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Slide 1
VTB Capital IM Investment Team
For Professional Investors Only
October 2016
Investment Outlook Fourth Quarter 2016 Update
Slide 2
Investment Summary
Global Themes
Domestic Macro
Privatization
Fixed Income – Ruble Debt
Fixed Income – Hard Currency Debt
Equities
Individual Stock Cases
Appendix
Contents
07.10.2016
Slide 3
Investment Summary
Source: VTB Capital Investment Management07.10.2016
Global economy is muddling through with commodities and EMs bottoming out. The world’s major central
banks continue to pursue accommodative policies. The US Fed’s tightening is likely to be gradual and economic data-
dependent. Increased global economic uncertainty due to Brexit makes the prospects for monetary policy
normalization more remote.
Russia is set to see an improvement in economic conditions. Recent data on economic activity was better than
market expectations. Market forecasts for 2016-17 are now being upgraded. Our base case scenario for 2017 implies
1.5% real GDP growth and declining inflation assuming an average oil price of $55/bbl.
The disinflationary trend continues. Inflation continues to slow faster than the market expects. The CBR estimates
headline inflation falling to 5.5-6.0% YoY for 2016YE and 4% YoY until 2017. Headline CPI was reported at 6.4% as of
Sep’16.
The government budget deficit (approximately -3%) will be funded by the sovereign wealth fund, privatization
proceeds and higher dividends from SOEs. Privatization plans have been accelerated with a $15 bln target. An
increase in the dividend payout ratio of SOEs from 25% to 50% will provide another $6 bln to fill the 2017 budget gap.
Our top-down and bottom-up DCF models indicate 20-25% equity market returns over the next 12 months.
Key points underpinning Russia’s investment case are EPS recovery from a very low base and an eventual re-rating
in multiples as geopolitical tensions subside and SOEs increase dividend payouts. We see ~15% EPS CAGR for
2016-18 assuming a gradual recovery in Brent to $60/bbl by 2018.
Spread compression in hard currency FI space is hitting its limits. Excess domestic liquidity and limited supply
are likely to continue supporting the Russian Eurobond market, but there is less room for further spread tightening.
We maintain our core positions in solid credit stories with shorter maturities, while also, focusing on a particular
duration and credit selections based on relative valuation and improved credit potential.
Over the next 12 months we expect the OFZ curve to gradually flatten as a result of short-term rates going
down. If the disinflation trend continues over 2016-17 the OFZ curve could normalize in 2+ years. The banking
system is likely shift from a deficit to a surplus of ruble liquidity in 4Q16, which is highly supportive for RUB bonds.
The CBR key rate could be reduced by 250 bps till the end of 2017, from 10% currently to 7.5%.
Slide 407.10.2016
Global Themes
Slide 5
US Stocks Are Expensive
07.10.2016
US stocks are expensive but have captured most of the portfolio flows YTD.
The PE of the S&P 500 is at 2 standard deviations above its 10-year mean.
9
11
13
15
17
19
The for war d 12M P/ E of the S&P 500 is at 2
standar d deviat ions above its 10 year mean
P/ E Ratio, 12M forward Average
2 STD+ 2STD-
111 597
6 330
5 038
1803
1318
1 047
523
472
339
329
-302
-399
-620
-1173
-1284
-1539
-4 674
-5 504
-8 842
-11174
United States
Canada
Japan
United Kingdom
Asia Pacific (excl. Japan)*
Australia
Asia Pacific*
Brazil
Taiwan
Indonesia
India
Hong Kong
Russia
Mexico
Spain
Italy
Germany
China
European Region*
Eurozone*
US has been draining l iquidit y f rom gl obal capit al markets - ETF net f lows, USD mln
* regionally focused funds
Source: Bloomberg
Slide 607.10.2016
Global interest rates were on a steady downward trend over the last 25 years firstly as a result of disinflation and the
subsequent asset purchase programs pursued by major central banks
Negative-yielding instruments now account for approximately 25% of the global bond universe, 65% of japan debt,
64% of german debt, 50% of French debt
Negative interest rates distort the time value of money, a cornerstone of investment decision making, and may lead to
capital market imbalances
Low / Negative Interest Rates Turn Search for Yield Into a
Challenging Quest
Source: JP Morgan, Bloomberg, VTB Capital IM Research estimates
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
200
400
600
800
1 000
1 200
$b
n
Volume of Govt Debt with negative yields ($bn)% of Govt debt with negative yields (rhs)
Vol ume of Government Debt Tr aded at Negat ive Yields
0
2
4
6
8
10
12
14
JP Mor gan Gl obal Aggr egate Bond Index YTM (USD)
Slide 7
In the past EM equities have outperformed DM equities during periods of commodity price growth and EM economic
acceleration versus DM
The EM-DM real GDP growth difference is expected to widen starting from 2016 and onwards as EMs re-accelerate
from a low base.
Both EMs and DMs need China’s smooth transition from investment to consumption-led growth .
Emerging Markets Are Bottoming Out
07.10.2016 Source: Bloomberg, IMF, VTB Capital IM Research estimates
0
50
100
150
200
250
300
350
400
-6
-4
-2
0
2
4
6
8
88 91 94 97 00 03 06 09 12 15 18 21
Index
valu
e (
12.3
1.19
93=
100)
GD
P G
row
th D
iffe
rence, %
EM-DM Real GDP Gap (lhs)
EM/ DM Equit ies Relative Performance (rhs)
EM/ DM Relat ive Performance is Tightly Cor related t o EM-
DM r eal GDP Gr owth Gap
IMF
fore
cast
0
100
200
300
400
500
600
700
800
900
1000
0
50
100
150
200
250
300
350
400
88 91 94 97 00 03 06 09 12 15
S&
P G
SC
I In
dex
Valu
e
Rela
tive
Perf
orm
ance In
dex
Valu
e
EM/ DM Relative performance (lhs) S&P GSCI Index Spot CME (rhs)
...As Well As Commodit y Pr ices
Slide 8
Global Oil Market Is Adapting to a New RealityUpstream capex has been
reduced by 22% or USD 740
bn for 2016 through 2020.
With an emerging oil supply
gap to 2025, more than 20
Mbpd must be developed by
then to offset declines and
meet demand growth
emerging from a significantly
slowed market. For now,
everyone is focused on the
near-term.
Over half of all new 2025
production breaks even at
USD 35-55/bbl.
Taking into account that a
quick recovery of oil prices is
unlikely to happen in the
short-term, the industry
needs to do more to address
the structural cost problems
resulting from a decade of
sustained cost inflation.
Source: IEA, EIA , Wood Mackenzie and VTBC AM estimates
30
35
40
45
50
55
60
65
70
75
2016 2017 2018 2019 2020
USD
/bbl
Brent forward as of 08.09.2016
Brent consensus as of 08.09.2016
Br ent for war d cur ve vs. consensus
est imates
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
Mb
pd
Deepwater Shallow water Oil sands Onshore
Liquids pr oduction impacted by pr oject
FID delays
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
90919293949596979899
100
Mbpd
Mbpd
Implied stock change and balance (rhs), Mbpd
World production (lhs), Mbpd
World consumption (lhs), Mbpd
Liquids pr oduction and consumpt ion might be
cl ose to bal ance in the coming quar ter s
Pr o jec t ions
0
10
20
30
40
50
60
70
80
1 3 5 7 9 11 13 15 17 19Bre
ake
ven U
S$/b
bl
Bre
nt equiv
ale
nt
New liquids production 2025, Mbpd
weighted aver age breakeven oil
pr ice based on 2025 production
Slide 907.10.2016
Return Expectations
Equities
RUB OFZs
RUB Corporate
Bonds
USD Sovereign
Bonds
IG Corp
Eurobonds
HY Corp
Eurobonds0%
5%
10%
15%
20%
25%
0% 5% 10% 15% 20% 25% 30%
Expecte
d R
etu
rn, %
Standard Deviation of Returns, %
Russian Asset Cl ass Ret urn Expect at ions and Vol at il it y Over Next 12m Hor izon
Source: VTB Capital Investment Management research estimates
Slide 1007.10.2016
Domestic Macro
Slide 11
Russia is dealing with the consequences of the trade shock with quite a moderate impact on real GDP growth
compared to the Asian financial crisis of the late 90’s and the 2007-08 global financial crisis.
A 3.7% contraction in real GDP in 2015 was less severe compared to previous recessions with the help of
accumulated official reserves and a flexible exchange rate policy, but the recovery could be more prolonged this time.
All in all, the business cycle is bottoming and recessionary pressure is easing in 2016. With economic adjustments
well under way a foundation for growth in 2017 is being laid.
Russia Has Adjusted and Is Now Recovering
07.10.2016
-5.0%
-7.8%
-3.7%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
199
7
199
8
199
9
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16 F
20
17 F
GD
P G
row
th,
%
Russia is Adapting t o Low Commodit y Pr icfes
Real GDP growth (%, ch. y-o-y)
Asian FinancialCrisis
Global Financial Crisis
Terms of Trade Shock
Source: Federal State Statistics Service, VTB Capital IM Research estimates
Slide 1207.10.2016
Russia – Short Term Macro Indicators
Russia is set to see an
improvement in its
economic conditions.
Recent data on economic
activity was better than
market expectations.
Consensus forecasts for
2016 are now being
upgraded.
Source: Bloomberg, VTB Capital IM Research estimates
Data as of September 2016
Indicator Value Comment
Current economic
surprise index27.3 points
Recent macro indicators continue to beat market
expectations.
Average 3M economic
surprise index27.7 points Average 3M economic surprise index is on a positive trend.
PMI Manufacturing 50.8 pointsPMI manufacturing shows an expansion in business activity
(>50).
GDP forecasts revision
momentum over the
past 3 months
0.30 pptReal GDP forecasts over the past 3 months are being
upgraded.
CPI forecasts revision
momentum over the
past 3 months
-0.6 ppt Inflation forecasts over the past 3 months show a decline.
Potential GDP growth,
YoY1.0 % Potential GDP growth is now estimated at 1% YoY.
Potential (normalized)
CPI growth, YoY5.2 %
Potential long-term inflation for the Russian economy is
estimated at 5.2% YoY.
GDP consensus
forecast, YoY (2016)-0.7 %
The Bloomberg consensus expects real GDP to stagnate at
0.7% YoY in 2016 and this is gradually improving.
Inflation consensus
forecast, YoY (2016)7.3 %
The Bloomberg consensus expects inflation to reach 7.3%
YoY in 2016, and this forecast is gradually being
downgraded.
Positive
Negative
Neutral
Slide 13
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
14,0%
16,0%
18,0%
CPI pr ojections f or the next 12
months, % YOY
Headline CPI, % YoY
0,3% m-o-m
BoR proxy
0,5% m-o-m
VTBC IM proxy
0,7% m-o-m
LT monthly CPI proxy, ex.extremums (2000-15)
LT monthly CPI proxy (2000-15)
-30
-20
-10
0
10
20
30
40
50
60
Inf l ation sur prises Index is in negat ive t er r itory
Inflation surprises index
Inflation is above expectations -bad
Inflation is below expectations -good
Inflation continues to slow
faster than market
expectations, which is
illustrated by the inflation
surprise index going into
negative territory.
The CBR estimates
headline inflation will fall to
4.5% YoY for the next 12
months and 4% YoY by
2017.
Headline CPI was reported
at 6.4% as of Sep’16.
Bloomberg consensus
implies 5.5% YoY headline
CPI for 2017.
Decline in Inflation Outpaces Market Expectations
07.10.2016Source: Bank of Russia, Federal State Statistics Service, Federal Customs Service, Citi, Bloomberg, VTB Capital IM Research estimates
Slide 14
The CBR has lowered the
key rate to 10%, but
maintains a hawkish
monetary policy with the real
rate at 3% above headline
inflation.
In addition to cutting interest
rates, the CBR is working to
absorb excess ruble liquidity
through operations on the
open market – deposit
facility, OFZ selling, and
OBR placements in the
future.
The key rate could be
reduced by 250 bps by the
end of 2017, from 10% to
7.5% p. a.
The Bloomberg consensus
expects a 225 bps rate cut
over the same period.
Interest Rates – Room for More Cuts
07.10.2016 Source: Central Bank of Russia, Federal State Statistics Service, Ministry of Finance, VTB Capital IM Research estimates
10,0%
8,5%
7,8%
6,1%
7,5%
4%
6%
8%
10%
12%
BoR Key
Rate,
current %
BoR Key
Rate,
TAYLOR
Rule inertia
adjusted
BoR Key
Rate,
Bloomberg
consensus
BoR Key
Rate, +25
bp over
expected
inflation
BoR Key
Rate,
blended
BoR Key r at e For ecast - 7.5% by 2017
2
4
6
8
10
12
14
16
18
20
Interest rates channel of BoRin action
BoR Fixed REPO Rate Overnight, %
BoR Fixed Deposit Rate Overnight, %
MosPRIME Rate Overnight, %
BoR Key Rate, %
Slide 15
Throughout 2H16 the CBR
expects that banks will shift
from a deficit to a surplus in
ruble liquidity.
The federal budget is using
the Reserve Fund to fill the
deficit gap, which is about to
reach ~3% of GDP for
7M16. This boosts the ruble
liquidity available to the
market.
Under these circumstances
the CBR could switch from
offering liquidity to
absorbing ruble liquidity
through deposit operations
with banks.
Consequently, money
market rates should drift to
the CBR fixed deposit
overnight rate and OFZ
yield compression should
continue.
Ruble Liquidity Is Shifting to Surplus
07.10.2016
-7,4
-5,5
-4,9
-3,8-3,5
-2,2
-1,3
0,4
-8,0
-6,0
-4,0
-2,0
0,0
2,0
Rub.
trln
.
BoRr educes r ef inancing oper at ions
with banks. The feder al budget pr ovides
addit ional r ouble l iquidity to the mar ket
FB deficit financing by SWFOther claimsLoansREPOThe BoR claims on banks, total Rub.trln.
-7,4
-5,5-4,9
-3,8 -3,5-2,2
-1,3
0,4
14,4
12,211,0 11,0
9,99,3
8,8 8,5
-12,0
-8,0
-4,0
0,0
4,0
8,0
12,0
16,0
4Q-14 1Q-15 2Q-153Q-15 4Q-151Q-16 2Q-164Q-16
F
Excessive Ruble Liquidity is heat ing up
OFZ mar ket
The BoR claims on banks, total Rub.trln.
OFZ YTM, eop %
Source: Central Bank of Russia, VTB Capital IM Research estimates
Slide 16
Forecasts for 2016 have
been upgraded following the
release of macro indicators
over the first eight months
that generally beat market
expectations.
The price of oil recovered to
$50/bbl, which is a
moderately comfortable
level for the economy.
Our base case scenario for
2017 implies 1.5% real
GDP growth and declining
inflation assuming an
average oil price of $55/bbl.
Macro Forecast for 2016-17
07.10.2016Source: Central Bank of Russia, Federal State Statistics Service, Ministry of Finance, VTB Capital IM Research estimates
Russian E conomy – Scenarios and Forecasts 2016KEY INDICATORS 2014 2015 2016 E Bear Case Base Case Bull CaseReal GDP, % YoY 1,3% -3,7% -0,3% 0,4% 1,5% 2,7%
Industrial Output, % YoY 0,3% -3,4% 0,3% 0,5% 1,9% 3,3%
Real Retail Sales, % YoY 3,9% -10,0% -4,6% -0,5% 1,7% 4,0%
Real Wages per capita, % YoY 5,2% -9,5% -0,7% 0,6% 2,8% 5,0%
PRICES AND MONEY SUPPLY 2014 2015 2016 E Bear Case Base Case Bull CaseCPI, % average per year 6,8% 15,5% 7,4% 6,2% 5,7% 5,3%
CPI, % December YoY 6,5% 12,9% 7,0% 7,1% 5,8% 4,7%
Money Supply (M2), % YoY 14,6% 11,5% 14,7% 12,5% 17,5% 18,9%
TRADE BALANCE AND FEDERAL BUDGET 2014 2015 2016 E Bear Case Base Case Bull CaseTrade Balance, $ bln 180 149 108 118 134 151
Federal Budget Revenues, Rub. bln 13 020 13 655 13 061 12 058 13 375 14 692
Federal Budget General Def.(-)/Surp.(+), % of GDP -0,4% -2,4% -3,4% -3,5% -2,9% -2,4%
EXCHANGE RATE AND INTEREST RATE 2014 2015 2016 E Bear Case Base Case Bull CaseUSDRUB Exchange Rate, eop 32,7 72,9 65,6 68,8 62,2 56,8
USDRUB Exchange Rate, aop 32,0 62,0 68,0 65,2 62,3 59,9
EURRUB Exchange Rate, eop 45,0 79,7 71,3 72,2 68,4 65,3
CBR Dual-Currency Basket ($55/€45), eop 38,2 75,9 68,2 70,3 65,0 60,6
Gross International Reserves (GIR), $ bln 510 368 390 394 394 413
ASSUMPTIONS 2014 2015 2016 E Bear Case Base Case Bull CaseCrude Oil Price, average, $/bbl 108 53 45 45 55 65
Scenario Probability, % 20% 60% 20%
Forecast by Scenarios 2017
Slide 17
Base case forecasts for
2017 from international
and government
organizations look positive
in general.
If global oil prices hold at
current levels ($50/bbl),
inflation is expected to fall
below 6% YoY and real
GDP growth should
achieve 1%.
Overall are we agree with
moderate prospects,
expecting a positive
scenario of low inflationary
growth for 2017.
Third-Party Estimates and Forecasts for 2017
07.10.2016
Note:
The table indicates base case forecasts, if not stated otherwise
IMF – International Monetary Fund
OECD – Organization of Economic Co-operation and Development
EBRD – European Bank for Reconstruction and Development
Source: Agencies’ data, Bloomberg, VTB Capital IM Research estimates
3-d parties forecasts of Russian E conom y for 2017
Source Real GDP Crude oil, $/bbl CPI, % yoyDate of
forecast
World Bank 1,4% 50 na Jun-16
Bloomberg consensus 1,3% 56 5,5% Sep-16
VTBC IM forecast 1,5% 55 5,9% Sep-16
Ministry of Economic 0,6% 40 4,9% Aug-16
Bank of Russia (BoR) 1,0% 40 4,0% Sep-16
IMF 0,8% 42 6,5% Jul-16
EBRD 1,0% na na May-16
OECD 0,5% na 5,3% Jun-16
Average 1,0% 47 5,3%
Average, excl. extremums 1,0% 49 5,4%
Slide 18
Our key approach for
determining USDRUB fair
value is based on exchange
rate sensitivity to crude oil
prices in real terms.
Our weighted probability
scenario for 2016 implies
USDRUB fair value at 62.4,
which is based on an
average oil price of $55/bbl
for 2017.
Market consensus
estimates the fair value of
USDRUB at 64.8, with
crude oil prices at $55/bbl
for the same period
according to Bloomberg
data.
Determining the Ruble’s Fair Value
07.10.2016
65,064,8
62,4
y = -29,29ln(x) + 177,63
R² = 0,8929
20
30
40
50
60
70
80
90
100
110
0 25 50 75 100 125 150
USD
RU
B r
eal t
erm
s,e
op
Crude oil price, USD/bbl average
USDRUBRER based on oil pr ices
USDRUB, real terms (current)
USDRUB, last price
Bloomberg Consensus (2017 eop)
VTBC IM Scenario Probability-Weighted (2017 eop)
Source: Central Bank of Russia, Bloomberg, VTB Capital IM Research estimates
Brent, $/bar average USDRUB
100 42.7
90 45.8
80 49.3
70 53.2
60 57.7
50 63.0
40 69.6
30 78.0
20 89.9
10 110.2
FV of USDRUB depending on average
Crude Oil prices
Data as of 8th Sep.2016
Slide 1907.10.2016
Catalysts to Watch
Disinflation. Russia remains firmly on a disinflationary track with YoY
CPI growth declining from 16% in Mar’15 to 6.8% in Aug’16. To remind:
disinflation was a major factor driving strong equity and bond returns in
DMs from early 80s to late 90s.
Privatization. The government has decided to jump-start the
privatization process by offering stakes in some of the largest SOEs in
order to help fill the gap in planned budget revenues.
Dividends. To maximize revenues from expected privatizations the
Russian government is considering increasing the dividend payout ratio
for SOEs from 25% to 50%. This aligns government interests with
minority shareholders.
Source: VTB Capital Investment Management
Slide 20
Reducing Budget Deficit Via Higher Dividends and Privatization
Slide 20
The government has decided to jump-start the
privatization process by offering stakes in some of the
largest SOEs in order to help fill the gap in planned
2016-2017 budget revenues.
The main candidates for the upcoming privatization are
Aeroflot, Alrosa, Bashneft, Rosneft, Russian Railways,
Sovkomflot and VTB, whose CEOs discussed this with
the Russian President earlier this year.
Recently the Finance Ministry has proposed enforcing a
50% DPR for SOEs dividends, which would contribute
around RUB 243bn of additional revenues to the budget
next year.
Source: Company data, Federal Property Agency, VTB Capital IM Research estimates
0
100
200
300
400
500
RU
B b
n
Budget revenues f r om SOEs dividend payments
Additional dividends if 50% DPR
SOEs dividends paid to the budget
07.10.2016
0%2%4%6%8%
10%12%14%16%18%
SOEs 2016e dividend yields (to be paid in 2017)
Base case DY DY under 50% IFRS DPR
Sovcomflot
Bashneft
Aeroflot
Alrosa
Transneft
Russian Railways
Rosneft
Inter RAO
VTB
RusHydro
0% 20% 40% 60% 80% 100%
Pr ivat izat ion program 2016-2017 (RUB 1 t r l n target )
Stake to be sold State holding
Slide 2107.10.2016
Fixed Income – Ruble Debt
Slide 22
The ruble bond yield curve
remains inverted, implying
that further rate cuts lie
ahead.
Sub-federal and corporate
ruble bond spreads are
close to their average
levels.
Another key rate cut by the
CBR is largely priced in by
the OFZ market.
Ruble Bonds – Key Trends
07.10.2016
0
200
400
600
800Ruble bonds Z-SPREADto OFZ, basis points
Corporate Ruble Bonds (MICEXCBICP Index)Sub-Federal Ruble Bonds (MICEXMICP Index)
4
8
12
16
20
Russian debt YTMs, %
OFZ (RGBI Index)Corporate Ruble Bonds (MICEXCBICP Index)Sub-Federal Ruble Bonds (MICEXMICP Index)
Source: Moscow Exchange, VTB Capital IM Research estimates
Sub-federal Corporate
MEAN 127 154
MAX 417 638
MIN 1 3
LAST 127 164
0
100
200
300
400
500
600
700
Z-s
pre
ads to
OFZ
, b
ps
Rubl e bonds spreads over 2006-2016 period
(ex.extremums of 2008/ 09)
7,0
8,0
9,0
10,0
11,0
12,0
13,0
14,0
0 1 2 3 4 5 6 7 8 9 10 11
Yiel
d to
Mat
uri
ty, %
Duration, Years
OFZ Yield Curve
Corporate Bonds Yield Curve
Government and First -t ier Cor porate Ruble Bonds
Slide 23
Russia
Brazil
South Africa
MexicoIndonesia
Hungary
Poland
MalaysiaThailand
India
Turkey
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
0% 20% 40% 60%
10Y Y
ield
less 1
6E
CPI
Inflation
Gov-t domestic currency debt, % of GDP
RUB r eal yields ar e within EM average
07.10.2016
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Sep
-13
Dec-
13
Mar-
14
Jun-1
4
Sep
-14
Dec-
14
Mar-
15
Jun-1
5
Sep
-15
Dec-
15
Mar-
16
Jun-1
6
Sep
-16
10Y OFZ Yield - CPI YoY
Real 10Y Yield Average
OFZ Yields and Inflation
Source: Bloomberg, VTB Capital IM Research estimates
Thanks to a steep decline in YoY inflation, due to the high
base effect, the yield on Russia’s 10Y local government
bond has moved into positive territory in real terms.
In the absence of new external shocks the disinflationary
trend should continue throughout 2016 and 2017.
OFZ real yields are slightly below the EM average,
however this looks fair, given low government leverage.
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
10/ 11 07/ 12 04/ 13 01/ 14 10/ 14 07/ 15 04/ 16
EM YoY CPI Inflat ion r ates
Turkey Brazil Russia South Africa
Slide 2407.10.2016
1.2
1.2
2.0
4.3
5.3
6.1
6.6
7.4
8.2
8.5
0 2 4 6 8 10
Hungary
Poland
Malaysia
Mexico
Indonesia
India
Russia
South Africa
Turkey
Brazil
%
10Y government bond carr y over UST
Ruble Carry Is Still Attractive
0.09
0.11
0.11
0.18
0.27
0.38
0.41
0.49
0.51
0.64
0.82
0 0.2 0.4 0.6 0.8 1
Thailand
Poland
Hungary
Malaysia
Mexico
South Africa
Russia
Indonesia
Brazil
Turkey
India
%
Vol at il ity-adjusted car ry over UST
Source: Bloomberg, Cbonds, Moscow Exchange, VTB Capital IM Research estimates
RUB still provides one of the highest yield pick-ups
over UST in the EM space.
At present levels Russia’s volatility-adjusted carry
over UST is close to EM peers (Brazil and South
Africa).
Going forward we see 15-25% p. a. as a fair range
for RUB implied volatility.
Russia
Brazil
South Africa
Mexico
Indonesia
HungaryPoland
Malaysia
Thailand
India
Turkey
0
1
2
3
4
5
6
7
8
9
0 5 10 15 20 25
Carr
y ove
r 10
Y U
ST
1Y FX IVOL
EM car r y over UST vs FX vol atil ity
Slide 2507.10.2016
RUB Yield Curve Set to Flatten
The rally in long-dated OFZs has moved the
slope of the sovereign yield curve on the
ruble debt market deeper into negative
territory.
Over the next 12 months we expect the OFZ
curve to gradually flatten as a result of short-
term rates going down.
As the disinflationary trend is likely to
continue through 2016-17 the full
normalization of the OFZ yield curve (i. e.
moving back into a positive slope) may take
2+ years.
Source: Bank of Russia, Federal State Statistics Service, Bloomberg, VTB Capital IM Research estimates
-6.00
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
No
v-10
Feb-1
1M
ay-
11A
ug-1
1N
ov-
11Fe
b-1
2M
ay-
12A
ug-1
2N
ov-
12Fe
b-1
3M
ay-
13A
ug-1
3N
ov-
13Fe
b-1
4M
ay-
14A
ug-1
4N
ov-
14Fe
b-1
5M
ay-
15A
ug-1
5N
ov-
15Fe
b-1
6M
ay-
16A
ug-1
6
OFZ Yield Curve Sl ope (10Y-1Y) vs CPI
OFZ10Y-OFZ1Y YoY CPI less LT average (RHS, inverted)
Slide 26
Ruble Bonds – Expected 12m Returns
The upside for ruble bonds over the next 12 months could be realized through a further decline in the
CBR key rate
Soft budget policy and using sovereign wealth funds to finance the budget deficit creates additional
sources of ruble liquidity and pushes bond yields down further. However, a projected increase in net
MinFin supply from ~400bn RUB in 2016 to over 1tn RUB in 2017 presents a major risk
Non-resident holdings of OFZs have been increasing from 2015 and now likely to exceed 50% of
outstanding longer-dated issues which could be a source of volatility
Corporate spreads to OFZs look moderately attractive
07.10.2016 Source: Moscow Exchange, VTB Capital IM Research estimates
Ruble BondsCurrent
ValueBear Base Bull
Corporate Bonds Z-spread to OFZ, bps 164 250 150 90
Weighted Average Duration, years
OFZ (Moex Index) 4.7 4.7 4.7 4.7
Corporate Bonds (Moex Index) 2.0 2.0 2.0 2.0
Target Yield-to-Maturity RUB terms, %
OFZ (Moex Index) 8.3% 9.6% 8.0% 7.4%
Corporate Bonds (Moex Index) 10.2% 12.1% 9.5% 8.3%
Expected Total Return RUB terms, % per annum
OFZs (Moex Index) 3.4% 9.5% 11.6%
Corporate Bonds (Moex Index) 8.3% 10.9% 12.1%
Average Expected Return RUB terms, % per annum 5.9% 10.2% 11.9%
Scenario probability, % 20% 60% 20%
Slide 2707.10.2016
Credit Spreads in Ruble Space
103
148
198
216
93
117
139
160
75
102
125
144
0
50
100
150
200
250
0-1 1-2 2-3 3-4
Sp
read
(b
.p)
Duration, yrs
Financials Corporates Government Regional & Local
Cr edit Spr ead Pr of ile by Sector & Dur at ion
7285 84
9385
114
138
159
114
143
175
204
0
50
100
150
200
250
0-1 1-2 2-3 3-4
Sp
read
(b
.p)
Duration, yrs
BB+ BB BB-
Cr edit Spr ead Pr of ile by Cr edit Rat ing & Durat ion
1-2Y corporate issues do not offer an attractive risk premium to OFZs.
Banking names offer a meaningful yield premium relative to non-financial corporates and local government issues
across the curve.
Non-financial corporate spreads to OFZs within the 3-4Y duration bracket look particularly attractive.
Source: Moscow Exchange, VTB Capital IM Research estimates
Slide 2807.10.2016
Fixed Income – Hard Currency Debt
Slide 29
Credit metrics, debt loads and Russia’s balance of payments look better than EM peers.
The yield on five-year Russian Eurobonds has fallen to 2.9% YTM, and 5-year CDS on Russia to 220 bps, which
is roughly in line with average levels for EMs of 2.99% and 150 bps, respectively.
At current levels Russian Eurobonds remain moderately attractive relative to their EM peers.
Russian Eurobond Market Versus EM Peers
07.10.2016Source: IMF, Bloomberg, VTB Capital IM Research estimates
Russia
Turkey
Hungary
South Africa
IndonesiaIndia
Brazil
Colombia
Peru
ChinaPhilippines
Mexico
Poland
Malaysia
Chile
EM average
50.0
100.0
150.0
200.0
250.0
300.0
1.0 2.0 3.0 4.0 5.0
5Y S
ove
reig
n C
DS, U
SD
bps
5-7Y Sovereign Eurobond YTM, %
Russia acr oss EM peer s - Russia is r el at ively at t r act ive
Russia
Chile
China
Indonesia
Colombia
Korea
Turkey
Philippines
EM average
Argentina
South AfricaMexico
Thailand
Malaysia
Poland
IndiaBrazil
-8
-6
-4
-2
0
2
4
6
8
10
0 20 40 60 80 100
Cu
rre
nt acco
un
t B
ala
nce (20
16 E
), %
Gross Government Debt to GDP (2016 E), %
Russia has a positive current account and moderate har d cur rency indebt edness
Slide 30
0
4
8
12
16
20Russian Eurobond YTMs, %
Sovereign Eurobonds (GDRU Index)
High Grade Corporate Eurobonds (ERUI Index)
High Yield Corporate Eurobonds (ERUH Index)
Russian Eurobond credit
spreads are below their
historical averages and are
close to reaching new
lows.
Current spreads to USTs
are around 150 bps for
sovereign issues, 230 bps
for high-grade issues and
330 bps for high-yield
issues.
The potential for a further
tightening in spreads
remains, but the market
looks less and less
attractive relative to
historical averages.
Russian Eurobonds – Key Trends
07.10.2016
0
400
800
1200
1600
2000Russian Eurobond Govt OAS spr eads, bps
Sovereign Eurobonds (GDRU Index)High Grade Corporate Eurobonds (ERUI Index)High Yield Corporate Eurobonds (ERUH Index)
Source: BofA Merrill Lynch, Bloomberg, Moscow Exchange, VTB Capital IM Research estimates
0
1
2
3
4
5
6
7
0 2 4 6 8 10 12 14 16
Yiel
d t
o M
atu
rity
, %
Duration, Years
Russian Eurobonds: sovereign and cor por ate issues
Sovereign Eurobonds Yield Curve
Corporate Eurobonds Yield Curve
Sovereign HG Corporate HY Corporate
MEAN 232 316 532
MAX 773 1062 1711
MIN 71 115 186
LAST 151 231 334
0
400
800
1200
1600
2000
OA
S s
pre
ads, bps
OAS spreads of Russian eurobonds over the
2001-2016 period (ex.extremums of 2008/ 09)
Slide 31
07.10.2016
49108
160256
338 345
624
1231
0
400
800
1 200
1 600
CEMBIBroad
AAA
CEMBIBroad AA
CEMBIBroad A
CEMBIBroad
BBB
CEMBIRussia
Broad(BB)
CEMBIBroad BB
CEMBIBroad B
CEMBIBroad C
z-Spre
ad t
o w
ors
t, b
ps
Russia's Credit Pr icing is Cl ose To Fair Level
Russian Corporates: Credit Spreads Look Fair
Source: Bloomberg, JP Morgan, VTB Capital IM Research estimates
Brazil (BBB-)
Chile
China (BBB)
Colombia (BBB-)
CzechHong KongIndia
Indonesia (BB)
Israel (BBB-)
Korea
Mexico
Philippines
Qatar (A)
Russia (BB+)
Saudi Arabia (A)
Singapore
S.Africa (BB+)
Thailand (BBB+)
Turkey
UAE
0
100
200
300
400
500
600
700
1.00 2.00 3.00 4.00 5.00 6.00
Spre
ad t
o W
ors
t, b
p
Gross Debt / EBITDA
Gr oss leverage vs Cur r ent STW
ATTRACTIVE
EXPENSIVE
The Russian corporate bond universe (represented by the CEMBI index) has an average S&P rating of BB+ and
an average gross debt/EBITDA ratio of 3.0x.
Indonesia and Brazil’s corporates now trade 200-300 bps wider than Russian corporates, but this is explained by
higher debt loads.
Rapid corporate deleveraging is underway as a result of sanctions. This is leading to a scarcity of Russian
corporate credit risk on the market and premium valuations.
Slide 3207.10.2016
Corporate Leverage and Credit Spreads
Since 2010 the aggregate Debt/EBITDA ratio for Russian corporates (ex-banking sector) has increased from
1.5x to 3.0x.
Despite the dramatic deterioration in external conditions in 2014-16, Russian corporates have managed to keep
key credit metrics more or less stable by cutting capex and deleveraging.
An increase in Debt/EBITDA to 3x based on trailing 12m 2Q16 data has a one-off nature as it captures cyclically
worse quarters in terms of profitability
0
0.5
1
1.5
2
2.5
3
3.5
2010 2011 2012 2013 2014 2015 2016
Gors
s d
ebt
/ EB
ITD
A
Russian corporate univer se aggregated Gross
Debt / EBITDA (ex f inancial s)
Now
0
100
200
300
400
500
600
700
800
900
1 1.5 2 2.5 3 3.5
OA
S, b
ps
Gorss debt / EBITDA
Russian corporateuniver se l ever age vs credit
spr eads
Source: Bloomberg, VTB Capital IM Research estimates
Slide 33
Russian Eurobonds – Expected 12m Returns
Russian Eurobonds could deliver ~3-4% total returns over the 12-month horizon under the base case, which assumes
no significant movement in benchmark UST rates and credit spreads remaining close to current levels.
At current levels we maintain core positions in solid credit stories with shorter maturities
On average the high-yield segment does not provide an adequate risk premium for a bear case, but selected credit
stories still look attractive.
07.10.2016 Source: BofA Merrill Lynch, Bloomberg, VTB Capital IM Research estimates
Russian EurobondsCurrent
ValueBear Base Bull
Govt OAS Spreads, bps
Sovereign Eurobonds (GDRU Index) 151 258 150 130
Investment Grade Corporate (ERUI Index) 231 380 230 200
High Yield Corporate (ERUH Index) 334 727 350 300
Weighted Average Duration, years
Sovereign Eurobonds (GDRU Index) 5.5 5.5 5.5 5.5
Investment Grade Corporate (ERUI Index) 3.5 3.5 3.5 3.5
High Yield Corporate (ERUH Index) 3.5 3.5 3.5 3.5
Target Yield-to-Maturity, %
10-year US Treasury Bonds 1.7% 1.2% 1.7% 2.1%
Sovereign Eurobonds (GDRU Index) 2.9% 3.5% 2.9% 3.1%
Investment Grade Corporate (ERUI Index) 3.4% 4.4% 3.4% 3.5%
High Yield Corporate (ERUH Index) 4.1% 7.6% 4.3% 4.2%
Expected Total Return USD terms, % per annum
Sovereign Eurobonds (GDRU Index) 0.3% 2.9% 1.8%
Investment Grade Corporate (ERUI Index) 0.9% 3.4% 3.0%
High Yield Corporate (ERUH Index) -4.6% 3.7% 3.8%
Average expected return USD terms,% per annum -1.1% 3.3% 2.9%
Scenario probability, % 20% 60% 20%
Slide 3407.10.2016
Equities
Slide 35
Key Market Trends
0
3
6
9
12
15
18
0.0
0.5
1.0
1.5
2.0
2.5
3.0
07 08 09 10 11 12 13 14 15 16
P/E
12m
fw
d
P/B
V
MSCI Russia Valuat ions
P/ BV P/ E (rhs)
Source: Bloomberg, VTB Capital IM Research estimates
Russian equities still trade not far from 10Y lows.
Valuation discounts are reminiscent of the 2008-
09 trough.
Russia’s 12m forward P/E is now 6.4x, P/BV is
slightly above 0.7x (50%+ discounts relative to
MSCI EM).
As a result of a prolonged de-rating Russia now
offers a large DY premium to EM peers.
07.10.2016
0
500
1000
1500
2000
07 08 09 10 11 12 13 14 15 16
MSCI Russia Index Per formance
0%
1%
2%
3%
4%
5%
6%
7%
8%
03/2011 03/2012 03/2013 03/2014 03/2015 03/2016
Div
idend Yie
ld, %
Russia of fer s a meaningful dividend yield
pr emium to emer ging mar kets
Russia Emerging Markets (MSCI EM)
Slide 3607.10.2016
Market Dislocations Create Opportunities
Source: Bloomberg, EPFR, VTB Capital IM Research estimates
0%
10%
20%
30%
40%
50%
2007 2008 2009 2010 2011 2012 2013 2014 2015
%
Passively -managed money now account s f or over 40% of Russia-dedicated Equit y
AUM
ETFs as % of Russia-dedicated funds AUM
Market dislocations create a unique opportunity for fundamental
stock selection in the future:
Passively-managed money now accounts for over 40% of
Russia-dedicated equity fund AUM.
Small-Cap performance relative to the broad market is at 2009
lows.
Consensus EPS dispersion is close to 2009 highs for the market
as a whole and significantly above that level for some sectors.
This highlights increased uncertainty, reduced sell-side
analytical coverage and, consequently, an opportunity to earn
excess returns with the right decisions.0%
50%
100%
150%
200%
250%
300%
350%
400%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Standard deviation of consensus EPS Estimates as % of historical average
Banking Retail Electric Grids Oil
Gas Gencos Metals&minig Telecoms
0
20
40
60
80
100
120
140
2007 2008 2009 2010 2011 2012 2013 2014 2015
Rel
ati
ve P
erfo
rm
an
ce
Ind
ex
Smal l-caps are t aking of f aft er f ive years of pain
Small-caps relative to the market
Slide 37
At What P/E Multiple Should Russian Stocks Trade?
The Russian market is skewed towards the energy sector,
which partly explains the aggregate valuation discount
relative to EMs.
The MSCI Russia sector-neutral P/E (using MSCI EM
sector weights) is 7.7 versus a non-adjusted value of 6.4x.
This brings Russia’s P/E discount down from 48% to 38%,
which is still rather wide compared to the last 10Y average
of 20%.
Thus, a P/E re-rating relative to EMs in the range of 10-
20% looks quite possible, but going beyond that requires a
considerable reduction in the geopolitical risk premium.
Source: Bloomberg, VTB Capital IM Research estimates07.10.2016
4%
1%
6%
8%
9%
18%
55%
37%
4%
7%
8%
7%
30%
8%
0% 10% 20% 30% 40% 50% 60%
Other (IT etc.)
Utili ties
Telecoms
Consumer Staples
Materials
Financials
Energy
Weight in MSCI EM Weight in MSCI Russia
Russian mar ket is skewed towar ds the ener gy sector
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Regular Sector-neutral
Russia 12 FWD P/ E pr emium/discount to EM
-48%
-43%
-38%
-37%
-36%
-29%
-20%
-14%
-70% -50% -30% -10% 10%
Russia total
Energy
Russia Sector-neutral
Materials
Telecoms
Utili ties
Consumer Staples
Financials
P/E Next 12m Discount / Premium, %
Russia 12M FWD P/ E discount or pr emium r elat ive to EM
Slide 3807.10.2016
Double-digit 2016-18 EPS CAGR Is Quite Achievable
We expect ~15% CAGR based on our bottom-up DCF
models.
Around 50% of the EPS for the RTS index comes from
sectors with limited potential for long-term growth (oil and
telecoms).
The other 50% is made up of sectors with profitability either
at cycle lows (banking, gas and metals) or which possess
the potential for long-term growth (structural growth stories in
the consumer sector).
For DCF modelling purposes we assume a $45/bbl average
Brent price for 2016, $55 for 2017, and $60 for 2018. 4.7%
9.1%
3.6%
9.0%
9.6%
57.0%
15.2%
0% 10% 20% 30% 40% 50% 60%
Basic Mat er ial s
Tel ecoms
Util it ies
Oil &Gas
Consumer stapl es
Financial s/ Real
Est at e
Russia - t ot al
Next 3Y EPS CAGR (based on in-houseDCF Models)
0.5%
0.4%
0.1%
5.3%
0.6%
8.3%
15.2%
0% 5% 10% 15% 20%
Basic Mat er ial s
Tel ecoms
Util it ies
Oil &Gas
Consumer stapl es
Financial s
Russia - t ot al
Sector cont ribution to Next 3Y EPS CAGR
Source: Bloomberg, VTB Capital IM Research estimates
Exporters
59%
Other
41%
Oil
21%
Gas
22%Metals &
Mining
17%
Financials
22%
Telecoms
4%
Electric utilities
3%
Consumer
staples
11%
RTS Index EPS by sector (2016E)
Slide 39
50
110
170
230
290
200720082009 2010 2011 2012 2013 2014 2015 2016
Index
EPS (
USD
)
RTS Index EPS now has a very low base
2006-2010 Forward 12 months Base CaseBull Case Bear Case
EPS Scenarios for 2017
The weak macro situation
and ruble have put pressure
on the EPS of domestic-
oriented sectors, especially
banking.
Consensus earnings
estimates for metals &
mining and utility names, as
well as Gazprom, have
significantly declined over
the past two years, which
creates the opportunity for
positive surprises in the
future.
A key driver for the RTS
index EPS in 2017 vs 2016
are banking and O&G
sector profits.
We see +15% EPS change
in 2017 vs 2016 under our
base case, +3% under our
bull case and -3% under our
bear case.
Source: Bloomberg, VTB Capital IM Research estimates
11.8%12.9%
13.7%
22.2 %
16.9%
12.6%
10.9%
15.8%
19.1%
14.3%13.2%
12.5%12.0%12.9%13.4%13.4%
11.3%
15.5%
0%
5%
10%
15%
20%
25%
RO
E
RTS Index ROE
Reported 2002-2013(F) Consensus Forecast Base Case Bear Case Bull Case
07.10.2016
14.9
6.3
3.6
3.1
1.5
0.2
0.1
-0.1
0.1
-12 -2 8 18
RTS Index total
Banking
Oil
Gas
Consumer Staples
Telecoms
Consumer Cyclicals
Metals & Mining
Others
Sector cont ribution to RTS Index EPS change in 2017 vs 2016
(pr obabil ity-weighted for 3 scenar ios), pp -11,5%
-12,1%
14,4%
6,2%
17,4%
0,0%
-9,6%
0,4%
20%
7%
27%
11%
31%
-4%
-5%
14%
56%
25%
41%
16%
46%
-8%
-1%
29%
-20% 0% 20% 40% 60%
Oil
Gas
Banking
Telecoms
Consumer staples
Metals & Mining
Electric Util ities
Total - RTS Index
RTS Index EPS Scenar ios For 2017 By Sector
Bear Case Base Case Bull Case
Slide 40
Russian Equities: A Top-Down View
Source: Bloomberg, VTB Capital IM Research estimates
Ongoing geopolitical
tensions over the situation in
Ukraine still demand an
additional premium for
Russian assets.
The multiple expansion
phase of the market recovery
has begun, and the forward
12m RTS Index P/E ratio is
now trying to break through
the 6x ceiling seen over the
last five years.
We see ~15% EPS CAGR
for 2016-18, assuming a
gradual recovery in Brent to
$60/bbl by 2018.
RTS Index Top-Down Scenarios (Next 12 months)
Bear Base Bull
EPS 2016 $ 139.0 139.0 139.0 % change 2017 vs 2016 -3% 15% 33%EPS 2017E, $ 134.8 159.9 184.9Russian Sovereign Risk, % 6.8% 4.8% 4.4%Russian ERP, % 20.0% 12.0% 9.0%Terminal earnings growth, % 3.0% 3.0% 3.0%Current RTS Index Value 971 971 971Target P/E multiple 4.2 7.3 9.6RTS Index Fair Value 567 1162 1776Upside/Downside, % -41.6% 19.7% 82.9%Dividend Yield, % 3.5% 4.1% 4.8%Total Return, % -38.2% 23.8% 87.6%Probability-weighted return, % 24.2%
Estimated probability, % 20% 60% 20%
50
110
170
230
290
200720082009 2010 2011 2012 2013 2014 2015 2016
Index
EPS (
USD
)
RTS Index EPS now has a very low base
2006-2010 Forward 12 months Base CaseBull Case Bear Case
0
3
6
9
12
15
07 08 09 10 11 12 13 14 15 16
2006-2010 Forward 12 months Base Case Bull Case Bear Case
RTS Index Target P/ E Scenar ios
07.10.2016
Slide 4107.10.2016
Russian Equities: Bottom-Up DCF Snapshot
Source: Bloomberg, VTB Capital IM Research estimates
Energy
49,3%
Utilities
2,2%Consumer
6,9%
Basic
Materials
12,6%
Communicati
ons
6,3%
Industrials
0,3%
Financials
22,4%
RTS Index br eakdown by GICS sector s
14%
-14%
43%
23%
-20%
0%
20%
40%
60%
Bloomberg
Consensus,
median
Bloomberg
Consensus,
worst
Bloomberg
Consensus,
best
VTBC IM
RTS Bottom Up DCF Upside by scenarios
11%
-23%
29%
14%
15%
-3%
14%
-1%
21%
20%
11%
29%
-30% -20% -10% 0% 10% 20% 30% 40%
Energy
Utilities
Consumer
Basic Materials
Communications
Financials
DCF bottom up upside, %
RTS Index Bot tom Up DCF upside by GICS
sector s
VTBC IM Bloomberg Consensus, median
Slide 4207.10.2016
Corporate Governance: In-House DCF Risk Assessment
Source: VTB Capital IM Research estimates
We address individual company risk factors through additions to the required ERP based on Quality, Liquidity and
Cyclicality:
Quality: Quality refers to the analyst’s assessment of the company’s management, disclosure, IR and corporate
governance. Possible values are High (0.00%), Average (1.00%), Low (2.00%).
Liquidity: Possible values are Blue Chip (0.00%) – ADTV >$30mn, Average (0.75%) – ADTV $2-30mn, Low (1.50%)
– ADTV <$2mn. Examples of Blue Chips are: GAZP, SBER, MGNT, GMKN. Examples of Average are: FIVE, AFKS.
Examples of Low are: NKNC, MRKC, MAGN.
Cyclicality: Defensive means a company’s business is resilient to changes in the economy. Market means that a
company’s results are changing in-line with the economy. Cyclical means that a company’s results have above-
average sensitivity to changes in the economy. Possible values are Defensive (0.00%), Market (0.50%) and Cyclical
(1.00%).
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
O&G M&M Utilit iesConstruction Telcos TransportConsumerFinancials
In-House DCF Equity Risk Premium
Decomposit ion By Sector
Baseline ERP Leverage adjustment Quality Liquidity Cyclicity
Slide 43
Expected Returns Over the Next Three Years
Return Component Top Down Estimate
Dividend yield 5% p. a.
EPS growth 15% p. a.
P/E re-pricing 3% p. a. (from 6.4x to 7.0x )
Total 23% p. a.
Dividend yield
EPS Growth
Equity portfolio return factors
Active Alpha
Market themes/drivers
Profitability recovery from depressed levels
in cyclical sectors
Rising dividend payouts
Global risk aversion gradually recedes,
improvements in market infrastructure and
corporate governance
VTB Capital IM alpha generation track
record for sector allocation and stock
selection
Multiple expansion
Market dislocations resulting from low
demand for Russia’s risk
07.10.2016Source: VTB Capital IM Research estimates
Slide 44
Russian Dividends Are Supported by Low Payout Ratios and
FCF Generation
07.10.2016
Russia
Brazil
China
India
Indonesia
Korea
Malaysia
Philippines
Thailand
S Africa
Turkey
Egypt Mexico
Chile
Columbia
PeruArgentina
0%
1%
2%
3%
4%
5%
0% 20% 40% 60% 80%
Div
idend Yie
ld, %
Dividend Payout, %
EM Divedend Yiel ds vs Payout Ratios
Russia
Brazil
China
India
Indonesia
Korea
Malaysia
Philippines
Thailand
S Africa
Turkey
Egypt Mexico
Chile
Columbia
PeruArgentina
0%
1%
2%
3%
4%
5%
-10% -5% 0% 5% 10% 15%
Div
idend Yie
ld, %
FCF Yield, %
EM Divedend Yiel ds vs FCF Yiedl s
Source: Bloomberg, VTB Capital IM Research estimates
Slide 4507.10.2016
Individual Stock Cases
Slide 46
Russian oils: Growth and FCF despite oil price volatility
The dramatic fall in oil prices has left the global oil industry
scrambling to contain the damage. In this context the
Russian oil sector seems to be the best positioned to face
current harsh times. This year crude oil production in
Russia has reached post-Soviet highs, despite low oil
prices and limited access to capital markets.
Costs optimization and a weaker ruble have allowed the
industry not only to continue generating positive FCF, but
also to reduce leverage. The progressive tax system has
also helped, however, there is a risk of a tax burden hike
next year.
Source: Russian Ministry of Energy, Wood Mackenzie, data from 6 Russian oil majors and VTBC AM estimates
0
20
40
60
80
100
120
140
160
4,0
5,0
6,0
7,0
8,0
9,0
10,0
11,0
12,0
199
6
199
7
199
8
20
00
20
01
20
02
20
04
20
05
20
06
20
08
20
09
20
10
20
12
20
13
20
14
20
16
USD
/bbl
Mbpd
Cr ude oil output has steadily gr own despite
oil pr ice vol at il ity
Russian crude production (lhs) Brent price (rhs)
0
20
40
60
80
100
120
2010 2011 2012 2013 2014 2015
USD
bn
Russian oil s have continued generating FCF
and decreasing l ever age
Net debt Cummulative FCF
-30%
-20%
-18%
-9%
-3%
-2%
-2%
0%
2%
2%
4%
4%
6%
7%
Russia
North Sea
Canada
China
Brazil
South-East Asia offshore
Central Asia
US onshore
Mexico
West Africa offshore
Middle East
South America onshore
North Africa
Europe (excl. North Sea)
Russia t ops opex per boe r eduction between
2014 and 2015
Slide 47
Bashneft: Growth and Dividend Story
Slide 47
Bashneft has demonstrated that it is operationally flexible
and quickly adapted to new oil prices and the tax
environment, reducing low-margin refining volumes in
favor of higher light products share.
Despite the ramp-up of greenfields and slightly growing
brownfield production, Bashneft has remained FCF
positive.
We prefer Bashneft prefs due to the current high discount
to ords and more attractive DY profile.
Upside catalyst: privatization of a >30-50% stake might
trigger an offer for ords holders at a premium to market
price.
Source: Company data, VTB Capital IM Research estimates
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
-2 000
-1 500
-1 000
-500
0
500
1 000
1 500
2 000
2 500
3 000
2014 2015 2016 2017 2018
US
D m
n
Despite higher capex the company is expected to
r emain FCF positive in the coming years
OCF (lhs) Capex (lhs) FCF Yield (rhs)
3,5%5,1%
5,8%6,8%
8,5%
5,8%
8,4%9,5%
11,2%
14,0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
0
50
100
150
200
250
300
2014 2015 2016 2017 2018
RU
B/s
h
We expect the company to cont inue r etur ning
value to shar ehol ders through dividends
DPS ord (lhs) DPS pref (lhs)
DY ord (rhs) DY pref (rhs)
0
1 000
2 000
3 000
4 000
5 000
6 000
1Q
10
3Q
10
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13
3Q
13
1Q
14
3Q
14
1Q
15
3Q
15
1Q
16
3Q
16
1Q
17
3Q
17
1Q
18
3Q
18
1Q
19
3Q
19
1Q
20
3Q
20
th t
Bashneft 's crude production CAGR is est imated
at +3,5% in 2015-2020
Core fields T&T Burneftegaz
Slide 48
2015 is a low base. The earnings momentum is turning up from a low base. FY15 net income was RUB 223 bn. We expect
FY16 net income to be above RUB 485 bn (up 117% YoY), 8% above consensus.
Earnings recovery. We expect Sberbank’s FY16 net income to grow 117% YoY and the FY17 figure to be 16% higher YoY,
while the rest of the market is unlikely to generate EPS revision in excess of 20-30% over the same period.
Net income growth supported by a return to normalized ROE. On our numbers the normalized ROE for Sberbank is 17%,
which corresponds to the normalized earnings level of more than RUB 600 bn beyond 2018. The net income CAGR for 2015-
19 is 32%.
SBERP discount to SBER is above average. SBERP shares are currently trading at a 28% discount to SBER, which is
above the five-year average of 26%. Since both classes of shares get similar dividends, any discount of SBERP to SBER
means a higher dividend yield for the former.
07.10.2016
Sberbank: Earnings Momentum Is Turning Up from a Low Base
106 98
28
182
316348 362
290
223
484
561612
688
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
700
800
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6e
201
7e
201
8e
201
9e
Retu
rn o
n a
ve
rag
e e
qu
ity
Net
inco
me
(R
UB
bn
)
Net income Net income (e.)
Return on average equity and net income
60%
65%
70%
75%
80%
85%
90%
0
20
40
60
80
100
120
140
160
180
S-1
1
D-1
1
M-1
2
J-1
2
S-1
2
D-1
2
M-1
3
J-1
3
S-1
3
D-1
3
M-1
4
J-1
4
S-1
4
D-1
4
M-1
5
J-1
5
S-1
5
D-1
5
M-1
6
J-1
6
S-1
6
SB
ER
P/S
BE
R r
atio
Sh
are
pri
ce
(R
UB
)
SBERP RX/SBER RX ratio (rhs) SBERP RX price
SBER RX price Average ratio (rhs)
Avg. - std (rhs) Avg. + std (rhs)
SBERP/SBER ratio is slightly above 5 years average
Source: Company data, VTB Capital IM Research estimates
Slide 4907.10.2016
Multiples. X5 has a 13.9 P/E and 7.0 EV/EBITDA ratios for
2017. Dixy and O’key lack the scale to become industry
leaders and currently do not have the ability to achieve such
a scale.
Operational improvements. X5 managed to turn around
its key discounter format (73% of 2015 sales) and now
enjoys strong revenue growth from this segment. The
company is now working to improve its supermarket and
hypermarket formats. Better results of discounters made it
feasible to ramp up their openings, resulting in higher top-
line growth.
17 17
1412
17
1412
19
23
19
14
1113
97
6
0
5
10
15
20
25
2015 2016E 2017E 2018E
Pri
ce
/ea
rnin
gs r
atio
MGNT RX FIVE LI DIXY RX LNTA RX OKEY LI
Forward P/E ratio
neg.
Sales CAGR ('16-'20) Selling space CAGR ('16-'20)
LNTA 14,8% 9,2%
FIVE 14,5% 8,6%
OKEY 12,9% 6,1%
DIXY 11,0% 6,4%
MGNT 12,3% 7,1%
X5 Retail Group: Strong Revenue Growth in Discounter Format
11 11
9
8
9
87
6
5
8
65
109
8
66 6
54
0
2
4
6
8
10
12
2015 2016E 2017E 2018E
EV
/EB
ITD
A r
atio
MGNT RX FIVE LI DIXY RX LNTA RX OKEY LI
Forward EV/EBITDA ratio
Source: Company data, VTB Capital IM Research estimates
Slide 50
Alrosa: Strong FCF Generation and Attractive Dividend Yield
Source: VTB Capital Investment Management07.10.2016
Alrosa is a pure-play diamond producer offering direct
exposure to improving diamond market fundamentals
The company generates solid free cash flows, has no
massive capex projects and no need to invest in further
production growth (Alrosa has around 19mct of diamonds
in stocks)
The company has low leverage
Dividend policy sets payout ratio at >=35% of IFRS Net
Income. But the government (owns 66% after recent
placement) seems to be putting pressure on state-owned
companies to increase dividend payouts to 50%.
EV/EBITDA17 is 4.4x , P/E17 is 5.8x, FCF yield~17%,
dividend yield (with 50% payout ratio) ~9%
0
500
1 000
1 500
2 000
0%
5%
10%
15%
20%
25%
2014 2015 2016e 2017e 2018e 2019e
St r ong Free cash f low and high dividend yiel d
FCF, ml n usd (r ight scal e) FCF yiel d,%
Dividend yiel d,%
0
1 000
2 000
3 000
4 000
5 000
6 000
0%
10%
20%
30%
40%
50%
60%
70%
2014 2015 2016e 2017e 2018e 2019e
Low cash cost, stable high margin
Sal es, ml n usd (r ight scal e)
EBITDA, ml n usd (r ight scal e)
EBITDA mar gin,%
Slide 5107.10.2016
Bank St Petersburg: Mid-sized Bank with Strong Market Position
Bank St Petersburg (BSPB) is a mid-sized universal bank
with a strong market position in St Petersburg.
BSPB intends to complement organic growth through
selective M&A and careful geographical diversification.
BSPB has been profitable in 2007-15, despite different
stages of the economic cycle. We expect the bank’s ROAE
to reach 13% by 2020.
BSPB’s dividend policy is to pay out at least 20% of its RAS
net income.
BSPB
VZRZ
SBER
VTBR
0%
5%
10%
15%
20%
0 0,5 1 1,5
RO
AE
20
16
e
P/B ratio
BSPB P/B and ROAE relative to domestic peers
0,2%
3,7%
1,9% 2,0%
2,6%
4,4%
5,7%
0%
1%
2%
3%
4%
5%
6%
7%
0
1
2
3
4
RU
B
BSPB dividends
Dividend per share Dividend yield (rhs)
Source: Company data, VTB Capital IM Research estimates
2,02,8
0,6
4,1
5,9
1,3
6,7
4,8
3,6 3,6
4,6
8,0
10,4
0%
5%
10%
15%
20%
25%
0
2
4
6
8
10
12
RU
B b
n
BSPB net income can exceed RUB 10 bn in 2019
Net income Net income (e.) ROAE (rhs) ROAE (rhs, e.)
Slide 5207.10.2016
Appendix
Slide 53Source: Cbonds, Moscow Exchange, VTB Capital, Bloomberg, VTB Capital IM Research estimates
The Russian fixed-income
market was estimated to
total $404 bln at 8M-2016.
This year issuers became
more active on the
domestic debt market, so
ruble debt has been
increasing.
At the same time on the
hard currency market
issuers have been under
deleveraging, and the total
amount outstanding of
hard currency debt is
shrinking.
Scarcity on Russian Fixed Income Market
07.10.2016
112 120160
193230
285309
225195
221
134 136
131
143
150
192
234
214
185183
0
100
200
300
400
500
600
2007 2008 2009 2010 2011 2012 2013 2014 2015 8M
2016
Total Amount Outstanding of Russian Fixed
Income Mar ket , USD bn.
Russian Eurobonds Russian RUB Bonds
Local non-
sov
34%
Local sov
20%
Eurobonds
non-sov
34%
Eurobonds
sov
12%
Br eakdown of Russian Fixed Income Mar ket
(8M 2016)
Amount
out st anding at
USD 404 bn.
Slide 54
The Russian ruble bond
market:
Has RUB14.5 tln of total
outstanding debt
An average credit rating of
“BB+”
Is mostly represented by
financials in the corporate
segment
Has a liquid sovereign
segment (OFZ)
Is dominated by domestic
investors (banks, financial
institutions and pension
funds)
The ruble bond market
amounts to only 18% of GDP
and has good potential for
growth.
Mapping the Ruble Bond Market – Room to Grow
07.10.2016Source: Cbonds, Moscow Exchange, VTB Capital, Bloomberg, VTB Capital IM Research estimates
Sovereign37%
Sub-federal
4%
Corporate59%
Rubl e Bonds Mar ket Br eakdown (8M
2016)
Total amount out statnding atRUB 14 462 bn.
Corporates 1st tear
15%
Corporates 2nd tear
10%
Corporates HY6%
Sub-federal
5%
Sovereign64%
The most l iquid Ruble Bonds
Snapshot (8M 2016)
0,1%
0,1%
0,2%
77.8%
6,9%
6,4%
3,1%
0,2%
1,3%
0,1%
3,7%
0% 25% 50% 75% 100%
A
BBB+
BBB-
BB+
BB
BB-
B+
B
B-
CCC+
NR
The most l iquid Ruble Bonds by cr edit rat ings (8M 2016)
0% 10% 20% 30% 40% 50%
Banks & Financials
Utilit ies & Transport
Oil & Gas
Telecoms
Metals & Mining
Retail & consumer goods
Industrial
Real Estate
Other
The most l iquid Ruble Corporate Bonds by sect ors (8M 2016)
Slide 55
The OFZ market is
estimated to total RUB5.8
trillion, which is about 40%
of the total ruble bond
market.
Over 30% of marketable
OFZs are owned by non-
residents, who continue to
play a significant role in the
market.
The Finance Ministry
intends to develop the
market by issuing new
types of OFZs.
RUONIA-linked OFZs and
inflation-linked OFZs could
play an important role in the
domestic market.
OFZ Mapping – Non-residents Still Play a Significant Role
07.10.2016Source: Finance Ministry, Bank of Russia, Cbonds, Moscow Exchange, VTB Capital, Bloomberg, VTB Capital IM Research estimates
Fixed
coupon
49%
Floating
coupon
27%
Ammortizi
ng 13%
Non-
market
11%
OFZ by type of payments (8M 2016)
Total
amount at
RUB 5 827
bn.
Russian
banks
61%
Non-
residents
26%
Pension
funds and
managem
ent companie
s, incl.
VEB 13%
OFZ by type of investor s (2015)
0% 10% 20% 30% 40%
until l 3 years
4-7 years
8-10 years
Over 10 years
OFZ by matur ity (8M 2016)
0%
5%
10%
15%
20%
25%
30%
35%
OFZ non-r esidents’ mar ket shar e
Slide 56
The Russian Eurobond
market:
Has $184 bln of total
outstanding debt
Is mostly represented by
the finance and oil & gas
sectors within the
corporate segment
An average credit rating of
“BB+”
Sees large participation
from non-resident
investors and USD issues
Approximately 1% of issues
retain their IG BBB- ratings
and are available for the
most conservative foreign
investors.
Mapping the Eurobond Market – BB+ Average Rating
07.10.2016Source: Cbonds, Moscow Exchange, VTB Capital, Bloomberg, VTB Capital IM Research estimates
Sovereign
26%
Corporate
74%
Market Breakdown of Russian Eurobond market (8M 2016)
Amount
outstanding
at USD 184
bn. RUB2%
EUR11%
USD87%
Russian Eurobonds Market breakdown by currencies (8M 2016)
0,62%
71,51%
7,17%
<1%
<1%
0,67%
1,44%
1,28%
1,09%
0,33%
0,06%
1,17%
0% 20% 40% 60% 80%
BBB-
BB+
BB-
BB
B+
B-
NR
B
CC
CCC
CCC+
C
The most liquid Eurobonds by credit ratings (8M 2016)
0% 10% 20% 30% 40%
Industrials
Telecoms
Transport & Utili ties
Metals & Mining
Oil & Gas
Banks & Financials
Other
The most l iquid Eur obonds by sect ors (8М 2016)
Slide 57
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Slide 58
Contacts
Vladimir Potapov, CFA Tim McCarthy
Chief Executive Officer Managing Director, Co-CIO and Head of International Investment Management
Global Head of Portfolio Management VTB Capital Investment Management
VTB Capital Investment Management CH: + 41 79 273 6003
Tel.: +7 (495) 725 55 40 Email: [email protected]
John Papesh Ivan Ilushin, CFA
Head of International Distribution Head of Research
VTB Capital Investment Management VTB Capital Investment Management
Tel.: +971 (4) 377 0792 Tel.: +7 (495) 725 5540
E-mail: [email protected] Email: [email protected]
Amit Kapoor
European Investment Management Distribution
VTB Capital Investment Management
Tel.: +44 (0) 203 334 8967
E-mail: [email protected]
www.vtbcapital-im.com
07.10.2016
