $13 a day
By 2010, this number had decreased by more than 2 times – to 30.6%
Russia is growing
5
Source: IMF, OECD data and forecast
GDP growth
Source: Worldbank database
Inflation rate, annual %, consumer prices
4.3% 3.6%
3.7%
-2%
0%
2%
4%
6%
8%
10%
2011 2012 2013EUSA Russia EU Brazil China India
Russia is growing ‐ IMF forecasts 3.7% -3.8% GDP growth for 2013-2014
in Russia
Russia has a burgeoning middle class
‐ Based on the OECD definitions, 55% of households with annual incomes in the $6,000 - $15,000 range were considered ‘middle class’ in 2011. This is much a higher proportion than in the other BRIC economies of Brazil (30%), China (21%) and India (11%).
‐ The number of people with annual incomes in excess $15,000 surged from over 1.4 million in 2005 to more than 20.3 million in 2011 – 14.3% of the population.
Russia has relatively high inflation, though
recently the inflation rate has been going down
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005 2006 2007 2010 2008 2009 2011 2012
Russia is working
Source: CIA The World Factbook
Unemployment rates, 2011
Labor productivity as of GDP per hour worked as % of USA (USA = 100%)
Source: OECD, data as of 2011
21.7%
9.5% 9.3% 9.0% 8.1% 6.6%
0%
5%
10%
15%
20%
25%
Spain EU France USA UK Russia
*Source: European Social Survey, 2010 **Source: Worldbank database
Russia is getting healthier ‐ After a decade of post-Soviet decline, the birth
rate improved nearly 50% from 2000 to 2010 ‐ Russia has also seen life expectancy improve to
68.8 years in 2010 from a post-Soviet low of 64.5 years in 1994 according to the World Bank
Russia is working
‐ Low unemployment rates compared to USA and OECD economies
Russia is well-educated
‐ 99% literacy rate ‐ 39% of the population in the 25-39 years age
group have university degrees, compared to 20% in Germany and 31% in the UK*
‐ Engineering, manufacturing and construction graduates in 2009 - 3.2 per 1000 people in Russia compared to 0.7 per 1000 people in US**
Russia is getting more productive ‐ Labor productivity in Russia has increased
by nearly 50% since 2002 ‐ Still Russia has a lower productivity level than
developed countries; increasing productivity remains one of the key challenges
6 0 50 100 150
Australia
France
Germany
Greece
Korea
Luxembourg
Mexico
Netherlands
Norway
Turkey
United Kingdom
United States
Russian Federation
Russia is saving
7
Source: World Bank, estimates for 2012 – 2013
Fiscal balance (% of GDP)*
Russia has substantial international reserves** – ≈$526 bln in international reserves as of March 2013
– 19-fold increase since 2000
– Trending upward
Russia has budgetary discipline – Minimal government budget deficit as a % of
GDP compared to the developed world and
BRIC countries
**Includes hard-currency reserves, gold, IMF , supplementary foreign exchange reserves held with IMF
Country Foreign exchange and gold reserves, USD mln
China 3,549
Japan 1,351
Russia 561
Taiwan 391
Brazil 371
India 287
World reserves of foreign exchange and gold
Source: CIA World Factbook, December 2012
*The balance of a government's tax revenues, plus any proceeds from asset sales, less government spending
28 37 48
68 117
168
289
464
456 448 483
511 530
0
100
200
300
400
500
600
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-10
-8
-6
-4
-2
0
2
4
6
8
10 BrazilChinaGermanyRussiaUnited States
Russia lives within means
8 Source: McKinsey, 2012
Household debt (% of GDP)
Low government debt ‐ Russia has a very low government debt as a
% of GDP in comparison with the USA, Europe and other BRIC economies
‐ Debt level is not expected to grow
Household resilience ‐ Russian households are virtually
unleveraged, especially when compared to household debt in Western markets
‐ Russia has the lowest household debt among the BRIC countries
98%
88%
82%
68%
59%
49%
46%
29%
15%
9%
8%
0% 20% 40% 60% 80% 100%
UK
US
Spain
Japan
Germany
France
Italy
China
Brazil
India
Russia
103% 107% 112%
87% 94% 94%
69% 69% 69%
54% 54% 55%
15% 16% 16% 8% 9% 8%
0%
20%
40%
60%
80%
100%
120%
2011 2012E 2013E USA Europe India Brazil China Russia
Source: Citi Bank
Government debt (% of GDP)
Russia’s untold growth story
Russia as an “unbanked” market
Opportunities in Russia
Contents
9
▪ Strong growth in retail banking
▪ Growth in retail lending
▪ Expected growth in payments
▪ Global trends: Banking + Telecom?
▪ MTS: seizing opportunities in financial services
▪ Russia’s digital landscape
▪ Russia’s connectivity
US
UK Sw edenSpain
SloveniaSlovakia
Romania
Portugal
Poland
Netherlands
Malta
Lithuania
LatviaItaly
Ireland
Hungary
GreeceGermanyFrance
Finland
Estonia
Czech Republic
Bulgaria
Belgium
Austria
China
Russia
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
-- 10.0 20.0 30.0 40.0 50.0
Strong growth in retail banking
Sources: Local Central Banks, EIU, FactSet as at 30 July 2012 Note: Regression based on Nominal GDP and Total Retail Loans as of 2011
GDP per Capita (€ ‘000)
Re
tail
Loan
s /
GD
P
Regression analysis suggests further growth potential in retail banking
Research analysts expect strong earnings growth in the Russian banking sector
Average EPS Growth CAGR
’11-’14
Russia
15.7%
Latin America
12.2%
Asia ex. Japan
12.2%
Emerging Europe ex.
Russia
7.9%
US
6.2%
Western Europe
(1.4%)
14.4%15.8% 16.8%
2012E 2013E 2014E
6.8% 8.4% 9.2%
2012E 2013E 2014E
13.2%11.7% 11.9%
2012E 2013E 2014E
12.8%10.7%
11.8%
2012E 2013E 2014E
4.0%7.3% 7.5%
2012E 2013E 2014E
3.1% 2.3%(4.9%)
2012E 2013E 2014E
Russia 2011A
Russia 2030E
Russia’s retail loans are expected to grow at 19% CAGR 2011 – 2030 based on regression analysis
10
Growth in retail lending
Revenue in Russian retail loan products sector, RUB bln
Sources: McKinsey, Rosstat, CBRF, Bankir.ru
Retail lending products in Russia by volumes issued, RUB trln
+34% CAGR +7.2% CAGR +6.2%
11
1.9 2.0 2.1 2.2 2.3
0.7 0.7 0.8 0.8 0.9
1.6 1.6 1.8 1.9
2.0 0.3 0.5 0.6
0.7 0.7
2011 2012E 2013E 2014E 2015EConsumer credits Auto loans Mortgage Credit cards
493
719
927
1 189
1 528
2011 2012E 2013E 2014E 2015E
Number of credit cards issued in Russia as at the end of the year, mln Number of credit cards per capita, 2011
5.7
8.9 9.3 8.6
10.0 11.0
11.8 12.7 12.5
14.3 15.2
2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
0.1 0.2 0.2 0.2
0.9
1.7
2.8
Russia China Poland Italy UK USA Japan
Penetration of credit products in Russia is significantly lower than in developed and developing markets Volume of retail lending is forecasted to grow at 7.2% CAGR in 2012-2015 Under-penetration in Russia’s credit cards is even more pronounced than in the broader retail banking and indicates more
rapid expected growth
Expected growth in payments in Russia and globally
The volume of e-payments in 2011 in Russia is estimated at RUB 987 bln
In 2012-2014 the volume of payments and transfers by individuals is expected to grow at an annual rate of 20% in Russia
Quick growth of credit cards penetration will be a driving turnover of payments
2 389 3 225
4 289 5 790 987
1 188
1 354
1 570
3 950
4 490
5 194
6 009
1 732
1 954
2 166
2 400
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
16 000
18 000
2011 2012E 2013E 2014E
Electronic Payments
Payments & Transfers w/o Open Bank Account
Payments & Transfers through Moneys Transfer Systems and Post Office
Payments by Bank Card
Source: IE Market Research Corporation 2011, Yankee Group 2011, Gartner Report 2011, Mobile Payments Today 2011. 12
Gross Value of Global Mobile Payment Transactions, USD bln
2010 2011 2012E 2013E 2014E 2015E
545
245
110
60 30
10
+122.5% CAGR
Mobile penetration globally by far exceeds penetration in financial services: 2 billion credit card users versus 5 billion mobile phone users
Mobile payments will be growing much faster than e-commerce; CAGR of 122.5% is forecasted in mobile payments 2010-2915E compared to only 15% CAGR in turnover of e-commerce
Market volume for payments and money transfer by individuals in Russia, RUB mln
Comments Companies Scale Country
Global trends: telecom + banking
China & Hong Kong
China Mobile bought 20% stake in Shanghai Pudong for USD 5.8bn
Pakistan Telenor bought a 51% stake in Tameer for USD12.5mn
Date
Nov 2008
Min
ori
ty S
har
eh
old
ing
Maj
ori
ty
Shar
eh
old
ing
Mar 2010
Launch of joint mobile finance platform
Platform includes money transfer, bill payment and cash withdrawal
Par
tne
rsh
ip Nov 2010 Kenya M-Pesa: 9.5 million
users
Equity bank: 4.5 million customers
Partners offer current account to, accessible through mobile phone
Use of M-Pesa credit scores for short term loans by Equity bank
Jo
int
Ven
ture
Oct 2011 Mexico America Movil to invest USD 50mn
Plans to offer bank accounts to America Movil customers
13
In March 2013, MTS acquired a 25.1% stake in a Russian mid-cap bank: MTS Bank. This is just one of the many examples of how carriers and banks globally are seeking to unlock synergies by combining finance and telecom
Mar 2013
Strategic cooperation to develop mobile payments, mobile transfer and mobile bank cards
Russia MTS acquired a 25.1% stake in MTS Bank (prior to Feb 2012 known as MBRD) for RUR 5.09 billion
Promotes innovative financial products in the “unbanked” Russian market Stimulates sales of smartphones and data-generating devices
MTS: seizing opportunities in financial services
Why expand into financial services?
MTS boasts the third largest retail banking network in Russia with more than 4,400 monobrand stores
MTS is one of Russia’s most trusted institutions. ‐ MTS is one of the two most valuable brands in Russia, according to
BRANDZ™ ranking compiled by Millward Brown in 2012
MTS can leverage extensive customer data for more efficient scoring procedures
14
Russia’s connectivity
15
Russia’s digital landscape
Odnoklassniki, Russia’s second-largest social network,
owned by Mail.ru Group
EPAM Systems, US-incorporated provider of software engineering
and IT consulting services with research centers in Russia and
Eastern Europe. IPOed in 2012 at the NYSE.
Yandex, the most popular search engine in Russia, IPOed at the
NASDAQ in 2011.
Ozon, Russia’s leading online retailer and one of the key players in the $10 billion e-commerce market in Russia
Mail.ru Group, Russia’s leading Internet company, owns two Russian social networks, My
[email protected] and Odnoklassniki.ru, and a stake
in the social network Vkontakte as well as stakes in
Facebook and Zynga. IPOed on LSE in 2010
Vkontakte.ru, Russia’s largest social network with over 140
million registered users. Owned by management and
Mail.ru Group
1C, a leading Russian business software developer, also known
for its video games
Digitizing Moscow GPON (Gigabyte Passive Optic Network) network is deployed by
MGTS, MTS’s fixed-line subsidiary in Moscow, to create a unique platform connecting 4.4 million Moscow apartments to fiber-optic networks supporting speeds up to one Gb/s and serves as network
backhaul to ensure faster speeds and higher reliability of connections in mobile networks
16
of contributions to Russian GDP attributable to the Internet economy in 2010, according to a BCG report. By 2015 the contribution will rise to 2.6%
1.9%
Russia’s untold growth story
Russia as an “unbanked” market
Opportunities in Russia
Contents
17
▪ Invest and do business with Russia
▪ Work in Russia
Invest and do business with Russia
Russia’s growth story is virtually unknown in the United States due to low intensity of economic ties between the countries
‐ In 2011, US Foreign Direct Investments in Russia amounted to $1.8 billion compared to $2.2 billion directed to Egypt’s economy
‐ In 2011, US goods accounted for less than 5% of Russia’s imports totaling $300 billion
‐ MTS is one of two Russian companies listed at the NYSE compared to 11 companies from India, 22 issuers from Brazil and 71 from China
‐ Opportunities: WTO entry/ PNTR granted
Why invest in Russia? ‐ Russia is growing, driven by sustained consumer demand ‐ Russia is less vulnerable to external shocks due to solid macro fundamentals ‐ Russia is set to benefit from an uplift in the global economy ‐ Russia is very cheap – trading at 5.1 x 12 months forward PE* ‐ Russian stocks are attractive dividend plays offering a 3.7% trailing dividend
yield ‐ Political and corporate governance risks are overdone
Why do business with Russia?
‐ Russia is forecasted to become the biggest consumer market in Europe and the world's fourth largest by 2020, according to Sberbank-CIB research
‐ Russia is modernizing its physical infrastructure. Russia’s investments in infrastructure are at a high level of 7% to GDP and are forecasted to grow at 3% CAGR 2012 – 2017, according to Morgan Stanley economists
‐ Russia is implementing structural reforms and improving business climate to boost growth
18 *Source: Morgan Stanley research as of March 26, 2013
Work in Russia
Career opportunities: ‐ Sustained demand for foreign professionals. In 2011, the inflow of
foreign specialists increased by 40% from the previous year, according to the Federal Migration Service
‐ 25% of the Russian companies are either employing foreign specialist or plan to hire them, according to a survey conducted by recruitment website Headhunter.ru
‐ Opportunities for quicker promotion: 84% of expatriates reported increased career opportunities since emigrating to Russia, according to the 2010 HSBC Expat Explorer Survey
High-profile Russian government initiatives aimed at the modernization of
Russia’s economy that require expertise of foreign professionals: ‐ Infrastructure investments: from roads and airports to power grids and
broadband Internet ‐ Entities fostering start-up culture and promoting investments in high-
tech: Skolkovo Innovation Center, Russian Venture Company, Russian Direct Investment Fund
‐ Creation of a regional financial center in Moscow
Competitive compensation:
‐ Russia offers competitive compensation to foreign professionals at a level higher than in many countries around the world
‐ Russia has one of the lowest income tax rates in the world – 13% ‐ According to the HSBC Survey, the disposable income of 86% of the
expatriates have grown since they moved to Russia
19
Contact information
For further information:
Alexey Kornya
+7 495 911 6566
www.mtsgsm.com
20
APPENDIX: sovereign ratings fail to reflect
economic reality
21
Source of forecasts: IMF, OECD, S&P
Unlike developed market peers, emerging 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 2012
(% of GDP)
GDP Growth 2013E
Germany AAA/stable 65% 3.3% AAA/stable 87% 0.6%
USA AAA/stable 69% 1.9% AA+/neg 110% 2.0%
Spain AAA/stable 46% 3.5% BBB-/neg 94% -1.5%
Italy A+/stable 95% 1.7% BBB+/neg 127% -1.0%
China A/positive 20% 14.2% AA-/stable 16% 8.2%
Russia BBB+/pos 7% 8.5% BBB/stable 11% 3.7%
Brazil BB+/pos 55% 6.1% BBB/stable 55% 3.5%
India BBB-/stable 79% 9.8% BBB-/neg 69% 5.9%
Company EV/EBITDA
2009 P/E
2009 EV/EBITDA
2012 P/E
2012
Revenue Growth 2009
– 2012
OIBDA margin 2012
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% 42.6%
APPENDIX: corporate credit ratings lagging
22
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
Source: Goldman Sachs. FCF is calculated as OPCF minus Capex
S&P credit ratings of leading telecommunications companies Post-Crisis 2009 – 2011
Multiples of leading publicly traded telecommunications companies