Revenue growth improves stability but future still uncertain

Published: 7/6/2000

Andrey Fedorov, President of IAPO in Irkutsk, while upbeat about the entity's short-term prospects at the company's recent AGM, raised a note of caution for the producer's future despite saying that 1999 had marked the transition from survival to relative stability. The assets of IAPO grew by 4.296 billion rubles ($171m) in 1999, primarily current assets which tripled, reflecting the plant's improved solvency through increased revenues. According to Federov however, these figures should not mask the potentially crippling lack of long term and working capital in the business. The entity's accounts receivable increased by five-fold at the end of 1999, reflecting the delays of payment for the delivery of aircraft to India in October 1999, which were finally made in the first quarter of 2000. Federal debts to IAPO have however been cleared. The eleven-fold increase of revenues was accompanied by a cut in the plant's debtors days by a factor of four according to the management. The poor performance in accounts receivable was somewhat offset by a more than two-fold growth in sales. As of January 2000, the sales were 5,411m rubles. The plant saw a 70% increase in inventory to 1974m rubles ($79m) during the year as the company geared up to meet ongoing orders in both 1999 and 2000 and avoid shortfalls in critical material inventory. The major component of the growth was the 566m rubles invested in what is described as 'raw material', which given the highly integrated nature of Russian aircraft production could mean anything, but the assumption is metal. Work in progress also grew by 245m rubles, while accounts payable increased by 2.5 times to over 2 billion rubles. The entity's long-term investments, primarily financial instruments and equity, rose by 12% to 315 m rubles. Investments were made in 24 companies and banks, although little detail is available about the exact nature of the investments. The investments include ONEXIM Bank, ZAO Russian Avionics, ZAO Betair, Rumyantsev NPO, FTK Aerokom, Incombank, Prombank, ZAO Aerocom and Beriev FTK. The rational for the investment strategy was not explained, but some of the investments are obvious driven by the need to guarantee suppliers and services. IAPO's lending to other enterprises in the period included short-term loans of 127m rubles (mainly to AO Betair, the Swiss registered company responsible for the Be-200) and short-term notes for 37m rubles and long-term loans of 1.832 billion rubles. Overall, the plant, despite its significant improvement in top line performance incurred losses of 607m rubles due to the dramatic impact of exchange rate losses amounting to 1,206m rubles loss, although this is a significant decline on the losses recorded in 1998. Andrey Fedorov has been quoted as saying 'under the long term Su-30MKI contract with India, the plant received a proportion of the contract in the form of advances in 1997, 1998, and 1999 at the exchange rates upon the day of acceptance of the orders, with deliveries of aircraft though to 2003. The loss is due to the fact that at the moment of delivery, the payment will be recorded at the current exchange rate. The deficiency of the reporting in reflecting the exchange movements (under Russian accounting standards) makes the plant reflect large book losses in its results, and reduces capital available for investment…. and for dividends to shareholders'. This is likely to continue as a trend for two to three according to Federov. Federov remains concerned about the future and intimated that despite the portfolio of successful products made up of the Su-30, Su-27 and Be-200 on both domestic and international markets, there remain few ongoing orders after 2001. To stabilise future revenues, the plant has to continue to invest in the upgrade and development of these aircraft and widen the company's aerospace products, as well as looking to produce and provide products and service in non-core areas. IAPO, as a result of this narrow focus of revenue and ultimately potential profit, says that it is considering a number of undisclosed strategic alliances and potential mergers to assure the viability of the entity, reflecting government policy. This is a curious statement from the head of a entity that has been less than enthusiastic in embracing total incorporation within the Sukhoi joint stock company. To succeed in developing new products, Federov believes they must have development funds of at least $70m to meet demands over the next three to four years. The funding of such developments should not simply come from borrowing, but should be significantly contributed by cost savings and efficiency from within the organization. This may signal his intention to tackle the issue of workforce. Currently, IAPO's order book is the largest in Russia's aerospace industry but despite this fact, the entity continues to have funding difficulties. The contracts with China and the Ministry of Emergency Situations are financed from the federal budget, which is an inconsistent payer. Payments are regularly delayed by six months, and the Ministry of Defence has paid its debts since 1997. Also, despite the large size of the Indian contract, the advances have been spent and there remain significant funding requirements for the ongoing design work. The issue of working capital continues to concern Federov, who argues that the lack of it may stop them meeting their orders in 2001. In 2000, IAPO plans to deliver the Su-27UBK to China, provide Su-30MKI prototypes to OKB Sukhoi for flight tests, and take the second prototype of Be-200 to OKB Beriev for the continuation of the flight tests for certification This will be undertaken with the aircraft's first customer and serial production of the aircraft and further deliveries to the Ministry of Emergency Situations.

Article ID: 1916