Hermès in Brazil - Country Risk course at Skema Business School, Raleigh

COUNTRY RISK – FALL 2012

MICHEL-HENRI BOUCHET

Hermès International S.A. in Brazil

C. Bilet, T. Bouchoux, A. Bouhdadi, A. Boulay, T. Breton

Table of content

1. Company overview1. 175 years of Hermès2. Hermès in 2012

2. Country Risk Analysis: Brazil1. Brazil Overview

1. Political & Demographical outline2. Economic outline

2. Socio-political risk assessment1. Political challenges2. Social issues3. Prince model

3. Financial – Economic risk assessment1. Economic overview2. Debt & balance of payments analysis3. Ratings

3. Conclusion

Company Overview

175 years of Hermès

Top of mind family-owned luxury manufacturer of leather goods, lifestyle accessories, ready-to-wear & perfume

Founded in in 1837 in Paris by Thierry Hermès

Values: luxury craftsmanship and traditions Same logo since its creation: Duc carriage with a horse Famous artistic directors: Jean-Paul Gaultier

But also, adaptability to the changes of the market Started off with horse saddles then diversified Iconic collections: Birkin bag

Hermès in 2012

Consolidated sales: €1,591.4 million up by 15.4% at constant exchange rates

Consolidated net income: €335.1 million

Operating profitability: 31.2% of sales

9,526 employees & 445 new jobs created in the first half of 2012

328 stores all around the world in 2011 123 dealers205 branchesSource: http://finance-en.hermes.com/2012/1ST-HALF-2012-RESULTS

Country Risk Analysis: Brazil

Brazil Overview

Political and Demographical outline

Population: 199,321,413 (July 2012)

Capital: Brasilia

Government: Federal Presidential Constitution Republic

President: Dilma Rousseff (PT)

HDI: 0.718 in 2011 (Ranking: 85th

in the world)Source: https://www.cia.gov/library/publications/the-world-factbook/geos/br.html

Brazil Overview

Economic outline for 2011

GDP in PPP: $2.294 trillion Exports: $256bn (23rd) Imports: $219.6 bn (23rd) Growth: 2.7% Inflation: 5.28% Exchange rate: BRL 1 = USD $0.49 Unemployment: 6% Central Bank discount rate: 199,321,413 (July 2012) Current Account Balance: $-52.48 bn FDI: $539.2 bn Public debt: 54.2% of GDPSource: https://

www.cia.gov/library/publications/the-world-factbook/geos/br.html

Socio-political risk assessment

Political challenges

o Expansionary monetary and fiscal policies to counter the spill-over effect of the slow growth in the US and Europe

o The World Cup and Olympics are catalyses for structural improvements

o Brazil still suffers from corruption and a heavy bureaucracy Transparency CPI index : 3.8/10 (73rd/183)

Socio-political risk assessment

Social issues

Unemployment: 6% (2011), It will remain stable for the next two years.

Income inequality: 51.9 (2012)High level of inequalities which is decreasing (-14% in 10 years)

Poverty rate: 21.4% of the population was living under the poverty line in 2009

Crime: 22.00 per 10,000 inhabitants in 2010Organized crime linked drug trafficking is concentrated in the favelas but the crime rate is decreasing thanks to the efforts of the government

Church = shock absorber of these social inequalities

Source: http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf

Socio-political risk assessment

Prince model

Financial & economic risk assessment

Economic overview

Economic growth expected to hold over the medium termIn 2012, household consumption and public administration will be the main source of growth.

Inflation controlled by the government and the Central Bank

Brazil attracts investors with low risk sovereign debt bondsYield 10Y bond: 9.45%

Financial & economic risk assessment

Large capital inflows over the past several years have contributed to the appreciation of the currency, hurting the competitiveness of Brazilian manufacturing and leading the government to intervene in foreign exchanges markets and raise taxes on some foreign capital inflows

Current account/GDP ratio: -2.11% Strong imports Low savings rates High personal consumption rates

as percentage of disposable income

Strengths

Abundant mineral and agricultural resources

Significant manufacturing industry

Primary budget surplus Significant margins for

contra-cyclical policies Net external creditor since

2008 Considerable currency

reserve

Weaknesses

Dependence on raw materials and foreign capital

Global general government deficit linked to debt service

Deficient infrastructures (energy, transport)

Lack of skilled labor Shortfall in household

savings rate and high cost of credit

High taxes primarily devoted to operating expenditures

Source: Coface

Financial & economic risk assessment

Financial & economic risk assessment

Debt Analysis Public debt= 54.2% of the GDP (2011)

Structure of the debt: External Debt = $382.5 billionTotal public debt = $1243.3 billion The external debt represents 31% of

the total public debt

Balance of payments analysis

Liquidity ratio (Interest/Exports): 52% (2010) Solvency ratio (Debt/GDP): 54.2% (2011) Debt servicing ratio: 19% (2010) Debt/exports ratio: 4.56% (2011) Exports/GDP ratio: 11% (2011)

The external situation is comfortable with gross debt representing 12% of GDP and 125% covered by foreign currency reserves, and a net credit position.

The country has a healthy situation and a low risk of default.

Financial & economic risk assessment

Ratings

Rating Agencies

Local Currency Rating

Foreign Currency Rating

S&P A- BBB

Fitch BBB BBB

Moody’s Baa2 Baa2

Dagong A- A-

Brazil debt is classified as medium grade.

Investment quality grade was granted to Brazil in 2008. Even if the rating agencies have low predictability and self-fulfilling

prophecy tendencies, they are a barometer for investors.

Conclusion

BRAZIL Hermes Silk Scarf, in blue, designed in 1988 by Laurence Bourthoumieux

Brazil Country Risk Analysis

Source: AM Best Country Risk Report Brazil December 2011

Brazil is a medium risk country.

Brazil was the first country in South America to get out of 2010 crisis and return to growth. The government with the help of the Central Bank are keeping a lid on the inflation and attracting foreign FDI to finance their current account deficit.

Even if the country is hindered by corruption and inequalities, the current government is working to improve the social conditions and reduce poverty.

Brazil has a low risk of default due to its external creditor position and its foreign reserve assets.

Advantages Drawbacks

Scale and potential of the domestic market

Household consumption as motor of growth for 2012

World Cup & Olympics will increase tourism and are catalysts for structural improvements

Social policies to reduce inequalities and increase purchasing power

Brazil has a healthy economy with sustainable growth for the coming years

Deficient infrastructures (transports)

Corruption and crime flourishing on inequalities

Hermès success in Brazil?

Hermès should invest in Brazil and open a branch in São Paulo