Analysts were scrambling for their atlases last month after Khelb Altaya (Altai Bread), floated on the RTS. The small flotation, even by Russian standards, of the federation’s biggest grain processor is the latest of a wave of “no name” corporates to pop up on investment bankers’ radar from the flourishing ranks of second-tier companies.
“There is a huge raft of companies with sales that have grown to $500 million or $1 billion a year but remain more or less anonymous. Since the Yukos affair they have begun to report their real earnings – and some of these are massive,” says Peter Westin an economist with Aton in Moscow, referring to the oil company dismembered by the Kremlin in December.
For most of the past 14 years about a dozen companies, mostly natural resource producers, have dominated, but in the past six months smaller companies have been coming to prominence as they are not that small any more.
Khelb Altaya is typical of the new breed. It is growing fast helped by International Finance Corporation loans and has a 10% market share, which it hopes to boost with the $4 million raised on the RTS, Moscow’s stock exchange. The same strategy is being followed by juice maker Lebedyansky’s IPO in February, which raised $151 million. A complete unknown six months ago, the company has emerged at incredible speed. Its market capitalization rose to more than $800 million shortly after listing – more than its main rival, the long-time retail sector leader Wimm Bill Dann.
It seems that in every sector catering to the domestic economy a handful of companies have come to the fore and are rapidly making these sectors their own.
The Vector combine harvester is the latest big hit from agricultural machinery producer Rostselmash, based in Chelyabinsk, whose sales have risen by 85% over the past year. It is battling it out with Agromashholding, which controls the other half of the market.
The Pipe Metallurgical Company (TMK) is now the world’s second-largest maker of pipes, with $6 billion of sales last year, and is preparing for an IPO. Investment banks have launched coverage of Fresco, a leader in shipbuilding. Several mineral and phosphorus fertilizer producers, such as Evrokhim and Ammofos, are flying. And Eurocement now accounts for half of Russia’s booming cement market. New companies are also appearing to fill out the niches in the more traditional sector. Titanium producer VSMPO-Avisma has posted impressive growth and is expected to issue an IPO later this year. The share prices of the listed iron ore producers, known as GOKs, have trebled over the past year.
Eric Kraus, head of strategy at Sovlink, a second-tier specialist, says: “The GOKs are not three times as good, but the second-tier companies are undergoing the process the first tier went through in 2000-01: investors looked at these companies and saw they were ridiculously underpriced. So they began to buy. At current prices the first tier is still cheap, but not that cheap. Companies in the second tier are still at the ridiculous price stage.”
Even the exchanges have woken up to the rising demand for what one wag dubbed “the great unpronounceables”, as foreigners stumble over the long Russian names.
In April the RTS launched a second index, the RTS2, that tracks the price of 52 companies with capitalization of between $100 million and $1 billion. The new index will compete with Sovlink’s index, which has been running two years and has consistently outperformed the traditional RTS index.
Strong economic growth is boosting the second-tier companies, but analysts point to the political brouhaha of the past year as the main reason why they are suddenly appearing in the media and on the domestic capital market. The state’s attack on Yukos has transformed attitudes to tax, and managers have scrambled to get their books in order.
“We were looking at the books of a leading fertilizer producer, and could see that while its exports of phosphates to western markets were rising steadily, its bottom line was static,” says Kraus. “It turned out most of its sales were going to a name-only company in Geneva. If we could see this, the tax authorities could, and sure enough they had a visit after which the bottom line went ballistic.”
Rising valuations have also given a push to what is turning into a virtuous circle of increasing transparency and rising values that has for the first time led managers to think about IPOs.
