Sberbank CIB News

Sberbank CIB1 launches major new body of Russian consumer-linked research

05.02.2013

Today, Sberbank Investment Research is publishing a major body of investment research examining trends and opportunities across Russia’s consumer-linked equity sectors: Retail, Staples, Agriculture, Financials, Telecoms, Media & IT, Real Estate and Transportation. The report analyses key Russia/CIS sectors and companies which are strongly linked to the ‘mega-theme’ of rising domestic consumption and sets the Russian investment opportunity into a global context.

Titled “Consumer Speed Kings: Team Russia Leads the World” the main report offers investors a unique analysis of how the Russian investment case compares to other emerging markets including Brazil, India, China, South Africa and Turkey as well as the Eurozone and the US. In a highly differentiated piece of analysis the team at Sberbank Investment Research combines its expertise across Economics, Strategy and Sector Research to link the top-down domestic consumption growth mega-theme with a bottom-up assessment of individual equity investment opportunities.

A summary of our major findings are highlighted below:

  • Domestic consumption (not the extractive industries) has delivered 80% of Russia’s economic growth since 2004: the consumer-linked industries have driven almost all of this growth
  • Russia is set to become the biggest consumer market in Europe and the world’s fourth largest by 2020; Russia’s annual total consumer sector activity may climb to $3 trln by 2025
  • Russian consumer is a mega-theme within global emerging markets; we illustrate that Russia has the biggest proportion of middle class among the BRIC countries and a GDP per capita that will take more than 10 years for Brazil, India and China to catch-up.
  • The Russian consumer market is still early-cycle relative to the other BRIC economies and continues to benefit from pricing resilience and low levels of penetration
  • Consumer sector valuations are anomalously depressed because of Russia’s oil risk image; Russia’s implied equity risk premium is trading at a near 10-year high.
  • Aggregate Russian consumer sector is trading on a 25-50% valuation discount versus Brazil, India, China, Turkey & South Africa whilst growing its aggregate earnings materially faster.
  • We forecast Russia’s listed retail sector revenues will grow by c23% in 2013
  • We expect M&A activity, JVs, Mergers and Strategic Alliances across the wider Russian consumer-sectors to pick up; we identify which companies may be involved
  • Back-testing of our optimized ‘Ivanov Index’ of 24 Russian consumer-exposed equities has been a very strong out-performer over the past decade; the prospect for future out-performance remains extremely positive.

The report highlights the fact that while some international investors continue to view Russia as predominantly an energy play, in reality more than 80% of domestic GDP growth has been from the consumer-related sectors over the past eight years. According to Andy Smith, Head of Equity Research at Sberbank Investment Research, Managing Director: “An undiscovered secret is that Russia is as much a consumer story as it is an oil proxy. But because two-thirds of the stock market is made up of stocks in extractive industries the remaining one-third - those companies which contribute 80% to economic growth – have tended to be penalised by a lack of understanding.”

Sberbank Investment Research believes Russia’s consumer-related sectors are trading at 25-50% valuation discounts to comparable consumer sectors in emerging markets and highlight that growth forecasts for Russian companies are – in most cases - clearly superior. Andy Smith predicts that “the real nature of Russia’s consumer growth story is appreciated then the current excessive risk premium applied to the market overall will be shrunk”. The report presents a technical analysis of the wider Russian consumer sector’s implied ‘equity risk’ premium versus the other BRIC markets and concludes that this premium is trading near a ten year high and is anomalous relative to key peers on fundamentals.

Sberbank’s analysts also identify the opportunity for increased M&A activity in the Russia consumer sectors both in terms of cross-border deals, domestic consolidation, joint ventures, mergers and strategic alliances. The consumer industries remain highly fragmented across Russia, offering opportunities for consolidation as companies strive for efficiency gains. Russia’s entry into the WTO last August is also reviewed – the team believes this will act as a powerful catalyst for consolidation as domestic operators face more external competition. Smith observes: “we believe that the slow-down in consumer markets in Europe and the US will prompt more CEOs to step-up the pace of M&A to replace foregone growth …. In this sense, the combination of growth and value we identify across Russia’s consumer stocks seems hard to ignore.”

From a strategic perspective the analysts at Sberbank believe that Russia offers significant potential for foreign strategic investors especially across agriculture, food production, modern retailing, pharmaceutical, leisure, consumer banking (convergence of mobile technologies), health-care, logistics, information technology, automotive, airline and consumer services. The ‘Consumer Speed Kings’ report also focuses on how investors may profit from playing the structural themes of rising food prices and the need for rising agricultural productivity.

In parallel with the launch of “Consumer Speed Kings”, Sberbank CIB has also launched the Sberbank CIB ‘Ivanov Index’. Investors will shortly be able to participate directly in the expected continued growth of Russia’s consumer sectors through a proprietary, optimized basket of 24 listed Russian equities operating in the consumer space. The basket will be priced daily (Bloomberg ticker IVANSCIB), rebalanced quarterly, and traded by the Global Markets team at Sberbank CIB. The back-tested results of this ‘Ivanov Index’ are particularly impressive and offer investors potentially superior returns at acceptable levels of diversified risk and volatility. Further information on the composition of the basket is contained in the ‘Consumer Speed Kings’ report, available to clients and customers of Sberbank CIB. Please contact your sales representative or the Sberbank CIB PR team to obtain your copy.

Sberbank Investment Research has also launched its inaugural survey of the Pan-Russian Consumer, the Sberbank CIB ‘Ivanov Consumer Confidence Tracker’ – a bi-monthly publication covering Russian consumers’ spending, saving and confidence patterns across the country. We chose “Ivanov” to represent the most common Russian family name. The Ivanovs represent middle-class Russia.

Apart from publishing a headline consumer confidence index, this regular, proprietary publication will provide a set of leading indicators as to the most important trends across the fast-growth consumer sectors in Russia - including Retail, Banking, Telecoms, Media, I.T., Real Estate and Transportation.

Paolo Zaniboni, Head of Sberbank Investment Research, Managing Director, CEO of Sberbank CIB UK Ltd, said: “Our overall aim is to assist investors, policy-makers and other stakeholders better understand current and likely future dynamics of the rapidly-changing Russian consumer landscape and therefore assist their investment decisions and returns. This type of research constitutes an important differentiating and value-added set of unique products that the Sberbank Investment Research team continues to strive toward producing”.

The survey, which is executed by the market research agency Cint on behalf of Sberbank CIB, will be conducted every two months under a methodology that closely mirrors that of the quarterly Federal State Statistics (FSS) Service of Russia and other EU confidence surveys but adapted to encompass a wider set of questions relevant to Russia’s middle-income consumers. The survey sample is 2,300 people, aged 18 to 65, and living in 164 Russian cities with a population of over 100,000 inhabitants. The tracking error is below 2%.

The inaugural “Tracker” shows an overall score of -4% which is more optimistic than the 4th Quarter 2012 score of -8% published in the last FSS survey.

Sberbank CIB – Ivanov Consumer Confidence Tracker, Jan 2013

  Sberbank Investment Research, Jan ’13 State Statistics Service, 4Q12
Overall index score - 4% - 8%
Personal wealth, last 12m - 8% - 8%
Personal wealth, next 12m 27% - 3%
Country wealth, last 12m -16% - 7%
Country wealth, next 12m 6% - 3%
Big purchases conditions -28% - 19%

Source: Cint, State Statistics Service, Sberbank Investment Research

The main findings of our inaugural survey are shown below:

  • While 2012 was challenging in terms of personal income and concerns over the direction of the Russian economy, most consumers are now more optimistic and expect an improvement in their personal situation in 2013.
  • But, while optimistic, the majority is still not yet confident enough to make major purchases. Most people are holding back from big-ticket purchases while waiting for evidence of better economic growth.
  • Within the big-ticket category, a surprising 42% of people still plan to change their car within the next two years.
  • A majority of people own their existing home (only 11% rent) but approximately half plan to upgrade to a newer home in the near term.
  • Customers are increasingly price sensitive: 37% of respondents consider price attractiveness as a key factor in whether, and where, they buy.
  • In selecting a supermarket, price and the quality of goods are significantly greater considerations for food shoppers than interior layout or service.
  • Inflation and unemployment are key areas of concern for most of the population, although there is healthy optimism: 44% say they expect an improvement in their personal wealth in 2013 compared with 2012.
  • Most people see the high level of corruption as one of the main reasons holding back economic development in Russia. They see the fight against corruption as one of the government’s key priorities.
  • The number of people who say they would be prepared to emigrate as they consider economic and lifestyle prospects to be better elsewhere is still extremely high at 38%.
  • Stock-specific findings re-enforce our positive stance on multiple Russian equities including Magnit, Dixy, Yandex, Megafon, MTS, LSR, Etalon, Sollers, and Aeroflot.

Further Background to Russia’s Consumer Story

  • Russia has the largest consumer base in Europe with a total population of 143 million and 43 million households. Russia’s population decline has been arrested and is projected to have shown a modest increase in 2012.
  • Based on the OECD definition of Middle Class, 55% of Russian households are already in that category compared to 30% in Brazil, 21% in China and 11% in India. Wealthy households are also more numerous with 15% of Russian households boasting annual income above $50,000 compared to 5% in Brazil, 2% in China and 1% in India.
  • On a forecast GDP per capita in Russia of just over $16,000 at the end of 2013, we estimate that it will take more than a decade for other emerging markets to reach this figure: 25 years for India, 20 years for China, 17 years for South Africa and 11 years for Brazil.
  • Russia is the world’s fifth biggest consumer market, by spending volume, and is set to overtake Germany as Europe’s biggest market and the world’s fourth largest consumer market by 2020.
  • Since 2000 retail spending has grown at Compound Annual Growth Rate of 20% and, in 2012, totalled just under $700 bln. More than half of that total is non-food related.
  • Analysts at Sberbank Investment Research forecast Russia’s modern listed retail sector to drive sales growth by 23% in 2013. A sector in which productivity has tripled over the past ten years
  • Analysts at Sberbank Investment Research estimate that the wider Russian consumer-exposed sectors are trading at aggregate valuation discounts to comparable sectors across the other BRIC countries between 25-50% but are set to post superior medium-term compound earnings growth >20%.
  • Investing in a broad basket of consumer-linked Russian equities has been a profitable trade historically. The optimized basket identified by Sberbank CIB has outperformed the majority of key developed equity market benchmarks across the developed and emerging markets in eight out of the past ten years.

1On the basis of CJSC “Sberbank CIB”