Gustavo Ballvé on May 30th, 2011
Food for thought, Home, Industries, Investment Themes, Mental models, Portfolio Management, Signal or Noise, Telecom

We’re at the Rio Investors Day event and so far the attendance has been rather good for an event that was put together quickly. We’re not “live-blogging” experts nor do we intend to emphasize short-term messages and official company management speech – it’s a matter of coincidence that two interesting events were held so close to each other. And yet, attending these events is both necessary and interesting once one escapes the “soundbite trap” and filters some signal from the noise – be it behavioral or analytical (in 99.9% of the cases, one can’t find informational edge in these events). We’ll post sparsely from some of the panels – we intend to pay attention – but please come back during the day for updates.

For background regarding the event in English, here’s an interesting teaser at the The Rio Times’s site.

Telecom panel

Currently debating are the CEOs of Oi and TIM regarding the Brazilian market (interesting because the first is a fixed line heavy-hitter with strong mobile and the latter is almost a pure-play in mobile). Both agree that voice in mobile will continue to be by far the most relevant growth driver – there’s loads of room for increased voice use from existing users.

TIM’s CEO said, jokingly, something important: the mobile technologies are like wine – the older, the better. GSM is now a very stable, known technology while LTE, in 10 years, will probably become as stable and so on. What he means is the learning curve that makes continuous change so strenuous. And then he linked it to spectrum: sometimes budget-starved governments don’t take into account the technology learning curve (by staging auctions for new spectrum bands that require new technologies). Oi’s CEO just complemented: Brazil isn’t ready for 4G, and if it comes it shouldn’t be 2.5Ghz but 3.5Ghz, much more efficient. He agrees that one should focus on getting 2G and 3G spread out to poorer areas before focusing on 4G.

(obviously, it should be noted that continued infrastructure investment decreases ROIC for the industry, which means there’s a constant tug-of-war between governments’ incentives to expand/improve services and the companies’ justified desire to maximize returns).

Consumer goods & foods/ retail panel

Participating companies: Ambev, Marfrig, LASA and B2W.

The room got quite a bit emptier as we suspect the banking panel attracted more investors. From the getaway the format here is a bit more focused on macro and short-term company-specific issues. The other panel, with just two participants, left more room for debate (a bit counter-intuitive perhaps, but once the moderator asks a question for each company there’s less time for conjectures).

Ambev highlights that the Investor Day they’ve held in Brazil’s Northeast region event is indicative of that region’s importance – not just as market-wise but also production-wise. Since their product is essentially a returnable one (more volume from out-of-home consumption), it’s important to produce locally to support growth.

Lunch panel: Brazil’s Central Bank (“BC”) and BNDES (the federal development bank)

Mr. Luciano Coutinho, BNDES’ CEO and Mr. Aldo Mendes, the BC’s Director for Monetary Policy, both had short presentations followed by a Q&A session moderated by Rio de Janeiro’s Secretary of Finance.

Both presentations were quite optimistic about Brazil’s economy: possibly of sustained growth and better wealth distribution to supplement the obvious advances made in the last 10-15 years. What wasn’t as expected were news of a more controlled inflation rate not in some distant future but apparently right now. All very nice, of course, but the “catch” is not to pay too much upfront for the scenario where all these positives are sustainable.

The first question was for Mr. Coutinho of the BNDES, in terms of the bank’s loan volume for international projects. Mr. Coutinho highlighted that the % of loans in international projects was always too low, has increased but should increase further because Brazil’s “internationalization” is very incipient. It’s absolutely coherent with the “Brazilian champions” policy we’ve seen over the years.

The second question is a perfect tie-in: How does it work when BNDES (and other instruments) are so “expansionist” and the BC is worried about overheating in the economy? Mr. Coutinho said that BNDES has been reducing its disbursements in the first four months of 2011 when compared to the same period in 2010, stating that the objective is to foster the market for long-term debt in Brazil as inflation converges to the desired range and interest rates decline. But perhaps that’s the point: how much is a voluntary action by BNDES and how much is simply the market reacting to improved lending conditions? If the outcome is, as Mr. Coutinho says, an increase in overall private debt duration and, even better, the “duration” of Brazilians’ savings, we will be happy no matter how it comes about. Mr. Mendes said that while the BC was working to contain inflation, it isn’t “scared” of the current levels or of the supply of credit – according to him, a 13% YoY increase in the supply of credit isn’t an exaggeration. But on their side Mr. Mendes feels it’s important to highlight their active work to improve the local private long-term debt market.

The third question is again very well linked: how is bad-debt looking to the BC? Again they’re not worried with current rates or even with the rate of increase. He said that with the “mini-crisis” of 2008 in Brazil, duration was compressed – which increases monthly payments and therefore has an effect on people’s ability to make their payments. Along with the overall increase in credit, the resulting increase in bad-debt expense isn’t something that makes him lose any sleep. He even said that it’s supposedly improving (along with the inflation apparently decreasing, this was another piece of good news). That said, the BC and others have their “macro-prudential” measures in place and new ones newly developed, such as an increase in minimum credit-card payments (to 15% of the bill in the next few days and 20% by year-end).

The fourth question was already answered by Mr. Coutinho above (yes, the level of BNDES disbursements is decreasing).

Finally, an interesting question on compulsory des-indexing of contracts should inflation get out of control… it was interesting to see how much this has been thought out by both Mr. Coutinho and Mr. Mendes, despite the assurances that “nothing will be done that the market wouldn’t do by itself”. As Mr. Coutinho says, voluntary des-indexing is good and the debate should always be possible between counterparties of indexed contracts. That said, some of the regulatory structure regarding indexed contracts could probably be revised looking forward, obviously not interfering with established contracts. The BC went in the same line: they’re talking to “many players in the capital markets” about it over and over but no “violence” (his words) would be committed. This should evolve naturally as long-term confidence increases.

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