2016: Ris­ing con­sump­tion puts wind in the sails of re­tail­ers, car mak­ers

Top 100 See - - Top 100 Companies - By Nevena Krasteva

drow­ing do­mes­tic de­mand amid his­tor­i­cally low in­fla­tion and a pick-up in pri­vate in­vest­ment and em­ploy­ment con­tin­ued to drive eco­nomic growth in pouth­east burope EpbbF in OMNSK bco­nomic tail­winds ben­e­fited most re­tail­ers and car mak­ers – the two in­dus­tries most sen­si­tive to changes in dis­pos­able in­come and con­sumer sen­ti­mentK At the same time oil and gas ma­jorsI which tra­di­tion­ally dom­i­nate the rank­ing of the big­gest com­pa­nies in the re­gionI con­tin­ued to suf­fer loss­esI im­pact­ing the ag­gre­gate rev­enue of the pbb qlm NMM en­trantsK qhe com­bined net profit of the NMM big­gest com­pa­niesI how­ev­erI rose by a hefty P9B as com­pared to the profit of the prior-year en­trantsI largely as a re­sult of im­proved op­er­a­tional ef­fi­cien­cyI in­te­gra­tion of var­i­ous busi­ness-spe­cific ac­tiv­i­ties and economies of scaleK

EE­co­nomic growth in SEE quick­ened to 3% in 2016 from 2.5% a year ear­lier on the back of ris­ing pri­vate con­sump­tion. Cor­po­rate in­vest­ment grew, un­der­pinned by am­ple liq­uid­ity and favourable fi­nanc­ing conditions. Fall­ing un­em­ploy­ment also con­trib­uted to im­proved eco­nomic sen­ti­ment. In Ro­ma­nia, the fron­trun­ner with 4.8% gross do­mes­tic prod­uct (GDP) growth, re­tail and ser­vices con­trib­uted strongly to eco­nomic ex­pan­sion as im­proved in­come growth prospects fol­low­ing tax cuts and public sec­tor wage hikes fu­elled de­mand. For­eign di­rect in­vest­ment (FDI) in­flow to Ro­ma­nia, Croa­tia and Ser­bia rose and these coun­tries are poised to con­tinue to ben­e­fit from EU funds, which pro­vided an ad­di­tional boost to public in­vest­ment in Bul­garia as well. As eco­nomic growth picked up, so did M&A ac­tiv­ity - both in terms of the num­ber of deals and value - with Ro­ma­nia and Bul­garia lead­ing the way. Po­lit­i­cal volatil­ity, how­ever, re­mained a drag, par­tic­u­larly in Mace­do­nia, dent­ing in­vestor con­fi­dence and de­lay­ing re­forms. Gen­eral elec­tions were held in Ro­ma­nia, Ser­bia, Croa­tia, Mace­do­nia and Mon­tene­gro, put­ting fis­cal dis­ci­pline into ques­tion. Progress on struc­tural re­forms re­mained slow in the Western Balkans. Cor­rup­tion and weak rule of law con­tin­ued to curb eco­nomic growth. Anti-mo­nop­oly poli­cies in some coun­tries were weak and infrastructure, de­spite large scale public in­vest­ments in up­grades in re­cent years, re­mained un­der­de­vel­oped. The small size of the mar­kets in the re­gion was another con­straint on busi­ness, with the no­table ex­cep­tion of Ro­ma­nia.

Ro­ma­nian com­pa­nies ex­pand foothold, Da­cia leads the pack

Un­sur­pris­ingly, com­pa­nies from Ro­ma­nia - the re­gion's big­gest and fastest grow­ing econ­omy - again oc­cu­pied over half of the seats – 59, up from 55 in 2015, and dom­i­nated all sub­rank­ings. The three most prof­itable com­pa­nies in the rank­ing - Hidro­elec­trica, Romgaz and Con­ti­nen­tal Au­to­mo­tive Prod­ucts – are Ro­ma­nian, as is the leader, Au­to­mo­bile Da­cia. The car maker leads in the rank­ing for a third year run­ning. It raised its rev­enue by 8% to 4.619 bil­lion euro and in­creased its net profit to 100.5 mil­lion euro from 99 mil­lion euro in 2015. Da­cia brand sales rose by 10.6% to record 415,010 reg­is­tra­tions in 2016. The com­pany's ro­bust per­for­mance came on the back of im­proved op­er­a­tions and ef­fi­cient use of re­sources, ac­cord­ing to Yves Cara­catza­nis, man­ag­ing di­rec­tor of Groupe Re­nault Ro­ma­nia. “Groupe Re­nault Ro­ma­nia, em­ploy­ing 16,700 col­leagues, is the only com­pany in the coun­try in­te­grat­ing all ac­tiv­i­ties spe­cific for a car man­u­fac­turer, some­thing which has gen­er­ated a steady eco­nomic per­for­mance and a wide range of job of­fers in dif­fer­ent fields,” he com­mented. (Read the full in­ter­view with Cara­catza­nis on p. 12). Au­to­mo­bile Da­cia’s per­for­mance re­flects the growth of the au­to­mo­tive sec­tor across the re­gion, which has been mak­ing the most of its strate­gic ad­van­tages - skilled work­ers, low pro­duc­tion costs and easy ac­cess to EU mar­kets, while rid­ing the wave of peo­ple's grow­ing pur­chas­ing power. Car mak­ers in Ro­ma­nia and Ser­bia also draw on ex­ten­sive past ex­pe­ri­ence in the in­dus­try. In Ro­ma­nia the sec­tor also ben­e­fits from gov­ern­ment sup­port schemes. The to­tal rev­enue of the au­to­mo­tive sec­tor in SEE TOP 100 rose to 11.5 bil­lion euro from 9.6 bil­lion euro in 2015. It should be noted here that the most prof­itable in­dus­try ac­cord­ing to the rank­ing is rub­ber and rub­ber prod­ucts, which is rep­re­sented by two Ro­ma­nian tyre mak­ers - Con­ti­nen­tal Au­to­mo­tive Prod­ucts Ro­ma­nia and Miche­lin Ro­ma­nia - with a

16.3% re­turn on rev­enue.

Full pock­ets for re­tail­ers

Whole­salers and re­tail­ers are also reap­ing the ben­e­fits of ris­ing pri­vate con­sump­tion. For the first time this sec­tor has more rep­re­sen­ta­tives in the rank­ing, 24, than the oil and gas in­dus­try. The ag­gre­gate rev­enue of whole­salers and re­tail­ers in the rank­ing rose to 20.719 bil­lion euro from 18.647 bil­lion euro. The up­trend in the sec­tor puts pre­mium on re­tail chains that are bet­ter man­aged and in a po­si­tion to de­velop their own lo­gis­tics. Ro­ma­nia, be­ing the largest mar­ket and the first ex­pan­sion tar­get of in­ter­na­tional ma­jors, leads the way here again. No­tably, five of the nine new en­trants in this year's edi­tion are whole­salers and two are au­to­mo­bile man­u­fac­tur­ers.

oil and gas com­pa­nies strug­gle

Oil and gas com­pa­nies con­tin­ued to suf­fer heavy losses from un­favourable global mar­ket conditions. Their com­bined rev­enue fell to 30.28 bil­lion euro in 2016 from 34.1 bil­lion euro a year ear­lier and their num­ber de­clined to 21 from 24. De­spite the con­tin­u­ing fall in in­di­vid­ual rev­enues, how­ever, the com­bined rev­enue of oil and gas com­pa­nies re­mains al­most a third of the en­trants’ to­tal and nearly 50% higher than that of whole­salers and re­tail­ers.

Profit grows, rev­enues flat­tish

The com­bined rev­enue of the en­trants in the rank­ing for 2016 fell 1.8% year-on-year to 101.2 bil­lion euro. Ex­clud­ing the re­sults of the oil and gas heavy­weights, how­ever, the en­trants saw their com­bined rev­enue grow to 71 bil­lion euro from 68 bil­lion euro. At the same time, the ag­gre­gate profit of the top 100 com­pa­nies leapt by 39%, sug­gest­ing that they have man­aged to make the best of the dif­fi­cult en­vi­ron­ment in which their op­er­ate to stream­line busi­ness pro­cesses, raise ef­fi­ciency and im­prove bot­tom lines. The most prof­itable com­pany among the SEE TOP 100 en­trants was Ro­ma­nian power pro­ducer Hidro­elec­trica with a re­turn on rev­enue of 36.2%. Af­ter go­ing in­sol­vent twice, the state-con­trolled com­pany went through a rad­i­cal re­struc­tur­ing process, gen­er­at­ing a cu­mu­la­tive profit of 1 bil­lion euro for 2013-2016 and dou­bling its mar­ket value to 4 bil­lion euro. In April 2017, Hidro­elec­trica ex­ited in­sol­vency, paving the way for an IPO seen as the big­gest in Ro­ma­nia's his­tory.

In a sign of tight com­pe­ti­tion the thresh-

old for en­try into the rank­ing rose to 464.7 mil­lion euro from 440.1 mil­lion euro a year ear­lier. The rank­ing also wel­comed less new­com­ers than in previous years in yet another sign that the cor­po­rate land­scape in SEE is be­com­ing in­creas­ingly com­pet­i­tive.

Ten years af­ter

When SeeNews started com­pil­ing this rank­ing ten years ago the global eco­nomic crisis had still not reached SEE. The economies in the re­gion were in a strong up­ward mode. Ro­ma­nia and Bul­garia were caught up in the op­ti­mism of their ac­ces­sion to the EU in 2007 and the coun­tries of for­mer Yu­goslavia were still re­cov­er­ing from the re­cent wars. Bul­gar­ian and Ro­ma­nian stocks were yield­ing two-digit prof­its, their blue-chip in­dices soar­ing to all-time highs. Oil and gas com­pa­nies had a much stronger hold over the rank­ing at the time, ac­count­ing for a quar­ter of all en­trants and 35% of the to­tal rev­enue of the top 100 com­pa­nies. They were com­fort­ably set­tled at the top, tak­ing up the lead­ing four places. The big­gest com­pany in the re­gion in terms of to­tal rev­enue was Ro­ma­nia's OMV Petrom, while Croa­tia's INA was no.1 in terms of net sales. (In thе first edi­tion of SEE TOP 100 the com­pa­nies were ranked by net sales for the fis­cal year ended De­cem­ber 31, 2007. The fol­low­ing year we changed the method­ol­ogy and started rank­ing them by to­tal sales in­stead. The change re­flected our as­sump­tion that to­tal rev­enue is a more ac­cu­rate gauge of the size of any busi­ness be­cause apart from sales rev­enue it com­prises fi­nan­cial and other in­come, which is of­ten an essen­tial part of the in­come gen­er­ated.) No­tably, six of the en­trants in the top 10 in 2007 were the same ten years later. The global crisis reached SEE some­what late and the lo­cal economies were spared its full im­pact thanks to their weaker in­te­gra­tion with world mar­kets at the time. Still, the SEE coun­tries, most of which are net en­ergy im­porters, were se­verely hit by the sharp rise in global prices of oil, gas and met­als and the en­su­ing drop in con­sump­tion. Stock mar­kets in the re­gion saw most of their value evap­o­rat­ing as in 2008 their cap­i­tal­i­sa­tion col­lapsed some 70 80%. Banks in the re­gion, mostly owned by Western Euro­pean peers, tight­ened their lend­ing poli­cies, damp­en­ing the real es­tate mar­ket that used to be one of the en­gines be­hind the ro­bust growth of the lo­cal economies. Pri­vate con­sump­tion too shrank. The crisis was in full swing in the re­gion by 2009, when the top 100 com­pa­nies' ag­gre­gate rev­enues hit a low of 77.99 bil­lion euro as prof­its tum­bled to 1.699 bil­lion euro.

Re­cov­ery was slug­gish in the fol­low­ing

years, the big com­pa­nies weath­er­ing bet­ter the ad­verse fac­tors. Oil and gas com­pa­nies main­tained their hege­mony, yet they started steadily los­ing ground as au­to­mo­bile mak­ers picked up speed. A new mile­stone in this di­rec­tion was reached in 2013 when Da­cia over­took OMV Petrom as the top com­pany in the re­gion. As busi­nesses in SEE made un­steady strides for­ward dur­ing the years, they also had to over­come other hur­dles such as ob­so­lete infrastructure, cum­ber­some reg­u­la­tions and un­pre­dictable leg­isla­tive changes, wide­spread cor­rup­tion and po­lit­i­cal tur­moil.

In­no­vate, in­te­grate, work across bor­ders

In this com­plex en­vi­ron­ment, for­eign own­er­ship has emerged as a ma­jor fac­tor for the suc­cess of lo­cal com­pa­nies, help­ing them avoid many of the pit­falls of the lo­cal scene, while giv­ing them ac­cess to big mar­kets. Un­sur­pris­ingly, seven of the top ten com­pa­nies in this year's rank­ing are for­eign-owned. The win­ner, Au­to­mo­bile Da­cia, ex­ports 93% of its out­put. For do­mes­ti­cal­ly­owned com­pa­nies, ca­pac­ity to work across bor­ders is cru­cial to off­set the lim­i­ta­tions of the small size of the lo­cal mar­kets. In­te­gra­tion of the full range of ac­tiv­i­ties spe­cific to a cer­tain busi­ness is another key in­gre­di­ent of suc­cess, and here again we do not need to look fur­ther than the top of the rank­ing for proof.

Ca­pac­ity for in­no­va­tion too has emerged as cru­cial for a com­pany's suc­cess, and an area in which coun­tries in SEE have a lot to catch up on. Fo­cus­ing on these could help the lo­cal busi­ness har­ness the po­ten­tial of a mar­ket that en­joys up­beat prospects and seems set for ex­pand­ing con­sump­tion on the back of eco­nomic growth and ris­ing dis­pos­able in­comes. Re­tail­ers and whole­salers and au­to­mo­bile man­u­fac­tur­ers have al­ready taken the lead in this race and will most likely con­tinue to pace the growth of the re­gion's busi­ness. Other in­dus­tries, how­ever, such as IT, are still con­spic­u­ously miss­ing from the list of the top per­form­ers de­spite be­ing one of the most dy­namic econ­omy branches, in­ter­na­tional in essence and long present in the radar of for­eign in­vestors. Another in­dus­try, tra­di­tion­ally strong in SEE but weakly rep­re­sented in the rank­ing is agri­cul­ture. Its whose progress, how­ever, will de­pend very much on its abil­ity to mod­ernise. Look­ing at the M&A scene in Ro­ma­nia - the re­gion's lead­ing mar­ket that of­ten serves as a test­ing ground for in­ter­na­tional ma­jors plan­ning to ex­pand in the SEE and is thus very in­dica­tive of fu­ture de­vel­op­ments – health ser­vices are one in­dus­try whose growth po­ten­tial has not es­caped the at­ten­tion of for­eign in­vestors. Real es­tate too is ex­pected to rise strongly as grow­ing re­gional busi­nesses seek more of­fice and com­mer­cial space.

“te are cov­er­ing four ac­cor­dant and syn­er­gic busi­ness ar­eas – oilI gasI en­er­gyI ecol­ogy xKKKz metrol droup un­der­stands the specifics of the mar­ket and also has good net­work of peo­pleI as well as a good net­work of lo­cal com­pa­niesK lur ad­van­tages on the mar­ket of pouth­east­ern burope - fa­mil­iar lan­guageI sim­i­lar cul­tural cir­cle and his­tor­i­cal back­groundI large net­work of friends - are ac­tu­ally a guar­an­tee for our suc­cessK ”

Marko Kryžanowski,

jan­age­ment Board Chair­man of metrol dKdK

2008 “lur chal­lenges come from four di­rec­tionsK cirst­lyI the struc­tural changes of the global gas and en­ergy mar­ket which will im­pact all parts of our busi­nessK pecond­lyI the con­text in which we op­er­ate and f would men­tion here the volatil­ity of the fis­cal and reg­u­la­tory en­vi­ron­ment in oo­ma­niaK x…z qhird­lyI there is the de­pressed mar­ket for gasI elec­tric­ity and fu­els in oo­ma­niaI our main mar­ketK xKKKzK cur­ther­moreI our port­fo­lio is com­posed of mainly ma­ture fields that ex­ceeded their pro­duc­tion lifeK”

Mar­i­ana Ghe­o­rghe,

Cbl metrom droup

2014 “fn­nef­fi­cient public sec­torI poor in­fras­truc­tureI need for im­proved con­nec­tiv­ity curb growth in pbbK”

To­masz Telma, fcC re­gional di­rec­tor for burope and Cen­tral Asia

2016 lnly by look­ing beyond short-term po­lit­i­cal ob­jec­tivesI con­fronting vested in­ter­ests and seek­ing the longer-term good of the econ­omy can this path to growthI jobs and pros­per­ity be re­sumedK

Sir Suma Chakrabarti,

bBoa mres­i­dentI

2012

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