Bottomlines under more pressure as competition intensifies

The slow recovery in the European Union, Southeast Europe’s (SEE) main trading partner, the sluggish prospects facing nearly all economies in the region and shrunken domestic demand all left their mark on corporate bottomlines in 2013. At the same time, long overdue structural reforms, fiscal and regulatory volatility and poor infrastructure continued to be a drag on local businesses. Against this backdrop, the performance of the companies in the SEE TOP 100 ranking was expectedly lackluster – their combined revenues in 2013 were flattish, with nearly half of the entrants seeing a decline in their revenues.

With the European Union economies still struggling to rebound from the crisis, their SEE counterparts fared better in 2013 than they did a year earlier but economic growth in most countries in the region underwhelmed. Romania was among the few exceptions, as its economy expanded by a better-than-expected 3.5%. The other top performers – Moldova, Kosovo, Macedonia and Montenegro – are all economies with a lesser degree of integration with the EU and, consequently, have been weathering well the recent recession in the bloc.

Across the region, foreign direct investment and external demand remained low as did household consumption. Long overdue structural reforms, fiscal and regulatory volatility and poor infrastructure further compounded the business environment.

With the exception of Slovenia, where a banking crisis nearly triggered an international bail-out, the banking system in the region was stable in 2013 but high non-performing loan (NPL) levels undermined the ability to lend more to the private sector to stimulate growth.

Persistently high unemployment rates, a large pool of unskilled labour and untapped potential for innovations continued to curb the competitiveness of local businesses.

Tightly packed

The combined revenue of the Top 100 non-financial companies in SEE for 2013 was largely unchanged at 103.98 billion euro versus 103.6 billion euro reported by the entrants in the 2012 ranking. Their net profit, however, totalled 2.63 billion euro, compared to 2.85 billion euro posted by companies included in the 2012 SEE TOP 100 ranking.

At the same time, the threshold for entry into the SEE TOP 100 ranking rose to 458 million euro from 440 million euro a year earlier, whereas the difference between the first and the last company in the ranking came down to 3.8 billion euro from 4.29 billion euro in 2012. As another indicator of how tightly packed the entrants in the latest edition of the ranking are, the difference between the first and the second-placed company dwindled to 115 million euro from 526 million euro in 2012.

The number of companies in the ranking which saw their revenues go down has been rising steadily over the past few years – to 42 in 2013 from 33 a year earlier and 21 in 2011. Furthermore, whereas in 2012 these companies were predominantly clustered towards the bottom of the chart – indicating that the bigger your business, the more resilient it is proving amid the challenging economic environment, a year later they are scattered throughout the ranking, with no less than six Top 10 entrants falling into this category.

Oil and gas firms unchallenged, automakers rev up

There were no surprises at the top of the ranking with OMV Petrom holding on to its no.1 spot for the seventh year in a row. However, the Romanian oil and gas heavyweight posted a drop in revenues by nearly 3.0% to 4.27 billion euro in 2013. At the same time, its net profit rose to 1.08 billion euro – the highest among the top 100 companies in SEE, from a revised 869.5 million euro a year earlier. With a 25.27% return on revenue, OMV Petrom was also the most profitable company in the ranking. The Romanian company has said it managed to offset the impact of depressed gas, power and fuel demand and an increased fiscal burden by large-scale investments over the past nine years. As the main challenges to its business, OMV Petrom has pointed to structural changes on the global gas and energy markets, the volatility of the fiscal and regulatory environment in Romania, and shrunken demand. These, to a large extent, hold true for all the representatives of the sector.

In the no.2 position, Romanian carmaker Dacia is the only non-oil or gas company among the top seven. Its revenues increased 44% to 4.2 billion euro in 2013 while its net profit rose to 75 million euro from 63 million euro. Dacia’s turnover was positively influenced by the absorption of its 100%-owned unit Renault Industrie Roumanie as of January 1, 2013. In 2012 and 2013, Dacia renewed and expanded its entire range, planning to continue to invest heavily.

Oil and gas companies occupy the next five places in the ranking. It should be noted, though, that three of the top-placed oil and gas companies – Lukoil Neftochim, INA and Rompetrol Rafinare – are at the very low end of the table in terms of earnings. As many as eight of the ten biggest loss-makers in the ranking are oil and gas companies, with Serbian state-owned gas monopoly JP Srbijagas booking the heftiest loss. Even though oil and gas companies continue to dominate the rankings and generate the bulk of the total revenue, their total revenue dropped by 5.45% to 41.8 billion euro in 2013, whereas their total profit fell to 659 million euro from 1.09 billion euro. However, the three companies to post the biggest earnings in 2013 all hail from the oil and gas sector – OMV Petrom, Naftna Industrija Srbije, Romgaz. A total of 29 oil gas companies made it into the 2013 edition of the SEE TOP 100 ranking versus 28 a year earlier.

The company to book the sharpest rise in revenue was Romanian state-owned road construction and maintenance company, CNANDR. However, transfers from the state budget accounted for a large portion of its total revenues. It was followed by FIAT Automobili Srbija with a threefold increase in revenue to 1.6 billion euro, climbing up 71 spots – the highest jump in the ranking. The carmaker made its debut in the ranking only a year earlier.

Construction and the automobile manufacturing were also the industries to see the sharpest increase in the combined revenue of their representatives in the ranking – by 320% and 48%, respectively. And while the construction industry had just one representative, which would make any conclusions about the overall state of this sector mostly irrelevant, the automotive industry has been steadily expanding its presence in the chart over the past few years. It should also be noted here that the SEE TOP 100 ranking includes two companies of the rubber industry – Romania’s Continental Automotive Products and Michelin Romania, whose core business is car tire manufacturing.

The SEE TOP 100 companies ranking welcomed 13 new entrants in its 2013 edition versus 16 a year earlier. They included four oil and gas firms, three automotive companies, three wholesale and retail traders, two electricity companies, and one furniture and decoration company.

The new entrants included one Bosnian and one Albanian company – Holdina d.o.o. Sarajevo and Bankers Petroleum Albania.

Romania, with a population of around 20 million, expanded its domination of the ranking, placing 53 companies on the 2013 list versus 51 a year earlier. For the first time since SeeNews started compiling the ranking, an Albanian company, Bankers Petroleum, has made it into the ranking. Just like in the previous years, none of the biggest companies in Montenegro or Moldova made the cut.

The big I’s

Growth in SEE in 2014 and 2015 is expected to be moderate, mostly on the back of improving external demand. However, domestic demand is expected to remain weak, further constrained by slow progress in sorting out NPL levels and persistent unemployment. A more prolonged delay in the full recovery in the euro area and renewed volatility on the financial markets are some of the major risks facing the region. A further escalation of the Russia-Ukraine crisis could have a significant negative impact on the region, affecting virtually all sectors of the economy. Internally, the need to overhaul certain sectors of the economy – such as energy, weighs heavily on some of the countries’ growth outlook. The business environment in the region is expected to remain largely unfavourable as political and regulatory uncertainties are expected to persist.

For SEE businesses, considering their rather limited capacity to influence the above-mentioned factors, this means they would need to invest heavily in their skills base and innovation potential to raise competitiveness.

If the performance of the companies in the SEE TOP 100 is anything to go by, the biggest corporations in the region seem unlikely to see a sharp rise in revenues in the near future, even less so – easy profits. Rather, they should be bracing up for tighter competition amid continuing market pressure and an uncertain demand environment. With high-tech companies almost entirely missing from the ranking, it is sectors such as automotive manufacturing and pharmaceuticals – which are more apt to adopt innovations – that seem poised for stronger growth despite the seemingly undisputed hegemony of oil and gas companies.

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