Investment Attractiveness Assessment of Global Russian Companies

According to Glen Arnold (Arnold, 2013), value-based management (VBM) could be defined as “a managerial approach in which the primary purpose is long-run shareholder wealth maximisation. The objective of the firm, its systems, strategy, processes, analytical techniques, performance measurements and culture have as their guiding objective shareholder wealth maximisation.” Value-based management interlinks the valuation of the shares of a company with its strategy, organizational and financial situation. It is a holistic management approach which focuses on working towards the value or in other words, maximizing shareholder value. Value-based management focuses directly on creating value. The value is created by pursuing the goals that support value creation (Hundal, 2015). An important notion that relates to the VBM approach is that the shareholders’ wealth creation objective is not necessarily in conflict with interests of other stakeholders. Even though VBM is mainly focusing on shareholder value maximization, it is important to understand Abstract


Introduction
According to Glen Arnold (Arnold, 2013), value-based management (VBM) could be defined as "a managerial approach in which the primary purpose is long-run shareholder wealth maximisation. The objective of the firm, its systems, strategy, processes, analytical techniques, performance measurements and culture have as their guiding objective shareholder wealth maximisation." Value-based management interlinks the valuation of the shares of a company with its strategy, organizational and financial situation. It is a holistic management approach which focuses on working towards the value or in other words, maximizing shareholder value. Value-based management focuses directly on creating value. The value is created by pursuing the goals that support value creation (Hundal, 2015). An important notion that relates to the VBM approach is that the shareholders' wealth creation objective is not necessarily in conflict with interests of other stakeholders. Even though VBM is mainly focusing on shareholder value maximization, it is important to understand Value is the key factor in investing. Investments are done in the expectation that value of the investment is growing so that for the risk taken a compensation gained. We argue that the company's ability to create value for its sharehol main measure that should be considered in a market economy. Value takes into account the long-term interests of all stakeholders in a company. Maximizing shareholder value seems to create good outcomes for all the stakeholders, which tells us about the importance of the value creation (Koller, et al., 2010) companies are creating a real value, there will not be fear of value investments. On the contrary, when the value is forgotten, market bubbles and financial crises are more likely to Koller et al. mention that behind the economic crises which emerged in 2007 was the unpleasant fact that value was underrated and not taken seriously.
According to certain research findings, Russia, being part of the BRICS counrties, is one of the most prosperous markets for investment, offers ample business opportunities along with a consumer Value is the key factor in investing. Investments are done in the expectation is growing so a compensation is ompany's ability to create value for its shareholders is the considered in a market economy. Value takes into term interests of all n a company. Maximizing shareholder value seems to create good outcomes for all the stakeholders, which tells us about the importance of the value (Koller, et al., 2010). When eal value, there fear of value-destroying investments. On the contrary, when the value is forgotten, market bubbles and ises are more likely to develop. mention that behind the economic crises which emerged in 2007 fact that value was underrated and not taken seriously.
According to certain research findings, Russia, being part of the BRICS counrties, is one of the most prosperous markets for offers ample business opportunities along with a consumer market hungry for new products, brands, and services, which, most importantly, is ready to "digest" them. Russia is among the world's fastest-growing economies in terms of domestic market size Adams, Samli, 2015). Consumer purchasing power in Russia is four to eight times greater than in China, India and certain European countries (USDA, 2013) Economists from various institutions (The Economist Intelligence Unit, OECD and the Central Bank of Russia) believe that after two years of recession the Russ economy and the Russian GDP will experience times of economic recovery and growth which would open up new investment opportunities.
One of the fastest growing market sectors in Russia, representing one of the highest investment potential is the groce (Kostin, Denslow, 2015). The grocery retail industry is rapidly developing, becoming more effective, less fragmented and more accessible to consumers in Russia Russian grocery retail market at the end of 2015 constituted 172 billion dollars forecasted to grow to 285 billion of dollars by 2020. The comparative data on European and BRIC grocery retail market is presented in Figure 1. The forecast of grocery retail market for 2020 _________________________________________________________________________ et hungry for new products, brands, and services, which, most importantly, is Russia is among the growing economies in terms of domestic market size (Kostin, Consumer purchasing s four to eight times greater than in China, India and certain ).
conomists from various institutions (The omist Intelligence Unit, OECD and the Central Bank of Russia) believe that after two years of recession the Russian economy and the Russian GDP will experience times of economic recovery and growth which would open up new One of the fastest growing market sectors in Russia, representing one of the highest investment potential is the grocery retail The grocery retail industry is rapidly developing, becoming more effective, less fragmented and more accessible to consumers in Russia. The Russian grocery retail market at the end of 2015 constituted 172 billion dollars and is forecasted to grow to 285 billion of dollars by 2020. The comparative data on grocery retail market is Our empirical investigation is focused on detecting value-based management principles and practices adoption by selected Russian companies representing one of the most dynamically developing marketing sectors in Russia. Our analysis is focused on the retail grocery sector of Russia as a recepient of VBM principles and practices. We argue that once the VBM principles and practicies are permanently adopted by global Russian companies, the quality of corporate governance, the transparency, economic growth and the investment attractiveness of companies in Russia will further increase.
The next section reviews the literature on value drivers and value creation in valuebased management. The setup of the analytical model is explained in the subsequent section. The empirical results based on value metrics calculations are presented and discussed in the section after that. The final section provides a summary.

Value Drivers and Value Creation
Maximizing shareholder value is an important corporate objective, but it is too distant and undetailed from the operating management view. It is important to "translate" corporate objectives to the operational level. Managers have to know which factors are creating most value and which factors to focus on. These factors are called "value drivers", and they are the primary focus of companies that are maximizing shareholder value. Value drivers ensure that strategy relates strongly to the practical operations (Lek, 2017).
Value drivers are those economic variables that are significantly contributing to the company's growth and overall success. There are many different opinions of the value drivers and the number of the drivers that researchers find to be the most vital vary. Turner (1998) has identified eight value drivers. These are: sales growth rate, operating profit margin, income tax rate, incremental investment in working capital, incremental investment in fixed capital, replacement of fixed capital, cost of financing and the planning period. The key drivers of the VBM framework are usually derived from sales, costs and assets (Akalu, 2002). As mentioned, value drivers are different depending on the industry and the key drivers often vary between companies in the same industry.
A value driver is something that adds value to a product, service or brand. In practice value drivers are those activities or capabilities that enhance profitability, reduce risk, and promote growth. Hence, focusing on value drivers leads towards the company's strategic goals (Rouse, 2016). In VBM the strategic goals are mainly associated with shareholder value. Value drivers affect the company's bottom line or profit and the main benefit of a value driver is that it provides a competitive advantage to a business in its industry. In practice, value drivers can be for example great brand awareness or very advanced technology.
In VBM it is especially important to understand those factors that are really creating the firm's value. Finding and understanding those key value drivers helps companies to focus on the right things, when targeting value creation. Through the key value drivers firms can add value. Value drivers are also helping people in the lower positions of organization to clearly understand what they are targeting.
Koller (Koller, 1994) emphasizes that the important issue about key value drivers is that even though they are a seemingly small part of the total business, they have a big effect on the results. In case of VBM the result is increased business value. The second issue is that these key value drivers should be measurable and actively monitored by the management. Those good drivers are also good to review regularly (Koller, 1994).
There are many different ways to determine value drivers and most of the researchers describe value driver as some kind of competitive advantage. Alfred Rappaport (Rappaport, 1998) has a different view and he identified seven value drivers that affect shareholder value. These are: -Rate of sales growth -Operating profit margin -Income tax rate -Investment in working capital -Fixed capital investment -Cost of capital -Value growth duration The guiding principle of value creation is the company's core competence competitive advantage. Sustainable fast growth is possible when the company has a clear and well-defined competitive advantage (Koller et al. 2010) directly on creating value, companies should set goals in terms of discounted cash flow value or some other value metrics. Discounted cash flow value is directly measuring value creation, considers long-term view and the need to manage the company's balance sheet. That's why it is widely utilized 1994). Value creation requires that company is working successfully and in harmony with shareholders and all the stakeholders.   (Koller, 1994) mentions company's need of nonfinancial goals, i.e. goals that target customer satisfaction, product innovation, and employee satisfaction for example. Those ar important signals for the staff about company's interests. Such goals do not contradict the value maximization. The most prosperous companies are usually just those that are doing well in these areas. Nevertheless, those nonfinancial goals must be carefully considered so that they do not damage the com financial circumstances (Koller, 1994) Arnold (Arnold, 2013) has created step model of value-based management for shareholder value creation, presented in Fig. 2. First step is creating awareness for the whole organization about mission that will create value for shareholders. Second, create the measures for value creation at all organizational levels and the measures should be understood and accepted by everyone. Third, make sure that al managers in the company are working towards the objective of value (Arnold, 2013).

The Three Steps of VBM (Created by author based on the data acquired from
Arnold, 2013) model leads sults in value creation. For example, Compass Group, a British foodservice, cleaning, property management and has reached comparison with (Arnold, 2013 value-based management in operational practice), focusing on the maximization of firm's value and on satisfaction of proprietors. There are several reasons which explain the lack of VBM adoption in Russia, quite effectively pointed out by Zhabin and Kandrashina (Zhabin, Kandrashina, 2009): Russian corporations are often built on the interpenetration between investors and managers, and the feeling of mistrust towards managers is a widespread attitude in the country, along with the fear of losing control of the firm. VBM could therefore provide a "bridge" between principals and agents, improving their interaction for companies' sake, moreover there's still room for VBM implementation for many operational and tactical purposes: from the evaluation of investment plans (through value-based indicators and criteria) to the gap diminishment in divided organizational structures (Sirbu, 2012). These are just some general possible application areas, but a large gamma of positive aspects (different for each business sector) requires futher empirical investigation.
We can state that the shift towards the value-based management adoption in the Russian Federation is progressing and we attempt to quantitatively measure the effects of VBM adoption by the global Russian companies operating in the retail sector and relate these effects with the economic growth of the companies and their attractiveness for investors.

Economic Value Added -EVA
The technique of Economic Value-Added (EVA) has been widely used and popular in finance and accounting research. EVA is proved to be an excellent performance measurement technique in comparison with the traditional measures like Return on Invested Capital (ROIC). The Economic Value Added is a popular tool used to estimate the value created by a firm.The economic value added (EVA) is an estimate of a firm's economic profit or, in other words, the value created in excess of the required return of the company's shareholder. The idea is that value is created when the return on the firm's economic capital employed exceeds the cost of that capital .
In order to calculate the value of the index, we cosidered utilizing two different but equivalent formulas: In our analysis we used the second formula because it was more relevant given the available dataset. EVA is a numerical indicator that allows investors to understand the consistence of gap between profit and expenses, since a positive value (EVA>0) implies the ability of the firm to create value, while negative values (EVA<0) means that the firm under evaluation destroyed value in the respected time period.
As far as comparison with other indicators is regarded, EVA provides a more realistic depiction of the corporation's results, due to inclusion of both operating and capital costs. The main advantage of EVA is the enhancement of likelihood of goalcongruent behaviors by managers, thus they need to strive for investment projects with EVA>0, which are viewed favorably by shareholders as well. On the other hand, it could be regarded as a financial indicator with a short-term orientation.

Market Value Added -MVA
The concept of Market Value Added was developed by Stern Stewart. This basic metric is focusing on the relation between the total invested capital in the business and the current market value of the company. This metric shows how well the available capital has been utilized. A positive MVA indicates positive value creation and respectively negative MVA indicates negative value creation, value has been destroyed (Arnold, 2013). Market Value Added is the figure that explains the difference between the market value of a company and the capital contributed by investors, both bondholders and shareholders. In other words, it is the sum of all capital claims held against the company plus the market value of debt and equity. A company's MVA is an indication of its capacity to increase shareholder value over time. A high MVA is evidence of effective management and strong operational capabilities. A low MVA can mean the value of management's actions and investments is less than the value of the capital contributed by shareholders.
Companies with a high MVA are attractive to investors not only because of the greater likelihood they will produce positive returns but also because it is a good indication that they have strong leadership and sound governance. MVA can be interpreted as the amount of wealth that management has created for investors over and above their investment in the company. Companies that are able to sustain or increase MVA over time typically attract more investment, which continues to enhance MVA.
For the sake of simplification, we've been considering that the market value of the debt equalls the book value. Therefore in our case, MVA was computed by subtracting the owners' equity from the market capitalisation. The MVA calculations were performed only for the current year as the MVA value also reflects the achievements of the previous years.

Free cash flow -FCF
Free cash flow (FCF) is a measure of a company's financial performance calculated as operating cash flow minus capital expenditure. FCF represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base. FCF is important because it allows a company to pursue opportunities that enhance shareholder value.
FCF is an assessment of the amount of cash a company generates after accounting for all capital expenditures, such as buildings or property, plant and equipment. The excess cash is used to expand production, develop new products, make acquisitions, pay dividends and reduce debt. Specifically, FCF is calculated as : EBIT (1-tax rate) + (depreciation) + (amortization) -(change in net working capital) -(capital expenditure) Some believe that the finance focuses only on earnings while ignoring the real cash that a firm generates. Earnings can often be adjusted by various accounting practices, but it's tougher to fake cash flows. For this reason, we believe that FCF gives a much clearer view of a company's ability to generate cash and profits.
However, it is important to note that negative free cash flow is not bad in itself. If free cash flow is negative, it could be a sign that a company is making large investments. If these investments earn a high return, the strategy has the potential to pay off in the long run.
The Free Cash Flow is the company's available cash flow calculated as the difference between positive operating cash flow and the cash flow for investment on fixed assets. So, we can interpret this figure as the remaining amount of money deriving from operating activities, after the investments on fixed assets that, in the non FCF theory, increase the market value of the company.

Earnings before Interest Depreciation & Amortization Margin -Ebitda Margin
The EBITDA MARGIN is a measure widely used in order to assess the company's cash flow. It is defined by the Earnings before Interests, Taxes, Depreciation and Amortization. The EBITDA MARGIN is a means that allows to evaluate whether a company produces profit or loss in its operating business .
EBITDA MARGIN is one indicator of a company's financial performance and is used as a proxy for the earning potential of a business. EBITDA MARGIN is essentially net income with interest, taxes, depreciation and amortization added back to it over total revenues. EBITDA MARGIN is often used in valuation ratios and compared to enterprise value and revenue. We choose this particular indicator while it can be used to analyze and compare profitability between companies and industries given that it eliminates the effects of financing and accounting decisions.

Operating Income Before Depreciation & Amortization -OIBDA
OIBDA is a financial metric whose main purpose, as far as investors are regarded, is the check of a firm's operating efficiency, through the focus on core operations. It differs from EBITDA MARGIN because it excludes non-operating profit (or loss) in the index computing, such as investment in intangible assets, tax deductions and all the non-operating expenses. Calculations are performed accoding to the following formula (Investopedia, 2017): OIBDA = Net operating profit + Depreciation + Amortization (6) The focus on corporations' daily operations allows the OIBDA to be considered as a quite trustworthy indicator of the real value of the company, which could be extremely useful for investors.

Proposed Model
Therefore, cosidering the developed framework we propose the following model presented on Fig. 3, which we are going to apply in subsequent sections towards VBM implementation and investment attractiveness determination.

Figure 3: VBM implementation and investment attractiveness determination model (Created by author)
The relevant data for the calculations were derived from the financial statements of the respective companies. In our opinion the application of the described value measurement indicators and techniques combined determines the investment attractiveness of companies under investigation and provides better justification of conclusions drawn in the relevant section.

Companies under Investigation
The model proposed in the previous section was applied to the retail sectorone of the most promising and advanced market segments in Russia (Kostin, Denslow, 2015). The biggest playerslargest and most successful companies operating in the retail sector in Russia were selected for investigation: Magnit, X5 Retail Group, Dixy Group, O'Key Group and Lenta.
The brief overview of the companies under investigation is presented below.

Estimation Results
The investigation results will be discussed in accordance with the developed framework.  As we can conclude from this chart, Magnit is the only company that, according to the calculated EVA index, is performing positively and could be attractive to the investors according to this indicator. Within the five year timeframe taken into consideration, Magnit has recorded a continuous increase in performance with its peak in 2015.

EVA Indicator
All the other retail companies performed rather poorly according to the calculations, especially in the case of Retail Group where there is indication of undermined wealth. Nevertheless data could give unfair representation company performance, since according to our research the company had heavily invested in fixed assets in order to enlarge its network of stores in Russia and hence increase its marketshare which would contribute to superior returns in the mid to long run. Obviously this approach is part of a managerial strategy aiming at creating stable wealth for the investors. important point to consider is the macroeconomic situation in Russia, As we can conclude from this chart, Magnit that, according to the EVA index, is performing considered attractive to the investors according to this the five year timeframe taken into consideration, Magnit has ded a continuous increase in performance with its peak in 2015.
anies have according to the in the case of X5 roup where there is indication of Nevertheless, these data could give unfair representation of the company performance, since according to mpany had heavily invested in fixed assets in order to enlarge of stores in Russia and hence increase its marketshare which would contribute to superior returns in the mid to Obviously this approach is part of ming at creating th for the investors. Another important point to consider is the in Russia, highlighted by wide fluctuations of interest rates in the recent past which had definitely contributed to the increase in th cost of capital and the cost of debt for companies under investigation. We suggest that Magnit is currently the most appealing investment according to the EVA framework for the global investors.
The seemingly value destructive performance of the other companies under investigation, namely X5 Retail Group, Dixy Group and O'KEY could be attributed to different reasons. As reported above, X5 Retail Group is investing significant resources into the broadening network of stores. Our evaluation of su management strategy is positive, as pursuing it in the long run would allow them to rely on greater and stabler capital base. We could not justify O'KEY's negative performance according to the EVA index with a specific strategy such as for Retail Group. The company, according to the EVA index, is destroying wealth. Our suggestion would be to boost simultaneously increase the efficiency of seemingly value destructive r companies under , namely X5 Retail Group, Dixy could be attributed to . As reported above, X5 ail Group is investing significant the broadening of its network of stores. Our evaluation of such management strategy is positive, as pursuing it in the long run would allow them to rely on greater and stabler capital 's negative according to the EVA index such as for X5 . The company, according to dex, is destroying wealth. Our sales and the efficiency of O'key the operating activities because the costs undermine the net operating profit Dixy Group is performing poorly with the exception of the year 2014. The company explains in its report that after a period of "wild opening" in order to expand its market share, it is now pursuing the strategy targeting the improvement of efficiency of the network and the enhancement of the service quality last period, for instance, the closed 89 stores and opened only the average selling space grew by could conclude that on one hand the company improves operations' and on the other hand, enhances shopping experience quality for its customers investing in marketing research and related activities. The pursuit of this strategy puts Dixy Group in a favorable position as far as investment attractiveness is concerned in the midium to long run.
Lenta is performing very well into account the capital invested in fixed From the data analyzed we co X5 Retail Group has trouble creating positive value from the market. This is mainly due to the low attractivness of the company under situation according to our analysis already mentioned, the X5 Retail Group is following the strategy aimed at expanding forming poorly with the exception of the year 2014. The company explains in its report that after a period of "wild opening" in order to expand its pursuing the improvement of efficiency of the network and the service quality. In the iod, for instance, the Group had closed 89 stores and opened only 16, but verage selling space grew by 2%. We could conclude that on one hand the company improves operations' efficiency, enhances the quality for its customers investing in marketing research The pursuit of this strategy puts Dixy Group in a favorable position as far as investment attractiveness m to long run.
very well if we take invested in fixed assets. In fact, the company owns approximately 82% of the real estate used in its operating and adminis activities. On the chart we observe positive performance during the years of 2013 and 2014. Since 2015, the company capitalized on investing in real estate. This strategy had decreased the value of the indicator during the year 2015. But does not necessarily mean that the shareholder value is undermined. previous performance of the company always been positive and the diminishing EVA could be attributed to the significant investment in real estate in order to have full control and higher potenial profit margins in the long run. Figure 5 presents the results of calculations based on financial data for selected companies: conclude that has trouble creating positive value from the market. This is mainly due to the low short-term of the company under current according to our analysis. As was X5 Retail Group is y aimed at expanding their market share. In order to rea goal, they are heavily investing in fixed assets. We believe that this strategy would pay off especially if the the Group capitalizes on the franchising model in order to leverage the investments in fixed assets and hence increase   Figure 7 presents the results of the FCF calculations based on financial data for selected companies:    Unlike EBITDA, OIBDA does not operating income. Magnit accordance with the previous indicators, the best performer due to its stability, efficiency and market position.

EBITDA MARGIN Indicator
roup is performing well trend in the Lenta is on the growth path, although concentrating more on operation income generating activities in holder value. on the contrary still positively but rather displaying worse results in comparison with the previous years. Dixy Group and O'KEY have to follow the long-term strategy adopted by the manag which in the future years would resu the growth of this indicator.

Comparative Benchmark Analysis
As the main benchmark for indicator evaluation, we chose the world's largest and leading retail US based company "Walmart", a recognized and successful VBM adopter (Walmart, 2017) benchmarking purposes, all the indicators are split into three categories, corresponding to good performance average performance, and below average respectively (please see

Summary
Our study investigates the effects of valuebased management framework adoption in one of the most promising developing markets of Russia. The analytical framework is proposed based on the following VBM indicators: EVA, MVA, FCF, EDITDA MARGIN, OIBDA.
One of the most attractive sectors of the Russian economy is selected for the analysis: the retail grocery sector which displays stable growth and has significant growth potential. The top performing companies from this market are selected for the analysis.
We discuss implications of value-based management principles application and use the proposed framework to assess the investment attractiveness of the selected companies. The relevant ranking of the companies is presented with the justification to support the findings. In essence, based on our findings we advocate that deeper adherence to VBM principles leads to economic growth and greater investment attractiveness of the companies for potential investors.