Russian Agriculture Requires a Leap of Faith
Capitalists are coming to Russia’s
A plausible growth story for the Russian agriculture sector exists. But high debt levels, unproven management teams and climatic vagaries leave plenty of room for doubt.
Russia certainly doesn’t lack space. The country’s arable land stretches to about 120 million hectares, the world’s
That, at least, provides the chance for a
The bet for investors is such companies can pursue ambitious growth plans while improving returns. Rusagro’s financial details are scarce, but its posttax profit margin, on $183 million of earnings, improved to 16.7% in 2010 from 9.7% in 2009. Razgulay Group, a listed sugar producer, wants to increase its 324,000 hectares of land in cultivation by 50% in five years, while tripling earnings before interest, taxes, depreciation and amortization. Its return on invested capital should be 18.9% by then, from 2.7% in 2009, according to Renaissance Capital.
But there are plenty of risks. Company managements may not be able to handle rapid growth. Razgulay’s earlier expansion up to 2008 left it heavily indebted, and its net debt is still 5.9 times expected Ebitda. Its share price is a quarter of that from February 2008.
The Russian farm sector relies heavily on continuing government subsidies for bank lending; Cherkizovo, a
With opportunities to invest in large European agricultural stocks rare, investors prefer stocks like Astarta, operating in Ukraine’s more fertile, temperate conditions. Its enterprise value is 12.6 times expected Ebitda, compared with Razgulay’s 6.9 times and Cherkizovo’s 6.7 times.
Despite some favorable tailwinds, investors in Russian agricultural companies still require a leap of faith.
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