Assessing the short-term threat to expansion plans. Russian consumer stocks have tumbled 36% since 1 Aug 2011, underperforming their EM peers as threats to the sector’s growth story sparked a rush to the exit. Given the potential for increased borrowing costs next year − domestic banks have already started raising their deposit rates and may soon start to hike lending rates − we decided to calculate the proportion of debt payments faced by Russian consumer companies in 1H12 that is covered by operating cash flows and cash on the balance sheet. We discuss the results of these calcu lations in this note.
In our calculation, a ratio close to or greater than one suggests that a company might need to scale down its expansion plans if credit markets tighten further or if the global economy takes a major turn for the worse.
Financing costs look set to rise. Russian banks are currently seeking liquidity: the first indication was seen with the increase in deposit rates over the first three weeks of November (evidenced by data released by the Central Bank of Russia, Figure 5). This points to a possible rise in financing costs, suggesting that debt and cash flow analysis could soon become crucial for investors.
Consumers becoming price sensitive. A potential slowdown in the US and Chinese economies presents significant downside risk for oil prices. This in turn points to downside risk for the rouble, which is closely linked to the price of crude. These factors are sending negative signals to Russian consumers. In response, we believe customers are becoming more price-sensitive and starting to trim their expenditures. For consumer companies this could mean weaker top-line growth, prolonged store maturity periods and weaker margins due to increased competition next year. In these conditions, cash flow generation would be hampered, potentially limiting the ability of consumer companies to fund their expansion programmes in 2012.
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