Express financial

analysis of
NORTH WEST
TELECOM 2009

Eropkin Peter and Dmitriev Vitaly

05.03.2011
 1.Introduction
For the purpose of the vivid picture our team decided to do the analysis of two
companies from the same industry during the same time span. During this analysis we
are doing to discuss the following topics:
- overall market trends during selected period
- industry specific parameters of companies financial reporting
- similarity in financial reporting of two companies as well as the differences based
on their financial decisions and performance

For these purposes we selected two companies from Telecommunication Service

Providers industry – Moscow City Phone Network (MGTS) and North-West Telecom
(NWT). The structure of companies business is very much similar due to historical and
market reasons: both companies were based on the largest Russian cities phone
networks, and were privatized in 1990s and reorganized in the form of open joint stock
companies. Companies operate both of B2C and B2B markets. As they are acting on
different geographical markets there are no competition between them.

2.Overall operational environment and

industry impacts
In the end of 2008 capital and credit markets of largest world economies was described
with significant volatility. A number of world largest financial organizations were gone
bankruptcy, were sold to other financial organizations and/or got financial support from
government regulators. These activities brought world economy to significant decrease.
Ongoing financial crisis forced instability at capital market, fall of liquidity and toughening
of credit conditions.

Nevertheless these events didn’t have direct impact on business activities of MGTS in
2009 besides increase of interest rates on some the debts and decrease of MGTS
Capital Investments program. Management of the both companies also considered that
cash flow from main business activity will be sufficient to serve company liabilities by the
paying off terms. Concentration of credit risks on receivables was limited due to high
diversification of customer base and availability of the automation system for the
receivables collection control, what is typical for the Telecom SP business.

NWT Description of main business

North-West Telecom is the largest fixed telecommunications operator in the North-

Western Federal District of Russia. NWFD is one of the most developed federal districts
in Russia both economically and in terms of telecommunications: its population is 13.6
million, of which 82% live in cities, the highest urbanization index among the federal
districts. The telecommunication services’ penetration rate is much higher than the
average Russian rate: the BBA penetration rate is 34%, and the telephone density is 39
basic telephone sets per 100 residents.
NWT provides a wide range of telecommunication services, including local and
intrazonal telephone communication, services of data transmission, access to the
Internet , lease of channels , IP-TV, call centers etc., offering access to the services of

NWT 2
long-distance (international) telephone communication of telecommunication operators
all over its licensed area. By the results of 2009 on the NWFD telecommunications
market, N.W.Telecom holds 74% of the market in the local communication segment,
90% of the market in the intrazonal communication segment, and about 47% of the
market (subsidiaries included) in the broadband access segment*.

North-West Telecom provides services to over 4.5 million fixed communication users
and over 900,000 broadband Internet access users, and operates a payphone network
covering all the remotest and low-populated communities of the North-West. The local
network digitization is nearing 70%. The company has an impressive transport
infrastructure uniting all the regions of the North-West into one network:

The total length of N.W.Telecom’s telephone lines exceeds 200,000 km, of which nearly
30,000 km are up-to-date fiber-optic communication lines.

MGTS Description of main business

Open joint stock company “Moscow City Phone Network” (MGTS) operates one of the
largest city phone networks in the world. MGTS was established in 1882, nationalized in
1917 and was privatized in 1994 and reorganized in the form of open joint stock
company. MGTS provides telecommunication services like classical telephony (POTS),
broadband internet access (ADSL), data transfer (IP VPN), hosting and outsourcing call-
center services to mass customers, commercial companies and government
organizations.

NWT 3
 3.Financial analysis of the NWT performance
benchmarking MGTS

31.12.200 delt
ASSETS 31.12.2009 8 2009 2008 a %
Non-current assets
-
142
Property, plant and equipment 41787 43207 73,83% 79,74% 0 -3,29%
Intangible assets 5326 5207 9,41% 9,61% 119 2,29%
Long-term receivables 6 6 0,01% 0,01% 0 0,00%
Other long-term assets 715 393 1,26% 0,73% 322 81,93%
Investment property 96 0 0,17% 0,00% 96 -
Investment in associates 88 84 0,16% 0,16% 4 4,76%
315 7172,73
Non-current financial assets 3200 44 5,65% 0,08% 6 %
227
Total non-current assets 51218 48941 90,49% 90,32% 7 4,65%
Current assets
EQUITY AND LIABILITIES
Inventories
Equity attributable to OJCS NWT 431 460 0,76% 0,85% -29 -6,30%
Trade and other receivables
shareholders 2928 2596 5,17% 4,79% 332 12,79%
Prepaidcapital
Share income tax 415
2855 315
2855 0,73%
5,04% 0,58%
5,27% 100
0 31,75%
0,00%
Other current
Treasury assets
shares 270
-67 384 0,48% -0,12%
-67 -0,12% 0,71% -114
0 -29,69%
0,00%
Retained earnings 28658 26931 50,63% 49,70% 172 131,19
6,41%
Current financial assets 756 327 1,34% 0,60% 429
7 %
Cash equity
Total and cash equivalents
attributable to OJSC 574
31446 1001 1,01% 1,85%
29719 55,56% 54,85% -427
172 -42,66%
5,81%
NWT
Assetsshareholders
held for sale 9 162 0,02% 0,30% 7
-153 -94,44%
Non-controlling interest
Total current assets 1
5383 0
5245 0,00%
9,51% 0,00%
9,68% 1
138 2,63%
Total
Total equity
assets 31447
56601 29719 55,56% 54,85%
54186 100,00% 100,00% 1728
2415 5,81%
4,46%
Non-current liabilities
-
525
Non-current borrowings 8108 13366 14,32% 24,67% 8 -39,34%
Pension liabilities and long-term
social liabilities 2258 2108 3,99% 3,89% 150 7,12%
Long-term payables 34 22 0,06% 0,04% 12 54,55%
Other long-tem liabilities 333 358 0,59% 0,66% -25 -6,98%
Deferred income tax liability 1061 1079 1,87% 1,99% -18 -1,67%
-
513
Total non-current liabilities 11794 16933 20,84% 31,25% 9 -30,35%
Current liabilities
633 232,28
Current borrowings 9058 2726 16,00% 5,03% 2 %
Trade and other payables 3853 4281 6,81% 7,90% -428 -10,00%
Other current liabilities 443 520 0,78% 0,96% -77 -14,81%
Current provision 6 7 0,01% 0,01% -1 -14,29%
NWT 582 4
Total current liabilities 13360 7534 23,60% 13,90% 6 77,33%
Total liabilities 25154 24467 44,44% 45,15% 687 2,81%
Total equity and liabilities 56601 54186 100,00% 100,00% 2415 4,46%
 a. Balance sheet reformulation

2009 2008
Balance sheet reformulation 2009 2008 cleaned* cleaned*
Assets
Non-current assets (NCA) 51218 48941 50276 47999
Current assets (CA) i.e.
Inventories (Inv) 431 460 431 460
Receivables (AR) 4378 3784 4378 3784
Cash and cash equivalents (C ) 574 1001 574 1001
Total Assets (TA) 56601 54186 55659 53244
Equity and Liability
Equity (E) 31447 29719 30505 28777
Liabilities (L)
Long-term liabilities (LL) 11794 16933 11794 16933
Short-term borrowing (SB) 9058 2726 9058 2726
Payables (AP) 4302 4808 4302 4808
Total Equity and Liability 56601 54186 55659 53244

(*) prepayed expences and deferred taxes don't influence on figures but the share of
goodwill in intangibles is high (balance sheet footnotes 9) and equal to 942

b. Distribution of assets, equities and liabilities

NWT 5
Let’s start the analysis from the Quick Analysis of the reformulated balance sheet: 90%
of assets consist of NCA (A4) and are almost twice grater than Equity (L4). Payables
(A1) are 7 times higher than cash (A1), while short-terms borrowings (L2) are greater
than receivables (A2) and long-term liabilities (L3) are greater than inventory (A3)!
Not all conditions of the quick test are satisfied.

In 2009 we can see Total Assets growth via capital allocation, and Equity increased by
6.41% due to retained earrings in 2009.

3.1. Working capital analysis

Working capital 2009 2008 delta %

narrow -19771 -19222 -549 -2,86%
-
248,49
classic -7977 -2289 -5688 %
147,37
broad 1081 437 644 %

Working capital (classic) dramatically dropped by 5688 or 248,49% due to significant

decrease of non current borrowings by -5258 or 39,34% and growth of short-term
borrowings by 6332 or 232,28%.
Working capital
sufficiency 2009 2008 delta %
narrow -20202 -19682 -520 -2,64%
-
205,86
classic -8408 -2749 -5659 %
2926,09
broad 650 -23 673 %

NWT 6
Now let’s investigate the way of NWT was financed in 2009 and describe working capital
sufficiency effects. As we see from the balance sheet equity represented 55% of E+L
and increased by 5,81% since 2008, while it still do not cover NCA and based on that
fact WCS(narrow) is negative. So we can see the gap between net current assets and
equity of the company.

This situation could be considered as quite dangerous as NWT in 2009 was financed via
short-terms boring by the 16%. Growth of SB increased WCS (broad) and turned it into
positive value. LL share in the company financing is only 21%.

Based on working capital sufficiency analysis we can describe that the level of company
stability has positive dynamics and increased from CRISIS in 2008 to NON STABLE in
2009.

3.2. Liquidity and solvency analysis

Liquidity ratios 2009 2008 delta %

cash 0,04 0,13 -0,09 -67,66%
quick 0,37 0,64 -0,26 -41,64%
current 0,40 0,70 -0,29 -42,12%

Solvency stock measures 2009 2008 delta %

debt to total assets ratio 0,44 0,45 -0,01 -1,58%
debt to equity ratio 0,80 0,82 -0,02 -2,84%
long-term debt ratio 0,27 0,36 -0,09 -24,85%

Talking about company liquidity we see that NWT can not immediately pay on current
debts both in 2008 and 2009. And there is a negative trend in all 3 ratios.
LR Cash is lower than benchmark 0,2, LR Quick is lower than benchmark 1 and LR
Current is almost the same as the share of inventory in Total Assets is only 0,85%.

If we would compare NWT ratios to benchmark MGTS, we can clearly see that LR Cash
was also below 0,2, while we should consider the 2009 overall capital market situation.
Besides that we can clearly see that MGTS LR Quick and LR Current were in much
better situation than position of NWT.

We should admit that liquidity is dramatically dropped due to reallocation of financing to

short-term. There is high probability of the cash deficit. The liquidity declined due to
growth of short term borrowing and purchasing of long term securities. Based on the fact
that NWT is part of the investment holding Svyazinvest we consider this doubtful for the
operational company decision as the holding management guidelines devoted to the
holding goals beyond the certain operational region.

In the future NWT could address the liquidity issues via offloading of securities to cash
and restructuring of short-term borrowings in long-term.

3.3. Business Activities Analysis

NWT 7
 Business Activities Analysis 2009
Receivables turnover (RTO) 7,60
D (AR) Collection period 47,38
Inventory turnover (ITO) 59,01
D (INV) Days inventory outstanding 6,10
Payables turnover (PTO) 11,24
D (AP) Days payables outstanding 32,02
Operating cycle 53,48
Financial cycle 21,47
Daily Purchases 53,89
Interest rate 0,10
Financial cycle cost 115,69
Liquidity index* 56,50

(*) liquidity index is calculated assuming that turnover of short term borrowings is 60
days

Reviewing the operation cycle we should consider that Inventory is only 0,85% and has
very slight influence on the operation cycle of 53 days. Main part of the cycle is collection
period of debts which is 47 days which is typical for the fixed line telecoms with monthly
post-payment schema. Operation cycle is on 48% shorter than payables turnover period.
In total the financial cycle is positive and is 21 day. Very similar length of the financial
cycle we can see at benchmark company MGTS -22 days.
And additional possible financial funding for NWT could be evaluated in 115,69 mln.

3.4. Profitability analysis

NWT 8
 Profit and lost statement
reformulation 2009 2008 delta %
Revenues 26566 25176 1390 5,52%
Other opereating revenues 4440 2587 1853 71,63%
Gross revenues 31006 27763 3243 11,68%
Aggregate expences -26288 -23167 -3121 13,47%
Net income from sales 4718 4596 122 2,65%
Dividends 4 13 -9 -69,23%
Interest paid -1472 -1066 -406 38,09%
Other gains and losses -318 -195 -123 63,08%
Earnings before taxes 2932 3348 -416 -12,43%
Profit tax -340 -787 447 -56,80%
Changes in fair value of
152 -100,00%
financial assets held for sale -152
Net income 2592 2409 183 7,60%

Profitability analysis 2009 2008 delta %

Earnings before interest (EBI) 3893,30 3224,42 668,88 20,74%
Return on total assets (ROTA) 7,03% 6,33% 0,69% 10,97%
Return on total assets (RONA) 7,44% 6,53% 0,91% 14,00%
Return on equity (ROE) 8,24% 8,11% 0,14% 1,68%
Assets turnover (ATO) 54,78% 51,24% 3,54% 6,92%
Return on sales (ROS) 15,22% 16,55% -1,34% -8,08%
Financial leverage index 1,17 1,28 -0,11 -8,37%

Finally we can state that company is working on behalf of owners, index is positive. And
we can employ capital at interest rate lower than 7%
Capital productivity (assets turnover) is 54%. What is significantly good.

4.Conclusions and key findings

Main compelling issue on the financial performance of the company is the change of the
liquidity situation. For this sake NWT management should convert short-terms
borrowings to long-term liabilities with interest rate not higher than 7%. Additionally
company should focus on the operational excellence in order to reduce financial cycle
and especially payables turnover period.

NWT 9