1 / 41

MISSION: PROFITABLE

MISSION: PROFITABLE. Emerging Financial Markets Professor JianPing Mei. Presentation April 30 th , 2003. APAAC. A ditya Dugar P avel Nazarov A lex Reznik A lex Shaoulpour C hristine Nilsson. Russia. Factoring. AGENDA. Valuation. Opportunity. Russia Macroeconomic Outlook

saad
Download Presentation

MISSION: PROFITABLE

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. MISSION: PROFITABLE

  2. Emerging Financial MarketsProfessor JianPing Mei Presentation April 30th, 2003 APAAC Aditya Dugar Pavel Nazarov Alex Reznik Alex Shaoulpour Christine Nilsson

  3. Russia Factoring AGENDA Valuation Opportunity

  4. Russia Macroeconomic Outlook Political Environment Social Conditions Legal Framework

  5. GDP GROWTH APAAC Source: CBR

  6. CAPITAL OUTFLOW/FOREIGN DIRECT INVESTMENT FDI Capital flight APAAC Source: CBR

  7. INFLATION AND LABOUR COSTS Consumer Price Change Percentage Labor costs USD per hour APAAC Source: CBR

  8. CURRENT POLITICAL ENVIRONMENT • Mr. Yeltsin becomes the 1st President of Russia. • New Constitution and democratic parliament are adopted • March 2000 • Mr. Putin wins election 53% of vote • Russian financial crisis • 1990 • 91 • 92 • 93 • 94 • 95 • 96 • 97 • 98 • 99 • 2000 • 01 • 02 • 2003 • 1991—1999 • Political Instability, Rapid Succession of cabinets • 9/11 • drastic change in foreign policy towards Western direction APAAC

  9. POLITICAL ACCOMPLISHMENTS AND CHALLENGES AHEAD • Accomplishments • Challenges • Economic growth • Declining inflation • Foreign debt repayment • Unification of Federal and Regional laws • Tax reform • Judiciary reform • Labor law reform • Land reform • Social security reform • Exclusion from FATF ‘black list’ • Reduction of dependency of Russian economy on natural resources • War in Chechnya • Development of vast and strong middle class • Elimination of Red Tape APAAC

  10. SOCIAL CONDITIONS • Increase in poverty level since 1980-1999 to 37% of the entire population • Corruption:2.1 on a scale 1 (highly corrupt) to 10 (highly clean) Transparency International • Since 1999 increased level of law enforcement, elimination of tedious licensing and registration procedures; tax reform • Low level of trust in the banking system • Need of Court reform APAAC

  11. LEGAL FRAMEWORK • Civil Code • In line with Western standards • Enforcement is lacking • Federal Law on ‘Banks and Banking Operations’ • Operating framework • Federal Law on ‘Financial Securities Market’ • Specifics on debt instruments

  12. AVERAGE RUSSIAN CREDIT RATES Rates on short-term credits extended by Russian credit institutions (adjusted for inflation) Individual borrowers Corporate borrowers APAAC Source: CBR

  13. FactoringPrinciple of factoring Implementation in Russian Market Russia Valuation Opportunity

  14. FACTORING • What is factoring? • Financial management service designed to help firms better manage their receivables by offloading a firm’s receivables and credit management onto someone else • How does factoring work? • Factor collect the accounts on the due dates • Effects payment to its client firm • Factor assumes the credit risk associated with collection for a fee APAAC

  15. PROS AND CONS • Factoring can be expensive • Perceived as option of last resort • Factor contacts your customers and may damage ongoing relationships • Cash Flows improved due to quicker payments and available for reinvestment • Can focus on growth as reduction in overhead costs by transferring troublesome chore of collection • Disadvantages • Advantages APAAC

  16. RUSSIAN CREDIT MARKET — HISTORY AND PROBLEMS • Commercial banking emerged in Russia in the late 1980s • Russia had more than 2,500 banks by 1994 • Devaluation of the Ruble in 1997—1998 forced many banks into bankruptcy • In mid 2002 Russia had just under 2,000 registered banks and credit organizations • Industry dominated by a few large players • Main problems • The banking sector has failed to fulfill its main function to act as an intermediary • Lack of transparency • Lack of legal framework • Banks are not willing to expand their credit card services to the middle class APAAC

  17. DEMAND ANALYSIS • Increased level of lending by financial institutions, domestic investors and FDI since 1998 • Companies require advance payment terms or letters of credit • High portion of transactions are conducted on a non-cash basis

  18. $ million • 12/31/2000 • 12/31/2001 • 11/30/2002 • 247% increase • 103% increase • 126% increase DEMAND ANALYSIS

  19. INTEREST RATES • January 2001 • January 2002 • Interest rates on Personal loans • Percentage • Interest rates on Corporate loans • Percentage APAAC

  20. POTENTIAL AND EXISTING COMPETITION • Limited choices between three types of banks: • Foreign-owned subsidiary • State-owned Russian bank • Variety of Russian private commercial banks • Existing competition • Potential competition • Russian Private Commercial Banks are an aggressive component but still have a limited capacity to provide services • Top 5 include: Gazprom Bank, National Reserve Bank, Sobinbank, MDM Bank, Bank of Moscow APAAC

  21. BARRIERS TO ENTRY IN THE RUSSIAN MARKET • Not many regulations to protect either party • Corruption is wide-spread and deeply rooted • Serious obstacle for private sector growth • In 2002, Russian Corporations allocated an estimate of $60 billion towards bribes Few alternative solutions to Cash Flow Problems • Industry financing • Banks or Corporations APAAC

  22. Factoring Opportunity Fulfilling a need Deal economics Russia Valuation

  23. FACTORING SERVICES TO THE TRANSPORTATION INDUSTRY • Truckers’ clients are faced with cash flow problems – prefer to delay payments • Few trucking companies agree to accept A/R • Drivers are instructed to stay until payment is received • Such collection practice is detrimental to the business • A/R that are on the books = uncollectible debt • Shadow accounting APAAC

  24. OPPORTUNITY • Capitalize on the unrealized existing need for factoring services • No current market for factoring services, because nobody targets the transportation industry • By offering the factoring services we will create the market APAAC

  25. Merchandise $30K - $100K THE STRATEGY Provide factoring services to the transportation companies and use the established connections to gain access to the trade transactions that the transportation companies service Seller Buyer Access to the buyers and sellers will open an opportunity to offer factoring and purchase order financing services for large trade transactions APAAC

  26. service goods M2 M1 M2 – f1 M1 – f2 DEAL ECONOMICS — WITHOUT 3RD PARTY BUYER Factoring – with partial collateral Buyer M2 M1 Transport Co Seller APAAC Inc. Net: f1 + f2

  27. goods M3 M1+f1 M2 M1 M2 M1 M1 M2 – f2 services goods DEAL ECONOMICS — WITH 3RD PARTY BUYER Factoring and purchase order financing – with collateral 3rd Party (Retailer) Net: f1 + f2 APAAC Inc. Buyer (Wholesaler) Transport Co Seller M3 > M1 + M2

  28. BUSINESS RISKS • Collection and contract enforcement • Forced litigation to prevent or recover losses • Fraudulent actions towards APAAC • Shadow economy – lack of transparency • Unexpectedly large number of bad debts (>30%) APAAC

  29. MITIGATION OF BUSINESS RISKS • Extensive due diligence • Use experienced lawyers and law enforcement officers • Work only with ASMAP members (Association of International Transporters) • Cooperation with law enforcement agencies • Deal collateralization • Build long-lasting relationships APAAC

  30. Factoring Valuation Assumptions Cash Flows Cost of Capital Sensitivity Analysis Russia Opportunity

  31. ASSUMPTIONS • Our Cash Flows are the same as Net Income as • We are all equity financed (no interest) • Our CAPEX is immaterial as it will only consist of office equipment and other supplies • We have no depreciation expense due to the absence of capital assets • Other Assumptions • Our non-cash working capital is assumed to be stable in the short and medium term • Our terminal growth rate is assumed to be 10% APAAC

  32. Discount rate • Risk free rate* • Risk premium • 20% • 12% • 8% VALUATION — METHOD USED • Benefits of DCF • It incorporates all of the relevant cash flows • Easy to use • Easy to amend if the macro or micro environment changes • Drawback — does not include the value of real options • Drawbacks of other methods • Option valuation — difficult to use, not accepted • Comparables — not available due to lack of public companies in this line of business APAAC * MinFin (2030 Eurobond rate)

  33. 15% • 30% • 20% • 25% PROCEEDS FROM FINANCING OF TRANSPORTATION SERVICES • ~25% growth • (decreasing percentage) APAAC

  34. 12% • 17% • 20% PROCEEDS FROM MERCHANDISE FINANCING • 4% growth • (decreasing percentage) APAAC

  35. DCF VALUATION 2003 2004 2005 2006 2007 TV 2008 • Net Income • Transportation • Merchandising • Total NI Cash Flows 129,850 519,750 649,600 123,762 1,081,080 1,204,842 219,366 1,797,296 2,016,662 264,061 2,287,467 2,551,528 340,880 3,002,300 3,343,181 44,174,987 Present value of APAAC Inc’s NICF with 20% discount rate $17,434,979 APAAC

  36. RECEIVABLE FINANCING NEED DURING FIRST YEAR • Working capital • Transportation industry • Merchandising financing • Start-up costs • $7.4 million • $2.4 million • $5.0 million • $0.3 million • Total funds required • $7.7 million APAAC

  37. POTENTIAL EXIT STRATEGIES AND TERMINAL VALUE • Attractive target for larger financial institution eg, NIKoil, Sberbank • Strong customer base • Foothold in growing market • Value of option to close operations anytime • 60 day credit period • Need working capital for factoring services • Initial capital raised not a sunk cost (most should be recovered) but must be discounted from exit date APAAC

  38. DCF VALUATION REVISITED 2003 2004 2005 2006 2007 TV 2008 • Net Income • Transportation • Merchandising • Total NI Cash Flows 129,850 519,750 649,600 123,762 1,081,080 1,204,842 219,366 1,797,296 2,016,662 264,061 2,287,467 2,551,528 340,880 3,002,300 3,343,181 44,174,987 Present value of APAAC Inc’s NICF with 20% discount rate $12,213,224 Which equals an IRR of 44% APAAC

  39. SENSITIVITY ANALYSIS The sensitivity analysis shows the range of firm values depending on pessimistic, average and optimistic scenarios The most reasonable range of values is between the growth rates of 8%—12 % and the discount rates of 18%—24% Growth rate 6% 8% 10% 12% 18% 11,138,212 13,573,771 17,227,108 23,316,005 20% 8,374,512 9,973,975 12,213,224 15,572,097 Discount rate 22% 6,336,690 7,441,131 8,913,719 10,975,343 24% 4,778,835 5,570,769 6,588,970 7,946,571 APAAC

  40. SALES PITCH We make YOUR risk OURS™ APAAC

  41. QUESTIONS? APAAC

More Related