Overview of the Ranking

Tomasz Ochrymowicz Deloitte

The ranking presents the five hundred largest Central European enterprises according to revenues. Rzeczpospolita daily, the largest economic daily in Poland, is again the partner of the fourth edition of this publication.

This year sees the introduction of the CE TOP 500 Index of Success award. The award jury was composed of Polish and foreign business representatives, and included Henryka Bochniarz – President of PKPP Lewiatan; Jan Krzysztof Bielecki – President of the Economic Council of the PM of Poland; Pawe? Lisicki – Editor-in-Chief of Rzeczpospolita; Jaroslav Hascak – Penta Investments partner; and Jerzy Hausner – former Deputy Prime Minister and Minister of Economy. The jury selected a company operating in Central and Eastern Europe which not only is doing well during the economic downturn, but is also ensuring its long-term growth by making investments, taking active steps in the area of mergers and acquisitions, and displaying involvement in corporate social responsibility.

The pool of candidates for the award was selected from the Central Europe TOP 500 companies. Due to the regional character of the ranking, our intention was to award companies operating in at least two Central European countries.

The winner of the CE TOP 500 Index of Success is the largest pharmaceutical company in Hungary – Gedeon Richter. The company operates throughout the region, eg also in Poland, Romania and Ukraine. Despite the difficult times, Gedeon has managed to increase revenues and profitability both in forint and euro while maintaining high liquidity. Gedeon’s various corporate social activities (in particular in health, safety at work and environment) also helped it secure the win.

[srodtytul]Turbulent Times[/srodtytul]

Like the rest of the world, Central Europe is on the look-out for any signals indicating the direction the economy is headed. Have the funds which western governments invested in stimulating the economy produced the desired results? Are we faced with economic growth or at least stagnation or are we in for a prolonged period of recession? Have the countries of the region and the leading Central European companies been harmed by the economic slump and if so, how severely?

The macroeconomic indices and KPIs do not give us a clear view of the economic situation, and the forecasts given by economists vary considerably as to the expected trends. Each country applies a different approach when coping with its problems, likewise, large enterprises and financial institutions in the region have been affected by the crisis to various degrees and they handle their situations differently.

This year’s ranking of the largest Central European enterprises does not answer the question of how long we will have to wait for an economic upturn. However, in a sense, it shows the ways in which Central European business leaders and the sectors of the economy they represent find their bearings in the continually difficult commercial environment.

[srodtytul]The same leaders but changes are possible[/srodtytul]

CEZ, which is the largest company in Central Europe based on capitalisation and the largest energy sector company in the region, has now advanced to the top three companies of the region also in terms of the sales revenues. Even though its revenues did not increase, in 2009 CEZ outperformed another Czech firm – a leading car manufacturer – Skoda (in 2009 Skoda’s revenues fell by 12%). Now, CEZ holds third place in terms of revenues and it is the largest Central European company based on net profit.

As in previous years, the leading positions remain unchanged. The two large petrochemical firms leading the ranking, PKN and MOL, are almost 100% ahead of CEZ in third place. Nonetheless, as opposed to the previous years, in 2009 PKN and MOL had lower revenues, by 30.7% and 18.3%, respectively (calculated in EUR). In 2008, the consolidated revenues of PKN were 60% higher than the revenues earned by MOL. However, in 2009 and in the first quarter of 2010 the difference shrank to 36% due to the output decline in Lithuanian Czech subsidiaries of PKN, caused by stoppages and, primarily, the substantial reduction of refinery product prices..Compared with PKN, the revenue decrease in MOL was lower because, among others, the company assumed operational control over INA (a Croatian energy group) which recorded an increase in its revenues expressed in the Croatian currency (kuna).

Total revenues in EUR earned by the largest Central European enterprises fell by 21% in 2009 as compared to 2008. This change seems to constitute a painful consequence of the financial crisis, but a detailed analysis of the available data indicates that depreciation of local currencies has exerted a significant impact as well. The median of revenue changes in 2009 equalled -12%. Almost 80% of firms observed declines in revenues (18% on average). The revenues expressed in local currencies were generally the same as in 2008.

The decrease in revenues generally occurred in all industries, even though life sciences, construction, real estate and consumer goods were the least affected. These sectors increased their share in total revenues generated by the 500 leading firms and, additionally, the number of firms representing these sectors rose in 2009 as compared with 2008.

The companies engaged in manufacturing had the highest revenue losses, as the average revenues generated by such firms fell by more than 20%. The revenue decreases of companies from the energy sector, especially those engaged in mining and oil refining, were somewhat lower (approximately 17%). These revenue decreases, both in EUR and local currencies, confirm the actual drop in business activity within these sectors.

This year fewer Ukrainian enterprises are included in the ranking and the share of their revenues in the total TOP 500 revenues is also lower. The revenues of Polish companies included in the TOP 500 ranking remain at the level of approximately 35%, although their number has changed due to the consolidation of the entities operating within large energy groups which had previously been listed separately.

[srodtytul]Uncertain Growth[/srodtytul]

Quarterly revenues earned by the largest enterprises in Central Europe indicate a total increase by approximately 16% as compared to the first quarter of 2009. The median revenue change in EUR for individual enterprises amounted to 11%. In contrast with the 2009 data, the revenue increase in local currencies was lower, as it only amounted to 3%. Hence, the countries of the region and the firms operating in such countries could take advantage of the strengthening currency. Unfortunately, the increase in revenues in EUR, and especially in local currencies in the first quarter, was relatively low and could be observed only in some of the countries, primarily in Poland, Ukraine, and Romania. Therefore, it cannot be definitely stated that the economy in the region has recovered.

[srodtytul]Banking Sector[/srodtytul]

In 2009 PKO BP outdistanced Hungarian OTP Bank to take the title of largest Central European bank in terms of balance sheet amount. Despite the generally difficult situation that the entire sector struggled with in 2009, PKO BP observed an impressive 18% rise in total assets denominated in EUR. Only 4 out of the 50 analysed financial institutions had higher asset value increases in 2009, and the average asset change equalled 0.5%.

Nonetheless, PKO BP did not have the highest net profit. In 2009 CSOB, ranked third in terms of assets, recorded the highest nominal net profit and the highest ROE (25%) among the 50 largest banks. The average ROE in the largest banks fell from 13% in 2008 to 9% in 2009.

As expected, in 2009, the quality of the bank loan portfolio worsened across the region with loan loss provisions increasing by more than 100%.

At the end of 2009 the loan-to-deposit ratio fell from 1.12 to 0.99, which resulted from both the limited credit facilities and the average increase in the number of deposits placed. The trend continued into the first quarter of 2010 (the ratio dropped to the level of 0.93).

In the first quarter of 2010 the assets grew slightly when compared with the first quarter of 2009 – the average EUR assets increase equalled 4%. This was due to the intensified activity of banks in Poland, Ukraine, the Czech Republic and Hungary.

[srodtytul]Insurance Sector[/srodtytul]

PZU still occupies the leading position among insurance companies, despite its 20% decrease in gross written premium and the simultaneous 30% rise in net profit in 2009. As in previous rankings, Ceska pojistovna (22% decrease in gross written premium) placed second. Following the more than 26% decrease in its gross written premium, Warta, which used to be listed in third place, was replaced by Czech Kooperativa pojistovna.

In 2009 the gross written premium expressed in EUR dropped on average by 8%, but this decline primarily resulted from depreciation of the average annual local currency exchange rates – the average decrease in the premium expressed in local currencies amounted to 1%. The decreases in EUR premiums were observed in 40 out of 50 of the largest insurance firms.

As compared to the first quarter of 2009, gross written premium in the first quarter of 2010 increased in almost all countries (except for Slovakia). The average rise in the EUR premium equalled 8% and it mainly resulted from appreciation of local currencies – the average increase in local currencies amounted to somewhat more than 1%.

[srodtytul]Privatisation[/srodtytul]

The number of state-controlled companies included in the CE TOP 500 fell to 96 (from 110 in the list last year, and over 120 two years ago). Hence, we are now witnessing the development of a trend resulting from the ongoing privatisation process on the one hand, and the changes in the economic sector structure occurring in the wake of the economic slump on the other. However, the majority of the energy, natural resources and transportation firms included in the list are still state-owned. The number of companies under control of enterprises and natural persons from Central Europe decreased by 10 and the number of firms controlled from outside the region increased by 24.

[srodtytul]The Most Valuable Enterprises[/srodtytul]

The top three positions in terms of capitalisation remain unchanged – they are occupied by the Czech CEZ and two Polish banks: PKO BP and Pekao S.A., which at the end of July 2010 (as compared to the end of 2009) observed an increase in capitalisation, both in EUR and in the Polish zloty or Czech crown. This seems to be an increasing tendency because only 9 (in local currencies) and 7 (in EUR) out of 25 enterprises displaying the highest capitalisation recorded a downward trend in the period December 2009 – July 2010. Thus, the stock markets appear to be making up for the time lost during the financial downturn. In the first quarter of this year two large IPOs took place – PZU and Tauron – companies which automatically found their way to our ranking of companies with the highest capitalisation.