One third of the national endowment

Our stock market has become a real instrument to attract investments. But the largest player at this market is the state. The state is the source of main pricing news and – more important – the owner of one third of capitalization of 200 most expensive Russian companies.

By Stepan Zhulin

The year after compiling the previous "Capitalization-200" list has proven to bring real success to the Russian stock market – market value of 200 domestic companies grew up more than twice and reached 833 billion dollars. The quality of our list has also gone up. Now absolutely all of its participants sell their shares at the stock exchange. Current quotation encourages main shareholders to turn their companies public, selling shares to minority shareholders. The public status paves the way for such companies to debt markets.

One Gazprom show

Since 1998 total cost of 200 most expensive Russian companies increased by 33 times (even Buffett could not dream of annul 55% on a regular basis), the last year showing the growth of over 400 billion dollars. Almost half of the total capitalization of the current list (precisely, 414 billion dollars) is owned by the first three companies (all from the oil and gas sector, table 1). Total share of the first 20 companies in our top-list amounts to 84% of the aggregate cost of the whole list. The second hundred altogether comes to less than 2% of the total capitalization of the 200 companies.

Half of the list total capitalization increment is made by Gazprom, whose share has reached one third of the 200 most expensive Russian companies’ total cost. After Gazprom shares were finally liberalized, foreign investors dismissed their doubts as to the company global status and put it among the first ten most expensive world corporations of the Financial Times Global 500 list. On September 1, 2006, Gazprom share in the quarterly MSCI Emerging Markets Index reached 5%, and the company capitalization exceeded international reserves of the RF Central Bank (diagram 1).

In April 2006 Aleksandr Medvedev, the deputy chair of Gazprom board of directors, predicted the company capitalization to be 1 trillion dollars within 10-15 years – his assessment received skeptical response. But last June prediction by another deputy chairman, Andrey Kruglov, about 300 billion dollars capitalization within next 3-5 years looked even less believable (capitalization in time of prediction being less than 70 billion dollars) – and Gazprom reached the mentioned level in less than a year.

The side effect of the explosive growth of the gas giant stock was the increased share of the state ownership — the size of its shareholdings exceeds one third of "Expert-200" capitalization, which, in its turn, exceeds the Central Bank reserves.

Stock exchange as it is

The stock exchange has grown its capital and changed its quality. For the first time since 2002 all the two hundred participants have been traded at the stock exchange (in accord with our methodology, if our list consists of 200 stock exchange listed companies, other companies with quotations at over-the-counter markets can not be found in our list). In 2003-2005 to fill the list "Capitalization-200" we had to pick up some companies from over-the-counter markets. Our list has lost some of over-the-counter heavyweights (the "heaviest" one being TNK-BP), but got rid of low liquidity papers. At present the list contains only equity of the first three liquidity classes (diagram 2).

The ticket to the largest 200 companies’ list has gone cheaper: Yakutgazprom (place 200 in 2006) costs only 49 million dollars, while in 2005 place 200 (Riazannefteproduct) cost 75 million dollars. But the ticket is harder to get since it has become "weightier": next to demanded level of capitalization the applicant’s shares now have to be traded at the stock exchange. This situation in a way is caused by RAO UES reform. Regional energy companies have already been divided by types of business (generation, transmission, distribution), and inter-regional companies have not yet been established. The divided companies have already been present at the stock exchange, therefore the number of traded companies has gone up automatically. The share of electric energy in total capitalization being only 9%, the sector delegated to the list 85 of its representatives. After the reform their number should diminish drastically with drastic growth of average capitalization. The similar scenario was observed in 2002 – numerous telecoms were turned into seven inter-regional telecoms.

Diagram 1. Gazprom: dreams are coming true

Diagram 2. Liquid stock capitalization and volume of tender are by an order greater

Besides, there are only two companies left (Seversk pipe plant and Rosneftegazstroy) who sell at the stock exchange depositary receipts instead of shares. ADR/GDR trade turnover for shares of companies like AFK Sistema, Vympelkom and MTS in certain periods is significantly higher than turnover of their own shares at MICE and RTS, Russian papers being more and more liquid. Russian companies with depositary receipts abroad may easily become "blue chips" in Russia. For instance, MTS share (7.2%) in MICE index on September 1, 2006, was not far behind share of RAO UES (9.4%), whose shares have been historically the most liquid ones at the Russian market.

Diagram 3. Gazprom leads oil and gas industry, Sberbank – banks

Diagram 4. Companies find publicity in the share market but for the sake of money they come to the bond market

As in the past, FSFM did not encourage companies with Russian assets in their desire to pass IPO procedure abroad. But "colloquial interventions" proved to be ineffective this year. In "Expert-400" list (sales) there are 6 companies-nonresidents (table 2), that passed IPO procedure abroad. To get to "Capitalization-200" they would need to place Russian depositary receipts (RDR). Our law-makers try to use RDR to "bring the market back to Russia".

Leaders devour their children

Companies in different branches of industry (mobile phones operators, oilmen and metal-makers) try to repeat Gazprom success in purchasing new assets. First of all, corporation owners are willing to become a nucleus of the industrial consolidation in Russia and get international recognition.

Industrial consolidation is accompanied by change-over to common shares – many companies have already completed the process or at least have plans to do it. Rosneft has been converting shares of its daughters into the mother company’s shares, therefore next year its papers may turn more liquid, and its capitalization will give more adequate reflection of the company’s weight in the economy (last April its general director, Sergey Bogdanchikov, estimated consolidated effect of acquiring 12 main daughters as 10 billion dollars of extra capital). TNK-BP completed two stages of restructuring: it integrated TNK, Sidanco and ONACO into specially incorporated TNK-BP Holding; it also consolidated majority of minority shareholders of 14 key daughter companies in TNK-BP Holding through the program of voluntary share exchange. The program was completed by September 2005. The process of integrating TNK, Sidanco and ONACO with TNK-BP Holding ended on December 13, 2005 – ONACO was the last of the Holding companies to be liquidated by joining TNK-BP Holding. As a result minority share owners received about 5% of TNK-BP Holding shares. In case of entering the stock market the corporation will immediately hit the list of the five capitalization leaders, but getting the "blue chip" quality will require additional free-float. To consolidate its producing assets Severstal issued new set of shares and – by increasing its nominal capital almost by 70% - reached place 12. By the end of 2006 Baltika Breweries plans to complete its reorganization by integrating Vena, Pikra and Yarpivo (agreement of shareholders and Federal Antimonopoly Service has already been received) to own 10 breweries and 4 malt-houses.

Successful change-over of several corporations to common shares together with completion of RAO UES reform will contribute to further concentration of the list "Capitalization-200": the share of its second half may sink below one percent of the total capitalization. Financial dynamics of the first twenty determined industrial distribution, too (diagram 3). Iron-and-steel industry and telecommunications, in the absence of leaders, lost their grounds. Some time in the past electric power industry was accountable for over 20% of the list capitals. At present none of the industrial sectors with 5% share (banks, electric power industry, iron-and-steel industry and telecommunications) can expect to surmount 10% barrier. On the one hand, oil and gas sector keeps on exerting pressure (capitalization 64.5%), new stock exchange sectors are pushing from below on the other (retail business, in the first place).

Make stocks while stocking is good

In 2006 average ratio of "Capitalization-200" companies’ market value to volume of their sales (p/s ratio) reached 2.46 (last year — 1.47), and ratio between capitalization and net profit (p/e ratio) — reached 14.45 comparing to 10.99 the year before. Main shareholders of numerous non-public companies considered this circumstance as an invitation to the stock exchange and started placing their shares at local and foreign markets among broad circle of investors. Even more companies will announce their IPO in the mid-term future (so far one out of six revenue leaders in "Expert-400" list trade their shares at the stock exchange).

Lists of leaders and outsiders in the above mentioned ratios (tables 3 and 4) make it clear that investors do not make their decisions on the basis of p/e and p/s indicators. RUSIA Petroleum, a frequenter of such rankings, has worked at a loss for several years, Kovyktinskoe field license is under a constant threat to be revoked, but quotations of buyers (no sellers in sight, strange as it may seem) bring capitalization to the level exceeding the company consolidated revenues 500 times. In this respect gas deposits of the above field are more important. Reserves also put to the list NovaTEK and Gazprom, and the table itself does no longer bring to mind a list of marginals. Under current oil prices global investors are ready to consider our country as one big oil field.

Companies with minimum p/s (table 4), as a rule, find themselves in a corresponding list due to shares’ law liquidity (category C). All the creams of domestic motor building – AvtoVAZ, GAZ, KamAZ, UAZ – are among the stock market outsiders. Portfolio investors’ lack of interest in these companies can be easily explained: they can hardly generate quick and increased profits.

Public in the evening, capitalized in the morning

IPO procedure – with rare exceptions – has brought no big revenues to companies (money was received by controlling shareholders). Besides, there are no placements in sight to have helped to any issuer to attract more than one billion dollars (as was the case with AFK Sistema and COMSTAR-OTS in February 2005 and 2006, and in the middle of the current year with Rosneft – over four billion dollars for the three companies). The acquired public status permits to enter the debt market with far too greater demands. For instance, in March 2005 PAVA (place 180 in "Capitalisation-200") from Altay region attracted only 4 million dollars at the two Russian stock exchanges, but a year later the public status secured successful placement of one billion rubles bonded loan (almost by an order of magnitude greater than IPO revenues). Three and quarter billion rubles were placed by Irkut research and production company (place 60 in "Capitalization-200") on much more profitable conditions after IPO.

The bond market has proven to be a real source of financing for Russian companies (diagram 4). At the market of shares companies spend more than they attract: dividends paid only in 2005 exceed funds attracted by issuers in all the history of Russian IPO, starting from Vympelkom maiden appearance in NYSE in 1996. Companies also spend big money to buy back their own shares: thus, the cost of shares of MMC Norilsk Nikel purchased by the company between December 2004 and December 2005 and cancelled following the decision of the shareholders meeting last February amounted to 40 billion rubles.

Next to IPO procedure business fractioning has gained popularity, too: most novices in "Capitalization-200" list made their appearance at the stock market exactly this way. For instance, Norilsk Nikel has successfully singled out its gold-mining assets into Polius Zoloto, the latter immediately hitting position 16 in the list.

One thing to add. Companies have learned to attract money at the stock market, it is no longer considered as something exotic. But the money is mostly attracted either to cover turnover deficit or to support local projects, like purchase of new industrial device, implementation of an export contract etc. Unfortunately, on very rare occasions money is attracted for large scale programs of business strategic development.

Once it’s take-off, once it’s landing

Since September 1, 1995, when RTS index started from "100" mark, economic situation has entertained us with clearly set cycles (diagram 5). After two years of rapid growth (+353%, +261%, +163%, +178% by September 1997, 2000, 2003 and 2006) we have faced one year landing (-86%, -13%, 8% by September 1998, 2001 and 2004). The first landing was attributed to the tough crisis of 1998, the second reflected downfall of the world prices for raw commodities, the third was associated with Khodorkovsky.

The market has obviously becalmed in recent years: periods of growth became less intense, and landings — more "humane", actually, the market learned to heal oneself by these ups and downs. The intensity of landing by September 1, 2007, if calculated in a linear fashion considering previous rates of growth, will bring RTS index to 1776 point (the figures are easy to remember for American investors – the USA Declaration of Independence was adopted in 1776). It is less than 10% of annual growth, but considering previous September "sale" — more than 20% by the beginning of the next school year.

Being attentive to lengthy cycles of economic development, one feels like making comparison between our RTS index and American Dow Jones Industrial. When the Russian stock market went through hardships in 1998-1999, RTS index was two orders behind DJI index, and on October 5, 1998 it was 200 smaller than its American counterpart. But at big intervals RTS index demonstrates qualities of a marathon man (diagram 6), so it is more sensible to buy Russian assets in one-year cycle – when the market "cools down". If in the next 11 years the Russian stock market catches up with the American one with the same zeal, as in previous periods, by 2018 RTS-DJI will show parity.

Diagram 5. Hardness of landing depends on the achievements of two previous years

Diagram 6. Half-way to parity