We like the way the government intends to tackle problems, and create an investor-friendly environment, in the electricity sector. This outcome is one of the two scenarios that we see for the sector. Specific steps and measures have not yet been announced, and will be paramount for defining the direction and speed of the development. We have not as yet changed our current, downbeat view on company valuations or stock performances in the short to medium term. However, Medvedev’s words indicate that a turnaround might happen at some point in the future.
Overall, the statements are in line with our view that the idea of tariff growth delays being ‘rooted in the elections’ is dissipating rapidly. Over the last ten years, nominal rouble prices have soared from RUB 0.3/kWh in 2000 to RUB 2.3/kWh in 2011, reaching all time highs in USD terms.
We believe that there are two scenarios ahead:
1 - In the best case, government actions will be directed at state enterprises to make them respond to rising challenges by increasing the efficiency of both opex and capex which, even with slower tariff growth, would be sufficient to create equity value.
2 - The other scenario reflects limited cost cutting and the rising risk of the state supporting capex via additional equity injections into state enterprises as they face cash flow shortages with constrained top line and still egregious opex and capex costs.