Latin Finance - May/June 2011 - 18

brazilian corporate focus

Vitor Pini, investor relations director at Anhanguera. “There is a big opportunity for consolidation by the largest players.” For the moment, this will come in Brazil’s most populous regions, Pini says. Anhanguera’s post-IPO expansion has mostly been achieved through acquisitions and should continue to be so for the next one to two years. Student loans are less common in Brazil, so Anhanguera is not as worried about a slowdown in consumer lending effecting its business, he says. The biggest risk to the sector would be a drop in employment levels. Travel is expected to continue to increase in Brazil, though Brazilian airlines have had a troubled history, as in many other countries. Rental car agency Localiza has been an investor favorite for most of the past decade. “It’s an extremely well-managed company with a good track record,” says Larson, who owns the stock. “As Brazilians travel more, they need more cars, and there still seems to be good growth in travel. It’s a nice play on air travel without all of the complications you get with airlines.”

has accelerated, they have actually gained share, which is something that is counterintuitive during a robust economic period. You have to be cognizant of companies that are relying on that credit, if it should be pulled back.” Wage growth is another question. The government pleased markets by not raising the minimum wage – a key determinant of wages in Brazil – this year. In 2011, the minimum wage had zero real increase, according to Credit Suisse, versus 5% per year on the average for the last five years. Higher inflation threatens to keep real wages down. Considering the bank expects real wage growth to decelerate from 3.8%

Putting on the Brakes

Companies like Localiza, PDG, Renner, and others found in many portfolios would seem to offer a straightforward play on consolidation, future growth, and the movement of millions out of poverty. Brazil has even shown itself to be resistant to global shocks and the kneejerk risk aversion they can still bring, as its performance during the 2008-2009 credit crisis showed. This does not mean internal factors couldn’t still complicate the picture, however. Concern about the level of debt that has piled up in Brazil in recent years clouds the bullishness. Uncertainty about how best to reign in lending without stopping the economy is the key question. In particular, funds flowing through government-controlled lenders make it more difficult for the central bank to deal with investors’ other main fear: inflation. “I’m very concerned about the rapid reliance on institutions like the BNDES, and other government financial entities,” says Larson. “If you look at the past three to five years, the percentage of credit issued by government banks

Investors have to be persuaded: Newman in 2010 to 3.0% in 2011, rebounding to 3.5% in 2012 due to an expected increase in minimum wage. However, Credit Suisse sees the risk of stagnation in real wages in Brazil in the short term as low. The government has said fighting inflation is a priority. “So far so good, but the jury is still out,” Newman says. Brazil’s pursuit of both monetary tightening and so-called macro-prudential measures to safely slow growth and control currency appreciation has not made it easy for investors. Policy makers must time their moves correctly to keep growth and inflation within desirable limits. The biggest risk to the consumer growth play is that they get it wrong. “The question in Brazil is: can they achieve the right mix of policy to keep the momentum going?” Larson says.

There have been some moves in the right direction, he says, but the [central] bank’s moves in the last six months have not been as clear as they used to be. With inflation looking to stay near the top of the target range, Larson says that the key in choosing companies is to remain conscious of pricing power. The eventual effects of cutbacks in government spending are also unclear. Citi’s Press would prefer to see tightening moved to the fiscal, rather than monetary side, though so far, the needed budget cuts have not come. “We’re hoping Dilma will attack [the budget] someday, but this kind of change is not going to come fast enough to slow the economy soon,” says Press. The government will have to continue to rely on monetary policy, and Citi expects a 100 basis point increase in the Selic rate this year. Press says he is encouraged that keeping inflation low is one of Dilma’s priorities. Press expects Brazilian inflation to plateau this year, saying that we should see confirmation of this in the next few months. Citi forecasts 6.1% average inflation for 2011 in Brazil, and 5.0% next year, after seeing 5.0% in 2010. Brazil’s GDP grew 7.5% in 2010. Analysts expect a growth rate of about 4.0% for 2011 and in the mid-4% range for 2012. “As interest rates come down, as the cost of capital continues to decline structurally in Brazil over the next few years, it suggests that the credit culture will continue to grow very strongly, and suggests that equity valuations will become increasingly attractive,” Press says. “There are still large issues to be resolved, but that also gives further upside.” New issuers in the consumer sector will need to pay attention not only to these risks, but to the new landscape, and buyers’ increasing pickiness when deciding to come to market. The track record is mixed so far in 2011. Shoemaker Arezzo priced a 565.8 million reais deal at the top of its range in February, and has traded up 21% since, while others have had to cut prices or pulled deals altogether. “Investors aren’t stamp collecting,” Newman says. “Now you have to persuade investors that your story is good enough for them to sell something else to buy it. You have to demonstrate that you’re cheap or different.” LF

18 LatinFinance

May/June 2011

Latin Finance - May/June 2011

Table of Contents for the Digital Edition of Latin Finance - May/June 2011