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Presentation given on Hermes investing decision in Brazil regarding the country risk level of the country. Michel-Henri Bouchet Fall 2012 - C.Bilet, T.Bouchoux, A.Bouhdadi, A.Boulay, T.Breton
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COUNTRY RISK – FALL 2012
MICHEL-HENRI BOUCHET
Hermès International S.A. in Brazil
C. Bilet, T. Bouchoux, A. Bouhdadi, A. Boulay, T. Breton
Table of content
1. Company overview1. 175 years of Hermès2. Hermès in 2012
2. Country Risk Analysis: Brazil1. Brazil Overview
1. Political & Demographical outline2. Economic outline
2. Socio-political risk assessment1. Political challenges2. Social issues3. Prince model
3. Financial – Economic risk assessment1. Economic overview2. Debt & balance of payments analysis3. Ratings
3. Conclusion
Company Overview
175 years of Hermès
Top of mind family-owned luxury manufacturer of leather goods, lifestyle accessories, ready-to-wear & perfume
Founded in in 1837 in Paris by Thierry Hermès
Values: luxury craftsmanship and traditions Same logo since its creation: Duc carriage with a horse Famous artistic directors: Jean-Paul Gaultier
But also, adaptability to the changes of the market Started off with horse saddles then diversified Iconic collections: Birkin bag
Hermès in 2012
Consolidated sales: €1,591.4 million up by 15.4% at constant exchange rates
Consolidated net income: €335.1 million
Operating profitability: 31.2% of sales
9,526 employees & 445 new jobs created in the first half of 2012
328 stores all around the world in 2011 123 dealers205 branchesSource: http://finance-en.hermes.com/2012/1ST-HALF-2012-RESULTS
Country Risk Analysis: Brazil
Brazil Overview
Political and Demographical outline
Population: 199,321,413 (July 2012)
Capital: Brasilia
Government: Federal Presidential Constitution Republic
President: Dilma Rousseff (PT)
HDI: 0.718 in 2011 (Ranking: 85th
in the world)Source: https://www.cia.gov/library/publications/the-world-factbook/geos/br.html
Brazil Overview
Economic outline for 2011
GDP in PPP: $2.294 trillion Exports: $256bn (23rd) Imports: $219.6 bn (23rd) Growth: 2.7% Inflation: 5.28% Exchange rate: BRL 1 = USD $0.49 Unemployment: 6% Central Bank discount rate: 199,321,413 (July 2012) Current Account Balance: $-52.48 bn FDI: $539.2 bn Public debt: 54.2% of GDPSource: https://
www.cia.gov/library/publications/the-world-factbook/geos/br.html
Socio-political risk assessment
Political challenges
o Expansionary monetary and fiscal policies to counter the spill-over effect of the slow growth in the US and Europe
o The World Cup and Olympics are catalyses for structural improvements
o Brazil still suffers from corruption and a heavy bureaucracy Transparency CPI index : 3.8/10 (73rd/183)
Socio-political risk assessment
Social issues
Unemployment: 6% (2011), It will remain stable for the next two years.
Income inequality: 51.9 (2012)High level of inequalities which is decreasing (-14% in 10 years)
Poverty rate: 21.4% of the population was living under the poverty line in 2009
Crime: 22.00 per 10,000 inhabitants in 2010Organized crime linked drug trafficking is concentrated in the favelas but the crime rate is decreasing thanks to the efforts of the government
Church = shock absorber of these social inequalities
Source: http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf
Socio-political risk assessment
Prince model
Financial & economic risk assessment
Economic overview
Economic growth expected to hold over the medium termIn 2012, household consumption and public administration will be the main source of growth.
Inflation controlled by the government and the Central Bank
Brazil attracts investors with low risk sovereign debt bondsYield 10Y bond: 9.45%
Financial & economic risk assessment
Large capital inflows over the past several years have contributed to the appreciation of the currency, hurting the competitiveness of Brazilian manufacturing and leading the government to intervene in foreign exchanges markets and raise taxes on some foreign capital inflows
Current account/GDP ratio: -2.11% Strong imports Low savings rates High personal consumption rates
as percentage of disposable income
Strengths
Abundant mineral and agricultural resources
Significant manufacturing industry
Primary budget surplus Significant margins for
contra-cyclical policies Net external creditor since
2008 Considerable currency
reserve
Weaknesses
Dependence on raw materials and foreign capital
Global general government deficit linked to debt service
Deficient infrastructures (energy, transport)
Lack of skilled labor Shortfall in household
savings rate and high cost of credit
High taxes primarily devoted to operating expenditures
Source: Coface
Financial & economic risk assessment
Financial & economic risk assessment
Debt Analysis Public debt= 54.2% of the GDP (2011)
Structure of the debt: External Debt = $382.5 billionTotal public debt = $1243.3 billion The external debt represents 31% of
the total public debt
Balance of payments analysis
Liquidity ratio (Interest/Exports): 52% (2010) Solvency ratio (Debt/GDP): 54.2% (2011) Debt servicing ratio: 19% (2010) Debt/exports ratio: 4.56% (2011) Exports/GDP ratio: 11% (2011)
The external situation is comfortable with gross debt representing 12% of GDP and 125% covered by foreign currency reserves, and a net credit position.
The country has a healthy situation and a low risk of default.
Financial & economic risk assessment
Ratings
Rating Agencies
Local Currency Rating
Foreign Currency Rating
S&P A- BBB
Fitch BBB BBB
Moody’s Baa2 Baa2
Dagong A- A-
Brazil debt is classified as medium grade.
Investment quality grade was granted to Brazil in 2008. Even if the rating agencies have low predictability and self-fulfilling
prophecy tendencies, they are a barometer for investors.
Conclusion
BRAZIL Hermes Silk Scarf, in blue, designed in 1988 by Laurence Bourthoumieux
Brazil Country Risk Analysis
Source: AM Best Country Risk Report Brazil December 2011
Brazil is a medium risk country.
Brazil was the first country in South America to get out of 2010 crisis and return to growth. The government with the help of the Central Bank are keeping a lid on the inflation and attracting foreign FDI to finance their current account deficit.
Even if the country is hindered by corruption and inequalities, the current government is working to improve the social conditions and reduce poverty.
Brazil has a low risk of default due to its external creditor position and its foreign reserve assets.
Advantages Drawbacks
Scale and potential of the domestic market
Household consumption as motor of growth for 2012
World Cup & Olympics will increase tourism and are catalysts for structural improvements
Social policies to reduce inequalities and increase purchasing power
Brazil has a healthy economy with sustainable growth for the coming years
Deficient infrastructures (transports)
Corruption and crime flourishing on inequalities
Hermès success in Brazil?
Hermès should invest in Brazil and open a branch in São Paulo