HMS Hydraulic Machines & Systems Group plc Annual Report 2012

FY2012 Annual Report · HMS Hydraulic Machines & Systems Group plc

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HMS GROU P ANNUAL REPORT 20 12

Disclaimer

This document contains forw ard-looking statements that reflect the management’s current view s w ith respect to future events. Such statements are
subject to risks and uncertainties that are beyond HMS Group’s ability to control or estimate precisely, such as future market and economic conditions,
the behavior of other market participants, the ability to successfully integrate acquired businesses and achieve anticipated synergies, and the actions
of government regulators. If any of these or other risks and uncertainties occur, or if the assumptions underlying any of these statements prove
incorrect, then actual results may be materially different from those expressed or implied by such statements. HMS Group does not intend or assume
any obligation to update any forw ard-looking statements to reflect events or circumstances after the date of these materials.

This annual report does not constitute an invitation to invest in HMS Group GDRs. Any decisions you make in reliance on this information are solely your
responsibility. The information is given as of the dates specified, and is not updated, HMS Group accepts no responsibility for any information on other
w ebsites that may be accessed from this site by hyperlinks.

20 ANNIVERSARY

In 2012, we celebrate our 20th annirversary. This year we entered
to the new promising market of gas projects with an acquisition of

the leading Russian industrial compressor producer OJSC

“Kazankompressormash”. Also, pursuing enhancement of the

pumps product portfolio, the Group completed an acquisition of

German manufacturer of high-end specialized pumps Apollo
Goessnitz GmbH (Goessnitz, Germany).

Overview

We operate in the industries with

attractive fundamentals. Revenues

from oil&gas sector comprised 80%
of total, while Russian oil and gas

majors are incentivized to keep

investing in development of the oil

and gas infrastructure in coming

years. This allows us to benefit from

the long-term growth drivers in the

industry.

HMS Group’s consolidated revenues

increased by 22.4% year-on-year

for the full year 2012, mainly driven

by a gradual execution of the

infrastructure projects implemented

by main oil and gas majors.

We develop advanced flow-

control technology and bring it to

our customers through four

divisions, which employ around

17,400 people in Russia, Ukraine,

Belorussia and overseas.

Investment Thesis

The investment case

ATTRACTIVE MARKET FUNDAMENTALS WITH DEVELOPED
OIL AND GAS SECTOR, PLAYING CRUCIAL ROLE IN
EMERGING RUSSIAN ECONOMY

As w estern economies stagnate, Russia becomes especially
attractive emerging, fast-grow ing market w ith oil and gas sector
playing a crucial role for the w hole economy. Russian oil and gas
majors are incentivized to invest in development of the oil and gas
infrastructure and secured a large Capex for coming years. This
allow s us to benefit from the long-term grow th drivers in their
industries.

LEADING MARKET POSITIONS ALMOST IN ALL THE
SEGMENTS, WHERE WE ARE REPRESENTED

UNIQUE R&D BASE GIVES ABILITY TO PROVIDE HIGH-
MARGIN INTEGRATED SOLUTIONS

The largest installed base in Russia supports a stable and resilient
flow of orders for replacement, upgrade, modernisation and
maintenance of the operating equipment, w hile advanced R&D
capabilities allow s to offer customers high value-added integrated
solutions, w hich associated w ith higher margin, large contracts
size and offer aftermarket opportunities.

Strong focus on R&D is our core advantage, w hich allow s us to
provide complex integrated solutions. HMS Group combines
leading pump R&D centers, including design centers and research
institutes at the production facilities, independent research and
development centers in HQ and in the production regions in Russia
and CIS, as w ell as a center of innovative technologies complying
w ith API standards in Germany.

WELL-ESTABLISHED CUSTOMER BASE AND STRONG
RELATIONS WITH RUSSIAN OIL & GAS MAJORS AND POWER
COMPANIES

HISTORY OF RESILIENT FINANCIAL GROWTH

Well-diversified “blue-chip” client base of more than 3,000
customers, including numerous subsidiaries of Russian largest oil
& gas and energy companies.

Founded from scratch in 1993 as a pump trading and servicing
company, HMS has grow n organically and pursuing active M&A
policy completed 20 acquisitions aimed at either adding products to
the portfolio or expanding into the adjacent business areas. Thus,
since 2003 HMS Group consolidated a number of leading pumps
and equipment manufacturers in former Soviet Union and formed
leading industrial group w ith 2012 annual revenue of Rub 33.7 bn.
In 2012, w e added compressor business arm and acquired a
German manufacturer of specialized pumps for oil refineries,
pow er and off-shore applications.

DEDICATED MANAGEMENT TEAM COMPRISED OF
FOUNDERS AND SHAREHOLDERS

ATTRACTIVE DIVIDEND POLICY

HMS Group has been running by the strong management team
w ith sound track record that proved its ability to deliver organic
grow th and make value-accretive acquisitions. Management team
includes founders of the Group, w ith HMS being a core business
for the largest shareholders.

According to our policy, not less than 25% of profit for the year in
accordance w ith IFRS is distributed for dividends among our
shareholders.

At a Glance

HMS Group is the leading pump and compressor manufacturer and provider of flow control solutions and related services to the oil and gas, nuclear
and thermal pow er generation and w ater utility sectors in Russia and the CIS.

Our team is a leading industrial group w ith a strong research and design base, w hich can offer full integrated solutions from design and manufacturing
to engineering, construction w orks, repairs and maintenance.

We develop advanced flow -control technology and bring it to our customers, focusing on our core values:

Long-term partnership w ith clients and suppliers;
Constant development and grow th to keep leadership in strategic markets;
Ongoing improvement and perfection of produced equipment and offered solutions;
Strict compliance w ith an ethic code in respect to all stakeholders;
Low ering the environmental impact;

We do this through four divisions, w hich employ around 17,400 people employed in Russia, Ukraine, Belorussia and overseas.

INDUSTRIAL PUMPS

ACTIVITIES

Design, manufacture, install and service
industrial pumps for

CORE PRODUCTS AND SERVICES

REVENUE

Water injection
Trunk pipelines
Oil refineries
Nuclear and Thermal pow er,
Water utilities
General industrial pumps

Rub 17,066 mln

EBITDA MARGIN

EMPLOYEES

25.1%

8,422

Industrial pumps: The industrial pumps unit’s principal products include ready-made pumps based on standard specifications, customized pumps and
integrated pump systems. As the Company has developed, it has made a structural shift to higher margin products and services in the pump sector,
particularly on bespoke, integrated pump systems built on a turn-key basis for large infrastructure projects.

The industrial pumps business unit also provides aftermarket services, maintenance, repair and other support for its products;

OIL AND GAS EQUIPMENT

ACTIVITIES

Manufactures and installs ready-made
units for oil and gas industry

CORE PRODUCTS AND SERVICES

REVENUE

Oil pumping stations and pump
stations for w ater injection
Oil & gas and w ater processing
units
Nuclear and Thermal pow er,
Tanks, reservoirs and vessels
Oil development equipment

Rub 7,828 mln

EBITDA MARGIN

EMPLOYEES

17.8%

2,510

Oil and gas equipment: The segment’s products are equipment packages installed inside a self-contained, free-standing structure that could
be delivered to and installed on the customer’s site as a modular and completely integrated part of the customer’s operations. The segment also
provides aftermarket services, maintenance, repair w orks and other support for its products;

COMPRESSORS

ACTIVITIES

Design, manufacture, install and service
compressors

CORE PRODUCTS AND SERVICES

REVENUE

Oil and gas production
Oil and gas transportation
Refrigeration applied across
different industries

Rub 1,426 mln

EBITDA MARGIN

EMPLOYEES

6.0%

2,400

Compressors: The segment w as established after acquisition of a leading Russian compressor producer Kazankompressormash in July 2012. The
compressors unit’s principal products include ready-made customized and special project-tailored compressors and compressor based solutions
including compressor units and compressor stations.

The compressors business segment also provides aftermarket services, maintenance, repair and other support for its products;

ENGINEERING, PROCUREMENT AND CONSTRUCTION (EPC)

ACTIVITIES

Design, project planning and management,
procurement and implementation

CORE PRODUCTS AND SERVICES

REVENUE

Oil and gas projects focused on
design and planning
Oilfield infrastructure and pipelines
construction
Supplying of equipment

Rub 7,336 mln

EBITDA MARGIN

EMPLOYEES

6.5%

3,541

EPC: The segment designs, engineers, manages and provides construction w orks, including on a turn-key basis, for customers in the upstream oil and
gas, oil transportation and w ater utility sectors.

Chairmen's Statement

“We made good progress in 2012,
successfully meeting both our
financial and strategic targets
across all business segments.
Thanks to great opportunities that
emerged on our target markets and
efficient company management,
we participated in the most
meaningful and material projects
in the oil and gas industry, thermal
and nuclear energy, and water
utility sectors.”

German Tsoy
Chairman of the Board
of Directors

Dear Stakeholders

In 2013, w e celebrate our 20th anniversary. During these 20 years w e have experienced various periods of Russian economy
development, w orking our w ay through all the challenges w e faced and taking advantage of the most amazing opportunities that
presented in the emerging market. Having transformed the Group from a trading company focused on pump-based solutions into
one of the largest manufacturing holdings in Russia, providing services for the oil and gas industry, energy and w ater utility
sectors, w e look forw ard w ith confidence to the years ahead.

In 2012, sluggish grow th in the U.S. economy as w ell as Europe balancing on the edge of recession and slow ing grow th in China
definitely affected grow th in Russia. This w as especially visible in the second half of 2012 w hen w e observed GDP grow th
deceleration to 3.4% year-on-year. Nevertheless, w e managed not only to demonstrate a solid double-digit revenue grow th
of 22%, but also broke the barrier of US$1bn for the first time, w ith EBITDA hitting a record high of Rub 6,231 million. This again
justified the strategy chosen by our team, w hich focuses on close cooperation and integration of research and design resources
and production facilities. Now I can say w ith confidence that w e have emerged from the crisis period as an even stronger and
better company than w e w ere before, and a company w ith a leading position in the Russian market.

We made good progress in 2012, successfully meeting both our financial and strategic targets across all business segments.
Thanks to great opportunities that emerged on our target markets and efficient company management, w e participated in the most
meaningful and material projects in the oil and gas industry, thermal and nuclear energy, and w ater utility sectors. Our focus
on customers’ needs and the quality of our services allow ed us to secure new contracts and participate in the follow -on stages
of such important projects as the Vankor oilfield development and expansion of the first part of the East-Siberia Pacific Ocean
pipeline. On top of this, w e added into our order backlog a number of interesting new projects in the engineering, nuclear energy
and w ater industries, both in Russia and overseas.

Among important events of the last year I w ould like to mention new M&As. Having added Kazankompressormash (KKM) into the
Group’s portfolio, w e strengthened the range of solutions w e can offer to our existing customers and tapped into the promising
new market of gas projects. We need time and effort to transform KKM into a fully-fledged member of the HMS Group but even
now w e clearly see tremendous potential for the enterprise and strong prospects in the compressor market. This gave us
confidence to accept this responsibility and to set ambitious targets and goals for KKM’s development. Given the expertise
w e have accumulated through 21 successfully completed acquisitions, both in Russia and abroad, I believe w e’ll manage
to complete the transformational period w ithin a very tight deadline.

The acquisition of Apollo Goessnitz (Apollo), another production facility acquired in 2012, has at least equal importance, though
the size of Apollo’s business is relatively small compared to the Group’s scale of business. Apollo helps us to gain a very strong
level of engineering expertise and a product portfolio of specialized pumps for those target markets in Russia w here w e had
a limited presence — oil refineries and petrochemicals, as w ell as offshore oil production. In addition, w e’re going to deploy the
distribution netw ork of Apollo to offer HMS pumps to international engineering projects.

We achieved solid results in 2012, but I don’t expect 2013 w ill be an easy year for us. The main factor w e should take into
consideration is the schedule of customer tenders for new large infrastructure projects, w hich w e consider as priorities for our
development. According to our forecasts, most of these w ill be held in the second half of 2013. That means w e’ll be facing the
need to increase our revenue in 2013 mainly through the delivery of standard equipment and flow control solutions.

Given the current circumstances and our expectations on customers’ project cycles, w e have set clear and transparent goals for
2013: to demonstrate grow th outstripping the inflation rate and to build up a backlog of large complex orders for 2014 in every
business segment of the Group.

The expertise of our team of employees w ill be the main factor in our future success. This is a particular reason w hy
w e intensively invest in human resources and also w hy, in 2012, w e’ve been nominated again as “Attractive Employer of the
Year”. I believe w e have created an “entrepreneurial” atmosphere in our business that is based on trust and respect among our
sales team, w hile the young engineers w e recruit from leading Russian technical universities not only enjoy comfortable w ork
conditions but also the scope for personal development and training opportunities.

We are strongly committed to the principles of corporate governance, declared during the Initial Public Offering of the Group on the
London Stock Exchange in 2011. Out of 9 Directors on the Board, w e have 4 non-executive and 2 independent Directors. This
creates a balanced decision-making system for strategic aspects of the business, aligned to a target of sustainable grow th.
I w ould like to thank all Board Members for the job they have done in 2012.

Certainly, w e w ould not be able to achieve such great results w ithout the w ell-organized and professional w ork of our
management team, production and engineering employees, sales and marketing people and IT specialists, both w ithin the
management company and at the production facilities of the Group. Our 20th anniversary is a great chance to say “thank you” for
their motivation, ingenuity and dedication to our values, and I w ould like to take this opportunity to express my gratitude to all
of them.

Revenue
up 22%

We m anaged not only to dem onstrate

a solid double-digit revenue grow th

of 22%, but also broke the barrier

of US$1bn for the first tim e, w ith EBITDA

hitting a record high of Rub 6,231 m illion

Almost one-third of the HMS Group share capital belongs to international institutional investors. We are fortunate to meet and hear
from them regularly, and to gain expertise from our minority shareholders. I think last year many of them saw evidence that their
support and feedback are both appreciated and continue to shape our thinking. Unfortunately, the share price performance
doesn’t accurately reflect, in our view , the fundamentals of the business development and prospects. How ever, w e’d like to thank
our investors for their commitment to the Group’s investment case and partially return their investments through dividends. I’m
pleased to inform you that taking into consideration our strong positive cash-flow in 2012, w e made a decision to pay out
dividends of Rub 800 mn.

Your faithfully,
Germ an Tsoy

CEO Statement

"Our human resources potential is
a basis for sustainable growth and,
in support of this, we have invested
strongly in HR development over
the years. I would like to thank all
HMS Group employees for enabling
our achievements of the last year
and for their commitment to our
values. It’s a particular pleasure for
me to recognize our progress and
achievements as we approach the
important milestone of our 20th
anniversary."

Artem Molchanov
Chief Executive Officer

Dear Stakeholders and Partners of HMS Group

We are all looking back on a very successful year. It w as successful from both financial and strategic standpoints. We have
given a good account of ourselves, particularly in executing sophisticated and complex projects; last year w e successfully
completed deliveries and commissioning of pumping stations under construction for the second part of the East-Siberia — Pacific
Ocean pipeline (ESPO), w hich w as launched in December, 2012. Ow ing to the good job w e’ve done and strong references under
the ESPO project, w e w ere successful in w inning a tender and signed a new follow -up contract valued at Rub 4.6 bn in April
2012 for the delivery of three unique pumping stations under the ESPO — 1 capacity extension project.

In addition to this, w e managed to sign and successfully execute complex equipment deliveries under a series of contracts,
valued at more than Rub 3 bln, for integrated solutions under the second stage of development of the Vankor oilfield. This is also
the result of a previous job w ell-done — in 2010 w e participated in the first stage of the oilfield development.

How ever, our target markets are not limited to just the oil and gas sector. For example, in 2012, our contract in Turkmenistan for
deliveries of three customized w ater pumping stations for irrigation serves as good evidence of our strategy of focusing
on technologically demanding and complex solutions. We also signed this contract largely thanks to our previous execution
of a similar pilot project in the region in 2011. This year w as also memorable for a w in in the international competitive bid for
deliveries of pump equipment to the Tianw an Nuclear Pow er Plant in China. Positive references on our pumps, installed in already
operating pow er units of the plant, w ere among the key criteria for our contract success. On top of this, w e managed to sign
a series of contracts w ith nuclear pow er plants under construction and expansion in Russia — Beloyarskaya NPP, Rostov NPP
and the Baltic NPP.

Thanks in large part to these material projects and a constant flow of small and mid-size orders from our customers, w e managed
to reach a record high order intake in 2012, w hich totaled Rub 36.1 bn. Additionally, in the beginning of 2013 w e had a w ell-
diversified backlog of orders of Rub 21.5 bn, 22% higher than in 2011.

Last year w as also successful from a financial standpoint. Group revenue reached Rub 33.7 bn and w e observed grow th across
all business segments. In the “Industrial pumps” business segment w e managed to achieve Rub 17.1 bn of revenue, in the “Oil and
Gas equipment” business segment— Rub 7.8 bn, w hile in the “EPC” business segment — Rub 7.3 bn. In our new ly-established
“Compressors” business segment, revenue since consolidation amounted to Rub 1.4 bn.

We established a new business follow ing the acquisition of “Kazankompressormash”, a leading industrial compressors producer
in Russia. I believe this acquisition w ill help us to redefine our business and achieve a new level of development, given the
compressor market potential and prospects. Already in 2012 w e managed to materially increase order intake, having secured new
orders for delivery of complex technological solutions for compressor stations. Going forw ard, w e w ill leverage all of our
expertise and intend to expand the compressor business dramatically, as w e have demonstrated already w ith other assets
acquired by the Group.

We also acquired a German pumps manufacturer, Apollo Goessnitz GmbH (Apollo), w hich focuses on specialized pumps for oil
refineries, on-shore and offshore production, thermal pow er generation and the w ater utilities sectors. Apollo’s production
complies w ith API (American Petroleum Institute) and DIN (German Industrial Standards) and enables us to significantly strengthen
our portfolio of pumps for these industries. I see particular value in the research and development potential of Apollo, w hich w e’ll
be applying as part of other Group projects. I believe the acquisitions completed in 2012 w ill strengthen the Group’s position and
enable HMS Group to open up strong opportunities in new markets.

Due to the acquisitions of these new assets, the Group’s total debt grew to Rub 13.4 bln, w hile net debt to EBITDA ratio w as 1.94.
Despite this debt level grow th, w e managed to keep the ratio w ithin an internal limit of 2.5.

Ow ing to our participation in large technologically demanding infrastructure projects, w e managed to demonstrate solid business
profitability for the companies operating in the flow -control market. EBITDA of the Group amounted to Rub 6.2 bn, up 13%
in comparison w ith the previous year, w hile net profit w as Rub 2.3 bn.

All these results w ouldn’t be possible w ithout the excellent and w ell-organized w ork of the management team, our production
employees and research & development team. Our human resources potential is a basis for sustainable grow th and, in support
of this, w e have invested strongly in HR development over the years. I w ould like to thank all HMS Group employees for enabling
our achievements of the last year and for their commitment to our values. It’s a particular pleasure for me to recognize our
progress and achievements as w e approach the important milestone of our 20th anniversary.

Record high order intake

Rub 36.1 bn

Thanks to a num ber of m aterial projects

and a constant flow of sm all and m id-size

orders from our custom ers, w e

m anaged to reach a record high order

intake in 2012, w hich totaled Rub 36.1 bn.

Over 20 years w e’ve alw ays needed to w ork hard to achieve the best results, as w e have set more and more ambitious goals for
the company. Competition for business in our market niche is especially fierce in the challenging economic environment, and
2013 is not expected to be an easy year. We have set a clear and understandable goal for this year: to maintain the revenue
grow th, outpacing the inflation rate. The current share of material projects in our order book w ill allow us to expect moderate
single-digit grow th of EBITDA in 2013, w hile the main task for the year is to build up a backlog of orders for complex integrated
solutions to be implemented in 2014. I w ish good luck to all of us.

Your faithfully,
Artem Molchanov

20th Anniversary: Our history

Celebrating 20th anniversary — our history

HMS Group w as founded in 1993 w ith the creation of Hydromashservice, a specialised trading company that distributed pumps and pumping
equipment in Russia and the CIS. In 2003, the Company began acquiring companies w ith pump manufacturing facilities in Russia, oil and gas equipment
production facilities and engineering and construction companies w ith the goal of integrating the flow control market in Russia and the former Soviet
Union.

The timeline below highlights key events in the HMS Group’s history, as w ell as the Company’s participation in a number of high profile projects.

1993

Pump trading and servicing company w as founded by German Tsoy, Artem Molchanov and Kirill Molchanov.
The Company expanded its operations and client base to become a leading distributor of pumps and pumping
equipment in Russia and the CIS. Its main activity comprised supplies of pumping and joint equipment
to Russia from CIS countries (Ukraine, Belarus, Moldova, Kyrgyzstan) w here traditional suppliers of specific
types of pumps for the Russian market w ere located.

1995

HMS Group launched a pump skid assembly business in Russia and CIS countries w here Hydromashservice
became one of the leading enterprises specializing in complete deliveries of pumping equipment for oil and
gas complex, pow er and w ater industry and housing utilities.

2003

HMS Group began to manufacture pumps after an acquisition of Livgidromash (since 26 Aug, 2010 — HMS
Pumps), one of the largest manufacturers of industrial pumps in the CIS. The Group made its first steps
to become a largest industry consolidator.

2004

HMS Group enhanced its product offering w ith oil and gas equipment through the acquisition of Neftemash
(Tyumen), one of the largest Russian producers of modular flow control equipment for surface oil field sites.
The Company also acquired Elektrodvigatel plant (Bavleni), a manufacturer of submersible electric w ater
pumps for households.

2005

HMS Group became a leading manufacturer of high capacity customised pumps through the acquisition
of Nasosenergomash (NEM), located in Ukraine, one of the major companies for the nuclear and thermal
pow er generation industries and trunk oil pipelines in the CIS.

2006

HMS Group became a leading manufacturer of submersible borehole pumps for w ater through the acquisition
of Livnynasos, one of the largest producers of submersible electric w ater pumps in the CIS. The Company
also acquired operational control over TGS (Tomskgazstroy), a provider of construction services for oil and
gas pipelines. The Company expanded its maintenance and repair business through the acquisition of NRS
(Nizhnevartovskremservice).

2007

HMS Group entered the EPC market through the acquisition of SKMN (Sibkomplektmontazhnaladka), a provider
of integrated EPC services for the development and construction of oil field infrastructure. The Company also
acquired a minority stake in DGKhM, a manufacturer of pumps and vessel equipment, w ith an option
to purchase a controlling stake in 2012 and increased its R&D capabilities through the acquisition of a 49%
stake in VNIIAEN, an R&D centre and the only one of its kind in the CIS, w hich specialises in pumping
equipment for the nuclear pow er generation and oil transportation industries.

2008

HMS Group increased its presence in the w ater utility, pow er generation and modular equipment sectors
through the acquisitions of Promburvod, the largest producer of electric submersible w ater pumps in Belarus;
NPO Gidromash, a manufacturer of pumps for the thermal pow er generation and oil and gas industries that
consequently has been joined to NEM and IRVKP, a leading project and design facility for the w ater utility
sector.

2009

HMS Group continued to enhance its position in the w ater utility, pow er generation and oil and gas sectors
through the acquisition of SibNA, a manufacturer of high precision measuring equipment for the oil and gas,
pow er generation and w ater utility sectors. The Company participated in the flagship project of Vankor oil
field development and the Baltic Pipeline System construction project.

2010

HMS Group enhanced its design and R&D capabilities and its position in the EPC market through the
acquisition of 51% of the voting shares of GTNG, a leading independent Russian R&D centre focused on the
design of the surface infrastructure of oil and gas fields. The Group participated in the ESPO-1 pipeline
expansion project and the construction of the ESPO-2 pipeline. The Company commenced a large-scale
production of pumps for use in nuclear pow er generation.

2011

HMS Group w ent public in February 2011, placing 37.2% of its stock via GDRs on the London Stock
Exchange. Being a consolidator in the domestic pumping industry HMS completed 3 acquisitions
(Sibneftemash, Bobruisk Machine Building Plant and exersiced the option to acquire next stake
in Dimitrovgradkhimmash) seeking opportunities to increase its presence on existing and adjacent markets.

2012

HMS Group enters to the new promising market of gas projects w ith an acquisition of the leading Russian
industrial compressor producer OJSC “Kazankompressormash”. Pursuing enhancement of its pumps product
portfolio, the Group completed an acquisition of German manufacturer of high-end specialized pumps Apollo
Goessnitz GmbH (Goessnitz, Germany), w hich allow ed strengthening its market positions in the basic
industries w ith focus on technologically demanding integrated solutions.

Full Year Highlights

(Figures in brackets are for the tw elve months ended December 31, 2011)

Order backlog grew by 21% year-on-year to RUB 21.5 billion and w as driven by continued steady demand for pumps, equipment and EPC
services for infrastructure projects
Revenues up 22.4% year-on-year to RUB 33.7 billion (RUB 27.5 billion)
Adjusted
previous year
Profit for the year contracted by 31.8% to RUB 2.3 billion from RUB 3.4 billion
Total debt grew by 109.3% from RUB 6.4 billion to RUB 13.4 billion
Net debt grew by 150.8% to RUB 12.1 billion as of December 31, 2012 (RUB 4.8 billion)

up 13.1% year-on-year to RUB 6.2 billion (RUB 5.5 billion), w ith an adjusted EBITDA margin of 18.5% versus 20% in the

EBITDA

Key Developments in 2012

Several landmark projects in Russia have been successfully completed. Among them w as the delivery of trunk line pump systems to the East
Siberia — Pacific Ocean (ESPO) pipeline by Transneft. The project has strategic importance for the country’s oil industry infrastructure and
features a total pipeline length of more than 4,100 km.
Another flagship project completed in 2012 w as the second stage of the Vankor oilfield development, w here HMS provided an integrated solution
on delivery of a broad range of equipment and commissioning of w ater processing units as part of a produced w ater treatment system w hich
w as previously designed by HMS. The Vankor oilfield w as launched in 2009 and is now one of the largest high-quality oil suppliers to the ESPO
pipeline.
The Group secured several large infrastructure contracts across all business segments for different economic sectors, including:

the follow -up contract for ESPO — production and delivery of 12 trunk pipeline pump units for 3 pump stations,
projects for the production and delivery of specialist pumps for the nuclear industry in Russia and China,
construction of 3 main w ater pumping stations located in Turkmenistan,
the turn-key project for delivery and installation of a compressor station.

Tw o acquisitions completed during 2012:

Kazankompressormash (KKM), one of the leading manufacturers of centrifugal and screw compressors in Russia, located in Kazan,
Tatarstan. HMS acquired 77.8% of voting shares (74.35% of share capital) for a total cash consideration of RUB 5.5 billion
Apollo Goessnitz (Apollo), a w orldw ide operating manufacturer of centrifugal pumps and system equipment, located in Goessnitz
(Thuringia), Germany. HMS Group paid total cash of EUR 25 million for 75% of share capital of Apollo Goessnitz GmbH. The stake w as
acquired proportionally from the management, w hich remained the part of the integrated team.

Quarterly backlog performance 2012, Rub bn

Backlog structure as of 31.12.2012

17,777

18,625

18,372

23,723

21,513

6,535

476
5,525
546
4,694

6,941

1,317

6,037

4,330

9,540

818
3,189

4,825

10,974

1,460

6,334

2,491
2,464

9,381

646
5,167

2,287
4,031

Dec 2011 Mar 2012 Jun 2012 Sep 2012 Dec 2012

Oil & Gas equipment
Compressors
EPC
Others
Pumps

R&D activities

14.7%

9.1%

20.8%

55.4%

Oil and gas equipment
Compressors
EPC
Industrial pumps

HMS Group w as included in the short list of finalists of Pump Industry Aw ards, established by the British Pump Manufacturers’ Association. The
Group w as recognized finalist in the “Technical innovation of the year - Projects” nomination for its turnkey project of a pump station construction
in Turkmenistan
Automated multifunctional measuring and computing complex ACIS-6 w as purchased for subsurface laboratory for analysis of subsoils
Continued cooperation w ith Transneft under the project of ESPO 1 extension. A number of brand new large-capacity pumps of NM type for oil
transfer w ere developed and successfully tested;
Carried out a number of successful testing of oil trunk pumps based on double suction centrifugal pumps for another Transneft’s project — Purpe
Samotlor oil pipeline construction;
Developed technological modules based on improved injection pumps of ZNS type for Vankor oilfield by Rosneft, a principally new type
of equipment that hasn’t been produced in Russia before;
Continued expansion of research and development w orks for the oil and gas processing equipment, compressor and pow er generating units
under a new design center based on HMS Neftemash facilities;

Operational improvements

Ongoing implementation of unified IT infrastructure for accounting and reporting purposes, development of IT security system for the head office
Ongoing development of a ERP project based on a softw are by Infor-LN integrated w ith PDM systems focused on capturing and maintaining
information on products and services through its useful life, engineering and technological database, planning and coordinating all transactional
operations for R&D support

* EBITDA is defined as operating profit/loss adjusted for other income/expenses, depreciation and amortization, impairment of assets, provision for
obsolete inventory, provision for impairment of accounts receivable, unused vacation allow ance, defined benefits scheme expense, w arranty
provision, provision for legal claims, provision for VAT and other taxes receivable, other provisions, excess of fair value of net assets acquired over
the cost of acquisition. This measurement basis excludes the effects of non-recurring income and expenses on the results of the operating segments.

Operating Review

Financial Summary

(Rub million)

Order intake

Backlog

Revenue

Adjusted EBITDA

Operating profit

Profit for the period

Basic and diluted earnings per share (Rub per share)

ROCE (LTM)

Group

FY 2012

FY 2011

Year-on-Year
Change

36,110

23,221

21,513

17,777

33,656

27,496

6,231

4,237

2,301

17.89

5,509

4,547

3,377

27.88

18.7%

36.2%

55.5%

21.0%

22.4%

13.1%

-46.8%

-31.8%

n/a

HMS Group’s consolidated revenues increased by 22.4% year-on-year for the full year in 2012, mainly driven by a gradual execution of the
infrastructure projects implemented by main oil and gas majors. Strong activity in the oilfields development, oil transportation and w ater and energy
markets in 2012 w as a core driver of the revenue grow th. During 2012 HMS executed the projects for the main oil and gas majors, including providing
pump-based integrated solutions for Transneft in the midstream, delivery of oil and gas equipment and providing EPC w orks for Rosneft, TNK-BP,
Surgutneftegaz, Lukoil and Gazpromneft, Taas-Yuriakh Neftegazodobycha, in the up- and dow nstream as w ell as in the gas processing for Gazprom
and Novatek. The revenue grow th in 2012 w as mainly driven by strong performance in the oil and gas equipment and EPC business units, largely due
to the large-scale projects w ith Rosneft and several large projects for engineering and construction services. The industrial pumps business unit
accounted for approximately 50.7% of total Group’s consolidated revenue in 2012 versus 56.9% in 2011, oil and gas equipment business unit
accounted for 23.2% compared to 21.5%, w hile EPC business unit share in revenue w as flat and accounted for 21.7% in 2012 versus 21.6% in the
previous year. New ly established in July 2012 business segment Compressors accounted for 4.2%.

Revenue

Rub mn

40,000

30,000

20,000

10,000

33,656

27,496

23,070

13,399

14,046

14,772

1,423

1,644

1,890

5,509

6,179

3,519

2007

2008

2009

2010

2011

2012

Revenue, Rub mn
EBITDA, Rub mn
EBITDA margin, %

Total order backlog reached Rub 21.5 billion driven by several large contracts secured during the first three quarters 2012. As a result the total backlog
came 21.0% higher than RUB 17.8 billion in 2011, w ith stronger backlog diversification.

Backlog performance, YoY, Rub bn

10,947

19,106

17,582

21,513

2,686
297

4,614

3,350

13,429

363

3,942

1,373

6,340

1,022

5,525

4,694

9,381

646

5,167

2,287

4,031

2009

2010

2011

2012

Oil and gas equipment
Compressors
EPC
Other
Industrial pumps

HMS Group’s cost of sales grew in line w ith the revenue and increased by 23.6% year-on-year to RUB 23,645 million in 2012 compared to RUB 19,131
million in 2011, mainly due costs grow th driven by consolidation of the acquired companies.

Sales, general and administrative expenses increased by 45.1% year-on-year to RUB 5,217 million for the full year 2012 w hile its share in the total
revenue accounted for 15.5%, up from 13.1% in the previous year.

Revenue by industries

Revenue by segments, %

8.2%

2.9%

1.2%

1.0%

6.5%

Oil&Gas

Water
Nuclear

Thermal Power

Metall & Mining

Other

23.3%

50.7%

4.2%

80.2%

21.8%

Oil and Gas Equipment Business Unit
Compressors
EPC
Industrial Pumps

The Group’s adjusted EBITDA increased by 13.1% year-on-year from RUB 5,509 million to RUB 6,231 million, driven by execution of several large-scale
infrastructure contracts in oil upstream and oil transportation segments. The Group’s adjusted EBITDA margin w as 18.5% in 2012, compared to 20.0%
in 2011.

EBITDA, Rub mln

7,000

6,000

5,000

4,000

3,000

2,000

1,000

6,231

5,509

3,519

1,423

1,644

1,890

2007

2008

2009

2010

2011

2012

Due to the grow th of other operating expenses largely driven by fines under contracts, social expenditures, provision for legal claims and expenses
related to acquisitions, the Group’s EBIT contracted by 6.8% year-on-year in 2012. The EBIT margin stood at 12.6% in the reporting period from 16.5%
in 2011.

Due to debt grow th driven by acquisitions completed in 2012, interest expenses grew to Rub 1,220 mln, compared to Rub 486 mln, and comprised
3.6% of revenue versus 1.8% in the previous year. As a result, the Group’s profit for the year declined by 31.8% year-on-year and amounted to RUB
2,301 million in 2012 versus 3,377 million in 2011. Low er operating profit compared to the last year and higher interest expenses w ere among the key
factors contributing to the full year profit performance.

Profit for the year, Rub mln

EPS, Rub

3,500
3,000
2,500
2,000
1,500
1,000
500

491

330

3,377

2,301

1,581

27.88

17.89

14.32

2007

2008

2009

2010

2011

2012

2010

2011

2012

Industrial Pumps Business Unit

The industrial pumps business unit designs, engineers, manufactures and supplies a diverse range of pumps and integrated solutions to customers
in the oil and gas, pow er generation and w ater utility sectors in Russia, the CIS and internationally. The business unit’s principal products include
ready-made pumps built to standard specifications, customized pumps and integrated solutions. It also provides aftermarket sales, maintenance and
repair services and other support for its products.

The industrial pumps business unit demonstrated 9.1% year-on-year external revenue grow th in the reporting period, generating RUB 17,066 million.
This revenue grow th largely stemmed from an ongoing flow of small and medium orders and a number of large-scale projects w ith major customers
mainly in oil transportation, oil refineries and upstream segments.

Industrial Pumps Revenue, Rub mln

18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000

17,066

15,646

10,712

6,189

6,308

4,578

2007

2008

2009

2010

2011

2012

Generally, sales of pumps for oil industry w as flattish in 2012 w ith 32% year-on-year grow th in oil upstream pumps and 16% grow th in pumps for oil
refineries on the back of 5% year-on-year contraction of revenue from oil transportation industry. HMS also focused on strengthening its market
positions on the core pump markets and managed to outperform the average market grow th in pumps for oil upstream, w hile w as on par w ith the
market in pumps for oil refineries.

Sales of pumps for pow er generation applications grew by 43% year-on-year. The grow th w as driven by modernization and construction of nuclear
pow er plants in Russia. Sales of pumps for nuclear applications surged by 180% driven by the contracts signed in 2010-2011 w ith a long-term cycle
of nuclear pumps production. At the same time, sales of pumps for thermal pow er generation also grew by 16% year-on-year.

Sales in the w ater utilities segment declined by 18% year-on-year, mainly due to revenue contraction both in submersible w ater-w ell pumps and
pumps for w ater treatment systems. Sales of household pumps continued to decline on the back of high competition and purchasing pow er of end
consumers.

The industrial pumps business unit’s adjusted EBITDA declined by 2.7% year-on-year to RUB 4,278 million in 2012, compared to RUB 4,399 million
in 2011, due to changes in the project mix and low er share of high-margin contracts in revenue. The adjusted EBITDA margin stood at 25.1% in 2012
versus 28.1% in 2011.

Industrial Pumps EBITDA, Rub mln

5,000

4,000

3,000

2,000

1,000

4,399

4,278

2,367

686

822

1,012

2007

2008

2009

2010

2011

2012

Oil and Gas Equipment Business Unit

The oil and gas equipment business unit manufactures and installs modular pumping stations, automated metering equipment, oil, gas and w ater
processing and preparation units and other equipment and systems for use primarily in oil extraction and transportation, as w ell as for the w ater utility
sector. The unit’s products are equipment packages and systems installed inside a self-contained, free-standing structure w hich can be transported
on trailers and delivered to and installed on the customer’s site as a modular but fully integrated part of the customer’s operations.

External revenues if the segment w ere up 32.7% year-on-year and totalled RUB 7,828 in 2012, compared to RUB 5,900 in 2011. The increase w as
primarily driven by the large scale project on Vankor oilfield under w hich the Group equipped oilfield facilities over the second stage of the project
development and consolidation of oil and gas equipment producers acquired in 2011.

Oil and Gas Equipment Business Unit Revenue, Rub mln

9,000

8,000

7,000

6,000

5,000

4,000

3,000

7,828

5,805

5,900

4,126

4,166

3,534

2007

2008

2009

2010

2011

2012

Sales of w ater injection pumping stations and other large technological units increased by 8.3%, as a result of increased sales to large-scale projects,
including Rosneft’s Vankor oil field. Sales of automated group metering units (AGMU) and other modular equipment for gas transportation surged
by 88% mainly due to government regulations effected last year, requiring oil companies to install metering devises to measure volumes of gas flared.

The unit’s adjusted EBITDA doubled year-on-year to RUB 1,397 million in 2012, compared to RUB 697 million in 2011. The adjusted EBITDA margin w as
17.8% in the reporting period, up from 11.8% in 2011.

Oil and Gas Equipment Business Unit EBITDA, Rub mln

1,600

1,400

1,200

1,000

800

600

400

1,397

786

697

599

501

529

2007

2008

2009

2010

2011

2012

Compressors Business Units

Employees

Contribution to 2012 Group sales

Contribution to 2012 Group EBITDA

2.4 ths

1.4%

The compressors business segment designs, engineers, manufactures and supplies a diverse range of compressors and compressor-based
solutions, including compressor units and compressor stations, to customers in the oil and gas, metals and mining and other basic industries in Russia.
The business segment’s principal products include customized compressors, series-produced compressors built to standard specifications,
compressor-based integrated solutions.

In July 2012, HMS acquired KazanKompressorMash (KKM), one of the leading compressor producers in Russia, w hich w as consolidated into the IFRS
reporting of the Group starting from July 01, 2012. Previously, KKM didn’t apply IFRS accounting principles for its financial reporting that makes
it irrelevant to provide year-on-year comparison of the key financial indicators.

HMS applied IFRS accounting principles for KKM reporting starting from the third quarter of 2012 and reports the results under the Compressors
business segment.

In the second half of 2012, revenue of the business segment w as Rub 1,426 million, EBITDA w as Rub 85.6 million. As a result, EBITDA margin stood
w as 6%.

Engineering, Procurement and Construction (EPC) Business Unit

The engineering, procurement and construction (EPC) business unit provides design and engineering services, project management and construction
w orks for projects, including on a turn-key basis, for customers in the upstream oil and gas, oil transportation and w ater utility sectors.

The EPC’s external revenues grew by 23.4% year-on-year to RUB 7,336 million in 2012, compared to RUB 5,946 million in 2011, mainly driven by
contracts for oilfields infrastructure construction.

EPC Revenue, Rub mln

8,000

7,000

6,000

5,000

4,000

3,000

5,204

4,189

3,614

7,336

6,135

5,946

2007

2008

2009

2010

2011

2012

EBITDA in the EPC business segment contracted by 15.6% year-on-year to Rub 475 million in 2012 w ith EBITDA margin of 6.5% versus 9.5% in the
corresponding period of the previous year. The segment’s margin contraction resulted from the challenges appeared during implementation of the one
of the tw o EPC contracts at Srednebotuobinskoye oilfield. Due to insufficient quality of design documentation under one of the contract, containing
a number of uncertainties, the project required additional investments. Over the course of the negotiations w ith customer, HMS continued to incur
expenses related to the project implementation that damaged expected profitability of the project. How ever, HMS didn’t break off relations w ith the
customer and keeps on successful w orks under second contract in line w ith the budgeted performance.

EPC EBITDA, Rub mln

900

800

700

600

500

400

786

697

599

501

529

475

2007

2008

2009

2010

2011

2012

Low er than expected margin in the project and design area has also contributed to the segment’s performance since the Group continued to execute
several innovative projects as w ell as temporarily applied aggressive pricing policy to penetrate new promising market segments. How ever, the
average margin for these projects is expected to be recovered as a result of synergies betw een the different business segments, as the Group
intends to participate in the later stages of these projects.

Financial Review

Cash flow generated from operations before changes in w orking capital increased to RUB 5,725 milllion, compared to RUB 5,186 million. Despite
material grow th of interest expenses, net operating cash flow w as positive and amounted to RUB 3,184 million versus net cash outflow from operating
activities of RUB (1,595) million in 2011.

Net cash used for investing activities totaled RUB 8,303 in 2012, compared to 2,193 million in 2011. The Group spent RUB 1,623 million in 2012 for
capital expenditures, compared to RUB 1,194 million in 2011. Payments for acquisitions of KKM and Apollo Goessnitz, completed in 2012 and final
payment for DGHM, acquired in 2011, net of cash acquired totaled RUB 6,690 million.

Dividend payment for the FY 2011 results, effected in the second quarter of 2012, amounted to Rub 1,500 million. Subject to review ing its capital
position against its current and expected future capital requirements, the Group intends to pay dividends in the future w ith a payout ratio not less than
25% of profit for the year.

Thus, the Group’s free cash flow (before acquisitions of subsidiaries, net of cash acquired) amounted to RUB 1,561 million.

Total debt grew by 109% year-on-year to RUB 13,410 million in the reporting period, compared to RUB 6,408 million in 2011 mainly driven by M&A
activities of the Group. Apart of the acquisitions, the debt expansion w as used for w orking capital needs under the execution of the current projects.
By the end of the year 84% of total debt w as represented by long-term credit facilities w ith maturity of more than 1 year.

The net debt to EBITDA (taken for the last 12 months) ratio amounted to 1.94, much low er than banks’ and internal covenants. As a result, the Group
created a room for possible additional fund raising for business development and expansion. The Group’s cash balances stood at RUB 1,346 million
by the end of 2012, compared to RUB 1,598 million by the end of the last year. Ability of the Group to meet its debt obligation remained comfortable w ith
the interest coverage ratio of 3.5.

As of 31.12.2012, the Group’s net w orking capital w as w ithin the targeted range of 20-25% and amounted to 20.1% of total revenue taken for the last
12 months, compared to 21.9% in 2011.

M&A Activity

In the third quarter of 2012 the Group successfully completed tw o acquisitions. In July 2012, HMS acquired 74.35% of a share capital of
Kazankompressormash, a leading compressor producer in Russia, for Rub 5,525 million funded from available debt facilities of the Group. Later in
August 2012, HMS completed the acquisition of 75% of a share capital of Apollo Goessnitz, German manufacturer of specialized pumps for pow er, oil
refineries and off-shore application, for EUR 25 million.

Strategic Review

We regard as the essential part

of our business the

contribution to the society

development, economic
growth and improvement of

the quality of life in regions of

the presence.

RISK MANAGEMENT

WE USE A FORMAL RISK MANAGEMENT PROGRAM ACROSS OUR

COMPANIES, I.E. THERE IS AN ONGOING PROCESS FOR

IDENTIFYING, EVALUATING AND MANAGING THE SIGNIFICANT

RISKS FACED BY THE COMPANY.

Recognizing our achievements, in

2012 HMS Group was included on

the shortlist of finalists in the Pump
Industry Awards, established by the

British Pump Manufacturers’

Association. The Group was

recognized as a finalist in the

“Technical Innovation of the Year -

Projects” category for its turnkey

project involving the construction of
a pump station in Turkmenistan.

The well stock reached 162.8

thousand versus 161.2 thousand in

2011, while more than 138.8

thousand (~85%) of them are
actively producing. Russia aims to

maintain annual oil production at

the current level, or just over 10mn

bpd, over the next 10 years.

Macro and Market Trends

Tikhoretsk-Tuapse 2
(12 MMt, 295 km)

Trebs & Titov
(140 MMt, 2,151 km)

Baltic Pipeline
System-II
(50 MMt, 1,000 km)

Purpe-Samotlor
(25 MMt, 430 km)

“Yug” (South)
(9 MMt, 1,465 km)

Zapolyarnoye-Purpe
(45 MMt, 536 km)

Caspian Pipeline
Consortium expansion
(35 MMt, 1,510 km)

Yurubcheno-
Tokhomskoe-Taishet
(25 MMt, 430 km)

Haryaga-Yuzhny
Khylchuyu
(8 MMt, 160 km)

ESPO-I and ESPO-I
capacity expansion
(50 MMt, 2,694 km)

ESPO-II and ESPO-II
capacity expansion
(47 MMt, 2,346 km)

Komsomolsky
NPZ-port De-Kastry
(n. d., 300 km)

Komsomolsky
NPZ-port De-Kastry
(9 MMt, 313 km)

Macroeconomic Development

According to Rosstat, the Russian economy grew by 3.4% in 2012, low er than the 4.3% GDP grow th of the previous year but still a solid performance
w hich ranked higher than many international peers w ith similar income per capita. Given the significant challenges faced by global economy over the
last year, including U.S. debt issues, Euro area balancing on the edge of recession and softening of grow th in China, Russian performance looks
respectable.

How ever, 2012 w as a year of tw o halves. With GDP grow th coming at 4.9% year-on-year in 1Q12 (in line w ith performance of 2H 2011) there w as
a hope that Russia, supported by high oil prices, w ould be able to decouple from the rest of the w orld (both Emerging and Developed markets), w here
grow th w as rapidly decelerating. Early 2012 performance w as propelled by strong private consumption as low er inflation enhanced real purchasing
pow er via raising real w ages and real disposable incomes, and very strong retail borrow ing supported spending. In contrast, in 2H12 higher inflation
related mainly to poor harvest started to eat aw ay at real purchasing pow er, leading to a more moderate expansion of real retail sales and
to a softening GDP grow th.

The grow th rate w as mainly driven by domestic consumption that increased by 6.6%, w hile a year earlier the grow th w as 6.4%. Fixed investment
came low er than it w as expected by Ministry of Economy and grew by 6.7% mainly due to softening of consumer demand and real disposable income
in the second half of the year. Investments constituted 25.7% versus 26.6% of total GDP last year. Investments w ere mainly driven by infrastructure
projects development largely executed by state-ow ned companies, large private companies and federal budget, primarily in energy sector.

Industrial output expanded 2.6% in 2012. Over the year, raw material extraction and the supply and redistribution of electricity, gas and w ater
demonstrated relatively sluggish performance (grow th of 1.1% and 1.2% respectively). On the contrary, manufacturing sector remained a w hite spot
and grew 4.1%. Raw material extraction is facing serious constraints from the production side, as capacity utilization is close to maximum.

The w eak grow th in the supply and redistribution of electricity, gas and w ater can be treated as a positive, as it reflects a decline in the energy
intensity of GDP production. Electricity output edged up just 1.1%, w hich caused the electricity intensity of Russian GDP to decline around 2.7%,
implying an improvement in the Russian economy’s efficiency.

In 2012, real w age grow th came in at 7.8% in 2012, w hile real disposable incomes climbed 4.2%. Russia’s unemployment rate resisted the traditional
year-end rise and hit a new historical record low of 5.3% versus 6.3% last year, w hich is low er than during the pre-crisis peak of economic activity
in 2007.

Among important macroeconomic events in 2012, Russia’s accession to the World Trade Organization (WTO) and approval of the budget rule should
be mentioned.

On November 10, 2011 the Working Party on the Accession of Russia to the WTO approved a package of accession documents w hich outlined the
terms and conditions of Russia’s membership. The negotiation process has lasted 19 years, w hich made it the longest of any country acceding to WTO
membership. Follow ing the approval of the protocol of Russia’s accession, Russia became a full member of the WTO on 22 August, 2012. The
accession package is extremely broad, comprising a set of agreements that commit Russia either over time or immediately upon accession to reduce
tariffs on goods, provide more open market access for the foreign service sector, and reduce or remove subsidies in the agricultural and industrial
sectors.

The benefits of WTO accession to Russia are significant in the medium term. The World Bank has estimated that Russia should gain about $53bn
annually in the medium term (and $177bn of GDP in the long run) via accession, w ith gains coming mainly from increased foreign direct investment and
reform of the service and manufacturing sectors.

Prior to the crisis there had been pressure on the Ministry of Finance to increase levels of government borrow ing and curb its efforts to build
up financial reserves. How ever, in 2012 Russian Government adopted a budget rule, w hich came into effect from January 2013.

The budget rule determines the mechanism for the use of oil and gas revenues and the formation and disposal of Reserve Fund and National Welfare
Fund Resources. The budget rule is based on a benchmark oil price to determine the ceiling for budget spending. Spending cannot exceed anticipated
revenue at the base oil price, plus a budget deficit of 1 percent of GDP. The base oil price for the next financial year and planning period is the average
oil price in the previous five year period for 2013, and the previous six- and seven-year periods for 2014 and 2015, w ith the period increasing by one
year each year until it reaches 10 years.

Therefore, w ith the introduction of the budget rule as of January 1, 2013, the base oil price w ill be calculated as the average in 2007-2011 for 2013,
2007-2012 for 2014 and 2007-2013 for 2015. Starting in 2018, the base oil w ill be calculated as the average in the preceding 10-year period.

Brent Crude Oil, US Dollars per barrel

120

100

111.2 111.7

98.7

80.5

65.7

73.8

66.4

55.6

2005

2006

2007

2008

2009

2010

2011

2012

Market Trends

Oil Industry

Upstream

Russia is the largest holder of oil and gas reserves in the w orld and the second largest oil producer w ith 12% of total global oil output. The oil upstream
industry is a backbone of the economy w ith an impact on the country’s international balance of payments, exchange rate and formation of investment
resources of the economy.

Follow ing its post-Soviet collapse, Russian oil production has been grow ing and rebounded from its low of 5.8 million barrels per day to the level
of 10.4 million barrels per day in 2012, w ith around 7.2 million tons exported as either crude or oil product. According to the Russian Energy Ministry, oil
output in Russia grew by 1.6% to 517m tonnes, supported by tax legislation incentives and the launch of new pipelines and oil exploration projects.

Oil production in Russia, mln tonnes

470

480.5

491.3

488.5

494.2

505.1

509

517

550

500

450

400

350

2005

2006

2007

2008

2009

2010

2011

2012

The w ell stock reached 162.8 thousand versus 159 thousand in 2010 w hile more than 138.8 thousand (~85%) of them are actively producing. Russia
aims to maintain annual oil production at the current level, or just over 10mn bpd, over the next 10 years.

Russian Well Stock, ths itms

Production drilling rate, km

180

160

140

120

158.4 158.8 159.4 161.2 162.8

22,000

20,000

18,000

16,000

14,000

14,602 14,090

12,000

10,000

19,960

17,843

16,522

2008 2009 2010 2011 2012

2008

2009

2010

2011

2012

Capital expenditures of the oil upstream sector grew from RUB 596 bln in 2011 to approximately RUB 700 bln in 2012. Oil prices continued to support
favorable conditions in the industry. Follow ing strong performance in 2011 driven by unstable political situations in key oil producing regions as w ell
as the monetary policy of the developed countries, average oil price continued to demonstrate moderated grow th supported by ongoing monetary
expansion of the key Central Banks and prolonged instability in some producing countries. Average oil price reached 111.7 USD in 2012 versus 111.2
in 2011.

Midstream

Having more than 50 th. km of oil pipelines and more than 400 installed pump stations, Russia has the largest oil pipeline system in the w orld. More
than 90% of produced crude oil in Russia is transferred through the existing trunk pipeline system.

Transneft, the operator of the pipeline system, has significantly reformed the pipeline in the past 10 years to meet the needs of the post-Soviet oil boom
and transports around 460 ml tonnes of oil annually. When the system w as created in Soviet times, it w as primarily designed to supply the domestic
market: the refineries located in European Russia and the nearby republics, w ith only some excess volumes destined for exports. With the collapse
of the Soviet economy, oil producers redirected crude oil flow s to more profitable markets in non-CIS countries, w hich resulted in export capacity
bottlenecks in 2002-04. This w as resolved by adding new pipeline capacity.

The existing pipeline system is constantly expanding through the follow ing projects:

East-Siberia — Pacific Ocean (ESPO). The second stage of the project of the East Siberia — Pacific Ocean pipeline system w hich implied construction
of a main trunk pipeline at the section named Skovorodino — Kozmino SMNP (ESPO-2) w as successfully completed and launched in December 2012.
The subsequent increase of the existing capacity of the Taishet GNPS — Skovorodino NPS (ESPO-1) line up to 50 million tons of oil per year (extension
of ESPO-1) is currently under w ay w ith HMS continuing to w ork on the installation of 3 pumping stations.

The construction of the Zapolyarye-Purpe oil pipeline w ith its overall capacity of 45 million tons per year is planned in order to transport oil from the
green fields of Yamalo-Nenets Autonomous District and the North of Krasnoyarsk District. The overall length of the pipeline is estimated to be 500km.
In 2012, Transneft conducted most of the surveying, design and planning for the project.

The construction of the Tihoretsk-Tuapse-2 oil pipeline is to increase oil volumes delivered to the Tuapse oil refining plant. The estimated length of the oil
pipeline is 247km w ith a capacity of 12 million tons per year.

The amplification of CPC: The oil pipeline Tengiz-Novorossiysk of the Caspian Pipeline Consortium (CPC) is intended for the transportation of Russia’s
and Kazakhstan’s oil exports through the sea terminal of CPC.

The South construction project is the oil product pipeline linking Syzran-Saratov-Volgograd- Novorossiysk.

The length of the Samsun—Ceyhan oil pipeline w ill be 550 km w ith an estimated capacity of 50 million tons per year. The project is to create
a competitive route for oil transportation and solve the problem of the overloaded straits of Bosphorus and Dardanelles.

The total capital expenditure by Transneft in 2012 w as RUB 167 bln.

Downstream

Refinery capacity to oil production, 2012, %

135%

52%

43%

140%
120%
100%
80%
60%
40%
20%
0%

100%

85%

32%

33%

27%

Rosneft

Lukoil

Bashneft

TNK-BP

SNG

Russneft

Slavneft Gazpromneft

Tatneft

The Russian refining system is the third largest in the w orld, ranked only behind the U.S. and China, w ith approximately 275 mnt of total capacity.
In 2012, the volume of primary processing hit a record level of 270 mnt, up 4.9% year-on-year. Production grow th has been driven by the transition
to the European emission standards Euro-3 effected in 2013, an increase in internal demand and expansion of gasoline exports.

The majority of refineries still require upgrading, w ith a current Nelson complexity index of just over 5 compared to the European level of 6.5 and 9.6 for
the U.S. The strategic goal set by the government is to reach processing depth of 83% by 2015.

According to investment plans announced by oil companies, capital expenditures of the sector exceeded RUB 300 bn in 2012.

Industry grow th could be driven by new projects in 2013:

The second stage of the TANEKO oil refining complex is to be put into operation and could lead to processing volume grow th up to 5 mn tons.
Gaspromneft has several large projects on the agenda; construction of the Nakhodka refinery plant (20 million t.) and modernization of the Omsk
and Moscow refineries.
Rosneft has announced plans to increase oil refining volumes by 11.5% to 64.6 million t. Under the programme, the Tuapse and Novokuybyshevsk
refineries ought to be upgraded.
Surgutneftegaz has started to implement the project on the designed capacity of deep oil refining at Kirishinefteorgsintez This w ill allow the
company to increase production of light oil products by 3.5 million tons.
Lukoil is to launch the hydrocracker complex under the program of the Volgograd refinery modernization.

Gas pipeline projects

The Unified Gas Supply System of Russia operated by Gazprom is the w orld’s largest gas transmission system and represents a unique engineering
complex encompassing gas production, processing, transmission, storage and distribution facilities. It assures continuous gas supply from the
w ellhead to the ultimate consumer. The system includes 161.7 thousand kilometers of gas trunklines and laterals, 215 line compressor stations w ith
gas compressor units totaling 42 thousand MW in capacity, 6 gas and gas condensate treatment facilities and 25 underground gas storages locations.

Among the important projects on gas transmission, South Stream (estimated CAPEX of 510 bn RUB), Yakutiya-Khabarovsk-Vladivostok (Pow er of
Siberia) (estimated CAPEX of 770 bn RUB), Sakhalin-Khabarovsk-Vladivostok (estimated CAPEX 467 bn RUB) should be mentioned.

Power generation

Russia remains one of the largest electricity producers in the w orld, lagging only behind China and the USA. Strong electricity demand is driven by the
relatively low energy efficiency of national industries. This demand consequently challenges the limited and ageing energy producing capacity and
explains permanent tariff grow th and w hy this is one of the sources for high investment programs by the pow er generator companies.

In 2012, electricity output in Russia grew by 1.3% year on year and reached 1,053,900 mln KW/h.

Power generation in Russia

bln kW/h

1,200

1,100

1,037

1,036

1,016

1,000

991.4

991.3

953.1

200

1,053

1,067

100

2005

2006

2007

2008

2009

2010

2011

2012

Power generation in Russia, bln kW/h
Change in generation capacities in Russia, GW
Total capacity of power plants in Russia, GW

Russia’s pow er complex includes about 600 pow er plants w ith individual capacity of over 5 MW. In 2012, the total capacity of Russian pow er plants
amounted to 223.1 GW, exceeding the 2011 level by 5 GW. Grow th w as driven by the construction of new pow er facilities and modernization
of existing infrastructure.

The pow er industry has the follow ing structure of generation: 68.1% — thermal plants, hydraulic — 20.6%, nuclear — about 11.3%.

Long-term perspectives of the Russian pow er industry are shaped by the ‘General scheme of energy development for the period till 2020’.

Thermal power plants

For the most part, thermal pow er stations in Russia w ork on organic fuel like gas or coal and basically consist of steam-turbine pow er stations.
In 2012, Russia’s overall thermal pow er plant capacity installed w as 162 GW, up 5% compared to the previous year.

The infrastructure in the thermal pow er sector is quite outdated — almost 55% of the installed capacities have a maturity of more than 30 years.
As such, the Russian plants have an efficiency ratio of 37%, low er than the 41% level for the developed economies. This discrepancy dictates the
necessity for equipment upgrades by all the major pow er generating companies. This is the reason w hy the technical modernization and
reconstruction of the existing pow er stations is a primary development goal of the Russia thermal pow er sector as w ell as the start-up of new modern
generating capacities. Around 20 projects have been executed over 2012 w ith a total capacity of 4.5 GW.

The sector’s investment grew by 6% year-on-year and reached RUB 318 bn.

Thermal capacity maturity

5.0%

44.8%

50.2%

Maturity less than 30 years
Maturity of 30 to 50 years
Maturity more than 50 years

Nuclear power plants

Russia has a full-cycle technology for the nuclear industry — from the extraction of uranium ore to electric pow er generation. Currently, 33 nuclear
pow er units w ith the overall installed capacity of 25.2 GW are operated at 10 sites by Rosenergoatom. They account for 16% of domestic electricity
generation. The share of nuclear generation in the European part of Russia reaches 30%, in the North-West part of the country — 37%.

Currently, there is an ongoing process of large-scale NPPs construction in Russia. The construction is underw ay on sites of Novovoronezh NPP Phase
II, Leningrad NPP Phase II, Baltic NPP, and the w orld’s first floating nuclear co-generation plant Akademic Lomonosov. Another nuclear pow er unit —
the fourth reactor of Beloyarsk NPP — is close to completion. Nuclear pow er plants are being built abroad as w ell. These are Kudankulam (India),
Bushehr (Iran), Akkuyu (Turkey), Ostrovets (Belarus), and Tianw an Second Stage (China).

In 2012, Russia has 33 nuclear operating reactors w ith a capacity of 25.2 GW. Most of them are ageing; 80% of capacity has a maturity
of 20-40 years. This led to the development of a large-scale investment programme by the state operator Rosatom, under w hich several initial actions
have already been taken.

Nuclear capacity maturity

24.7%

75.3%

Maturity less than 20 years
Maturity of 20 to 40 years

Estimated investments of the sector increased by 29% year-on-year and reached Rub 258 bn.

Water

Having more than 20% of the w orld’s w ater reserves, Russia is one of the richest countries in terms of its w ater resources w ith almost 30 thousands
m3 per head annually. This significantly exceeds the minimum level of 1.7 thousands set by United Nations Organization. One of the historical issues for
the Russian w ater sector w as high w ater intensity in the economy and relatively large losses in w ater transportation. Annual w ater losses amount
to 7.5 km3, mainly driven by housing, public utilities and agriculture. A low technical level and outdated infrastructure are among the main reasons for
such losses. For instance, according to Rosvodokanal, a w ear ratio of w ater-supply netw ork is more than 65% for w ater supply pipelines,
approximately 63% for drainage netw orks, around 65% for w ater pumping stations, around 60% for sew er pumping stations, 64% for w astew ater
facilities and 56% for sew age treatment facilities.

A main source of capital expenditure of municipal utilities companies has been tariffs that have been grow ing higher than the average inflation level.
The w ater component of tariffs grew up to 15% in 2012 w hile GDP grow th w as 3.4% Aside from the tariffs, the government approved several federal
programmes to ensure the sectors development. Under the “Clean Water” federal programme, around Rub 276 bn is to be invested over the period
from 2013 to 2017. Next Rub 290.6 bn w ill be invested under the federal state program “Development of the w ater utilities in Russia in 2013- 2017”.

There are also a number of ongoing regional projects financed from all three levels of the state budget — federal, regional and municipal. On the
regional level, Kalinigrad, Far East, Transbaikal, Kurily Island, and the Chechen Republic are expected to invest more than Rub 50 bn focusing on the
development of the w ater utilities segment.

Innovations and Technology

Innovations are core of HMS Group business leading to constant implementation of high end technologies in design and manufacturing that promotes
Group`s sustainable grow th and guarantees its technological leadership on key markets.

In 2012 HMS Group w as included in the short list of finalists of Pump Industry Aw ards by the British Pump Manufacturers’ Association — one of the
most prestigious aw ards in the pump and pump-related product industries. The Group w as recognized finalist in the “Technical innovation of the years-
Projects” nomination for its turnkey project of a pump station construction in Turkmenistan. The impressive 126,000m3/h capacity allow s supply of Amu
Darya River w ater into the irrigation system. EPC project w as carried out in the harsh conditions and lead to increase in irrigated area
by 31,000 hectares.

Innovations

HMS Group pays special attention to creation of new products and innovative as w ell as energy efficient solutions. The Group incorporates six leading
R&D centers and testing facilities outfitted w ith cutting edge equipment and softw are that completed number of innovative projects in 2012.

Innovations for oil and gas

In 2012 HMS Group completed the design and delivery of new trunk pipeline pumps of NM type and booster pumps of NPV type to be installed
in pumping station of ESPO-1 and ESPO-2 projects of Transneft. New customized high pressure multistage centrifugal pump w as designed for Lukoil
Oil Company.

The Group expanded its product offering w ith hi-end API pumps for oil refineries, petrochemical and chemical plants by acquiring Apollo Goessnitz
GmbH. Production cooperation of Apollo’s R&D and “know -how ” w ith other HMS subsidiaries w ill allow to produce state-of-the-art skids based
on API standards.

Tests of new innovative solution — Mera MFR measuring unit w ith NetOil&Gas (NOG) mass flow meter w ere carried out last year. The equipment
features an automated mobile measuring unit used for measurement of mass flow rate of oil and gas w ith account for w ater cut w ithout the usage
of separator.

Innovations for water industry and utilities

HMS Group engineers have w orked on design of new high efficient D type pump under DeLium and Desum trademarks. These models have excellent
suction capacity and w ater proof design that increases efficiency and reduces w ear.

In 2012 the Group launched serial production of new type of pumps control and protection system — HMS Control L3. The station is designed for
borehole pumping units of w ell w ater pumps and submersible pumps. New controller provides precise measurement and convenient adjustment. The
usage of new stations has numerous benefits including accidents prevention and increase of operating life.

Innovations for power generation

HMS Group completed the design for the first in the series of new feed pump w ith updated hydraulic characteristics to be installed on Tom-Usinsk
pow er plant. Testing of new high tech feed pump for Novovoronezh and Leningrad nuclear pow er plants w ere carried out. Along w ith that, tests
of modernized feed pump for 3rd unit of Rostov nuclear pow er station w ere successfully run.

Production technology upgrade

HMS Group investment program aims at development of innovative activity and re-equipment of the production and R&D base. In 2012 several
subsidiaries of the Group have accomplished important stages of their modernization programs.

HMS Group completed the construction of a new cast shop w ith the capacity of 4 thousand tones of metal per year. The projected rate of operation
should be reached in the course of 2013. This project is a part of large scale modernization program w hich w ill allow the company to meet the grow ing
customer demand w ith strict compliance to the high standards of production. Technological line Omega (UK) installed in the shop w ill allow full
mechanization of the iron mould production. Melting compartment of the shop w ill have the capacity of melting 4 tones of metal simultaneously.

The Group purchased a new processing center produced by Danobat Group w hich w ill complement the existing high-end production facilities and
considerably improve the production of the spare parts(Nasosenergomash).

Equipment of new shop for w ater w ell pumps including launch of automated testing facility w ere completed last year. Reconstruction of existing
production facilities underw ent full scale replacement of mechanical processing equipment (Livnynasos).

HMS Group completed the enhancement of laboratory designed for research of permafrost soils by installing an automated multi functional measuring
and computing unit ACIS-6. This w ill provide for more efficient research and faster elaboration of design documentation for large oil & gas field
development projects (Giprotyumenneftegaz).

HMS Group continues to introduce latest technologies into production process. In order to optimize the elaboration of new type of pumping equipment
the Group purchased an industrial 3D printer w hich w ill facilitate the modeling of the new pumping equipment parts. Implementation of this latest design
technology gives the designers and engineers a clearer vision of a new product`s characteristics, makes the design process less time consuming,

more cost efficient and cuts dow n the level of materials required to manufacture products (HMS Pumps).

Risk Management and Internal Control

Overview

The Group is exposed to various risks and uncertainties that may have undesirable financial or reputational implications. In order to minimize the
negative impact of such risks and to benefit from opportunities a risk management and internal control system has been established and integrated into
the Group’s operations. The overall objective is to obtain reasonable assurance that the Group’s goals and objectives w ill be achieved, w hile remaining
true to the principle that expected benefits should outw eigh costs associated w ith them.

Key features of the Group’s internal control system over financial reporting

The Group uses a formal risk management program across its companies, i.e. there is an ongoing process for identifying, evaluating and managing the
significant risks faced by the Group. Risks are classified as to their possibility and significance; and different strategies are used to manage identified
risks. This process is regularly review ed by the Board in accordance w ith applicable guidance.

The Board is responsible for the Group’s system of internal control and for review ing its effectiveness. This system is designed to manage rather than
eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement
or loss.

Internal control and risk management monitoring is performed through internal and external assurance providers, w hich include:

financial statement audits performed by external auditors – discussion w ith the Audit Committee of the results of the audit, including a review
of the financial performance, any changes to disclosure, a subsequent events review , important accounting matters and other internal control
matters;
review and formal approval of the financial results by the CEO, CFO, Audit Committee and the Board;
Board and sub-committee approval and monitoring of operating, financial and other plans;
consolidation and verification of correct identification and assessment of critical business risks – the Audit Committee review s changes to the risk
profiles, together w ith progress on actions for key risks on a regular basis;
internal audit function – the Head of Internal Audit functionally reports to the Audit Committee and administratively to the First Deputy CEO. The
internal audit department activities are performed in accordance w ith a risk-based audit plan and incorporate review of material controls, including
financial, compliance and operational controls. The results of each audit are discussed in detail w ith the companies and business units
concerned, and action plans agreed.

The key features of the risk management process include:

gathering and analysis of information, related to internal and external factors, w hich can negatively impact the achievement of the Group’s
objectives;
identification of the possible level of negative impact of various events to operational and financial results in accordance w ith applicable risk-
assessment methods;
setting appropriate risk-tolerance levels;
ranging risks according to their significance and probability;
making appropriate decisions to manage identified risks;
active monitoring of the steps taken to control the most significant risks.

Principal Risks and Uncertainties

The relationship betw een the main categories of the risks w e encounter and how they affect our strategy is show n in the table below .

Strategy

Risk

Enhancing
margins

Driving
growth

Generating
cash

Maximize
returns

Securing
customers

Securing long-term
suppliers

Global political and
economic risks

Sales

Project execution risks

Human Capital

Acquisitions and disposals

Fraud and corruption risks

Technology

Legislation and regulations

Product liability and litigation

Financial risks

The follow ing narrative is the review of the principal risks facing the Group’s business. The Group also faces other risks, w hich are know n
or unknow n; some of them apply to similar companies operating both in Russian and international market.

Global political and economic risks

The Group may be exposed to various political, economic and other risks not only in the countries w here it has primary production facilities (Russia,
Ukraine, Belarus), but also in jurisdictions w here the Group has other interests (e.g. EPC projects in the Middle East and Central Asia).

Introduction of new regulations and imposition of trade barriers could disrupt the Group’s business activities or impact on the Group’s customers,
suppliers or other parties w ith w hich it does business. In some instances, this could have a material adverse effect on the Group’s financial position
and prospects.

Sales

The Group’s business depends on the levels of capital investment and maintenance expenditures by the Group’s customers, w hich in turn are affected
by numerous factors, including the state of global and Russian economies, fluctuations in the price of oil, taxation of the Russian oil and gas industry,
availability and cost of financing, and state investment and other support for the Group’s customers or in state-sponsored infrastructure projects.

The Group’s business depends on the aw ard of contracts and renew als and extensions of existing contracts; also the Group relies on a limited
number of key customers and contracts, and may incur losses due to unfavorable terms of contracts w ith certain large customers.

Project execution risks

Since the Group’s contracts are typically on a fixed-price basis, there are risks associated w ith cost overruns (especially in EPC segment). These
risks are mitigated by Group’s efforts on improving profitability, cost control, w ith the help of volume grow th and a mounting share of high-margin
integrated solutions services.

Human Capital

The ability to achieve the Group’s strategic goals highly depends on our most important asset — our people. We develop and remunerate our
employees using leading HR practices. In line w ith Group’s grow th strategy, w e aim to attract talented employees from the market and continuously
improve our recruitment methods.

The success of the Group’s businesses depends heavily on the continued service of its key senior managers. These individuals possess industry
specific skills in the areas of sales and marketing, engineering and manufacturing that are critical to the grow th and operation of the Group’s
businesses. While the Group has entered into employment contracts w ith its senior managers, the retention of their services cannot be guaranteed.
The Group is not insured against damages that may be incurred in case of loss or dismissal of its key specialists or managers. Moreover, the Group
may be unable to attract and retain qualified personnel to succeed such managers. If the Group suffers an extended interruption in its services due
to the loss of one or more such managers, its business, financial condition, results of operations, prospects may be materially adversely affected.

Acquisitions

The Group cannot be certain that the anticipated cash flow s, synergies and cost savings from these transactions w ill materialize or reach expected
levels. Inefficient integration of the new ly acquired businesses poses a risk to the Group’s operations. Any failure to successfully integrate the
operations of the Group companies could adversely affect the Group’s business, financial condition and results of operations.

Since its formation in 1993, the Group has completed a number of acquisitions involving the purchase of industrial pumps, modular equipment
manufacturing and EPC services companies, and the Group expects to make additional acquisitions in the future. The integration of these and future
acquisitions into the Group’s operations poses significant management, administrative and financial challenges.

The integration process may result in unforeseen difficulties and could require significant time and attention from management that w ould otherw ise
be directed at developing the Group’s existing business.

Fraud and corruption risks

Fraud and corruption are pervasive and inherent risks of any business operations. There is alw ays some potential for fraud and other dishonest
activity at all levels of the business, from factory w orker level to senior management. Efficient operations and optimal use of resources depends on our
ability to prevent occurrences of fraud and corruption at all levels w ithin the Group.

HMS Group promotes ethical behavior among its employees and maintains dedicated violations reporting channels to raise concerns w ithin the
Group — through an ethics hotline available 24/7. Group’s internal audit and/or security department perform investigations into alleged fraud and
misconduct cases. If necessary, the results of such investigations are provided to the CEO, the Board, the management and Audit Committee,
as necessary.

As the Group operates in a number of jurisdictions around the w orld, the Board and senior management also put a strong emphasis on corporate

compliance w ith applicable regulation, e.g. anti-bribery and anti-corruption legislation, such as the UK Bribery Act.

The Group has implemented procedures to ensure that all employees are aw are of the requirements of the Group’s anti-corruption policies, w ith
particular focus on those roles most exposed to the risk of breach. It is planned to perform annual certification of most employees to ensure their
aw areness of applicable policies and expected behavior.

Corporate Social Responsibility

HMS Group regards the contribution it makes to social development and improvement of the quality of life in local communities as an essential part of its
business.

The Group contributes to society development mostly by producing high-end equipment for key industries and participating in major infrastructure
projects that help to reduce pow er consumption and stimulate economic grow th and job creation.

People and workplace

HMS Group employees are considered its main asset and w e do our best to provide them w ith opportunities for professional and personal
development. We encourage our personnel to continuously improve operational excellence w hich fosters strong team spirit, higher employee
engagement and, thus, superior performance.

HMS Group view s development of its personnel as key element for the success of each individual employee as w ell as for the Group as a w hole.
We are focused on creating an environment w here learning and development can take place enabling the employees to excel. We provide our
employees w ith access to w ide range of industrial trainings, IT and foreign languages courses, technical and business training courses and seminars.

Average Headcount

9,658

10,055

9,952

12,408 12,669 17,209

5,249

5,635

5,862

128
2,239

183
2,235

211
1,767

6,868

6,877

235

3,175

251

3,071

8,449

281
2,370

3,662

2,042

2,002

2,112

2,130

2,469

2,447

2007

2008

2009

2010

2011

2012

Oil&Gas equipment
Engineering, procurement, construction
Compressors
Other
Industrial pumps

The collective employment agreement implemented in every company of HMS Group specifies providing the employees w ith decent w orking conditions
and remuneration. It is aimed to increase performance, standards of living and disposable income of the employees, providing them w ith social and
labor benefits.

HMS Group strives to help its employees attain a good w ork/life balance. The Group guarantees its employees voluntary health insurance and social
insurance in case of industrial accidents and diseases for the employees operating in hazardous environment. We offer various leisure and health
support benefits to our employees and their families, including holiday packages for vacation centers and presents for children. Comfortable w orking
environment includes canteens and medical stations. We provide our employees w ith access to corporate gyms, arrange professional and sporting
competitions, cultural and educational events.

HMS Group establishes several channels through w hich the employees` initiatives can be review ed and put into practice. There are corporate
periodicals, information stands, feedback lines and face-to-face meetings at every facility of the Group.

Health and safety are top priority and an integral part of HMS Group practice. The Group is committed to zero accidents at w orkplace. All the
employees are provided w ith personal protective equipment and health inspections for the w orkers exposed to occupational hazards are conducted
on a regular basis.

Community engagement

HMS Group makes significant charitable contributions in the communities w here its operations have an impact. Through our operations w e create jobs
and business opportunities that strengthen local economies and support community development projects.

HMS Group subsidiaries have established long-term relationships w ith local colleges and universities. This cooperation includes launching of student
initiatives and internships at the Group`s production facilities. R&D clusters of the Group host scientific conferences for young professionals aimed
at involving the young minds into scientific projects. During these w orkshops talents have the opportunity to show case their innovative projects.

HMS Group has a long-standing tradition for supporting charity initiatives, either by providing funds or by giving active support in charity projects. The
main focus is health care institutions, orphanages and World War II veterans associations. The Group actively supports various sport, educational and
cultural events.

We provide constant support for organizations for disabled people promoting their integration into society. The required help is rendered to divisions
of Red Cross. HMS Group provides financial support for renovation and equipment of nurseries and schools. For several years the Group has been
among sponsors of Preobrazhensk cadet corps in Moscow .

Environmental initiatives

The HMS Group is committed to achieving the highest environmental standards by minimizing the loss to the environment and human health. We regard
ecological activity as an integral part of our day-to-day operations fully recognizing the necessity to support ecological balance. Our policy in this field
follow s every applicable environmental law in all countries of operation. Regular audits ensure that these requirements are being met. HMS Group
incorporates environmental considerations throughout the production process starting from design to development and manufacturing.

HMS Group production sites control and improve the processes for emission reduction and introduce resource conscious production technologies and
equipment. The Group w orks continuously to improve resource efficiency in the manufacturing process. In 2012, along w ith the production expansion,
the Group introduced modern w aste treatment facilities. We expect to make stronger commitments in this area in the future by implementing
environmentally sustainable high-tech solutions.

Board of Directors

HMS Group’s corporate governance practices are designed to ensure that the interests of all its stakeholders are given due consideration. Although the
company is not subject to any mandatory corporate governance code in its home jurisdiction of Cyprus nor required to observe the UK Corporate
Governance Code, it has implemented various corporate governance measures, including the appointment of 2 independent non-executive directors to its
Board of Directors and the establishment of an audit committee and a remuneration committee. Each of these board committees is chaired by an
independent, non-executive director. HMS Group continues to review its corporate governance policies in light of international best practice.

The Board of Directors consists of nine (9) members, four (4) of w hom are executive directors.

Mr. Germ an A. Tsoy

Chairman of the Board of
Directors,
non-executive Director

Mr. Artem V. Molchanov

Member of the Board of Directors,
Managing Director (CEO)

Mr. Tsoy w as appointed as Chairman of the Board of Directors in
October 2010. As one of the founders of the Group, he has held various
executive positions w ithin HMS Group since its establishment in 1993. Mr.
Tsoy has more than 19 years’ industry experience. He graduated from
Frunze Polytechnic Institute (currently the I. Razzakov Kyrgyz State
Technical University) w here he gained a degree in electrical engineering
in 1985. He graduated from Buguruslan Flying School of Civil Aviation
w ith a degree in civil aviation in 1979. Mr. Tsoy served as General
Director of OOO HMS-Holding from 2008 until 2009 and as President
since 2009.

Mr. Molchanov w as appointed as an executive member of the Board of
Directors in October 2010. Mr. Molchanov became the President of HMS
Group in 2008. As one of the founders of the Group, he has held various
executive positions w ithin HMS Group since its establishment in 1993. Mr.
Molchanov has more than 19 years of industry experience. He graduated
from the Plekhanov Russian Academy of Economics (currently Plekhanov
Russian University of Economics) w here he gained a degree in industrial
economics.

Mr. Kirill V. Molchanov

Mr. Yury N. Skrynnik

Member of the Board of Directors

Mr. Molchanov w as appointed as an executive member of the Board
of Directors in October 2010 and has served as Vice President of HMS
Group since 2008. As one of the founders of the Group, he has held
various executive positions w ithin HMS Group since its establishment
in 1993. Mr. Molchanov has 19 years of industry experience.
He graduated from Bauman Moscow Higher Technical School (currently
Bauman Moscow State Technical University) w ith a degree
in electromechanical engineering. He has graduated from the Judge
Business School, University of Cambridge w ith an executive MBA
degree.

Mr. Skrynnik w as appointed as an executive member of the Board
of Directors in October 2010. He is currently the Head of Compressor
business unit, a position he has held since its establishment in 2012.
Previously he held a position of Director for Strategic Marketing. Prior
to joining HMS Group, he served as the Chief Representative of OAO
Sumy Frunze NPO (Ukraine) in Russia from 1999 until 2008. Mr. Skrynnik
w orked as Director of the Innovative Technical Subdivision of OOO
Machines, Equipment, Technologies, Products and Services from 1992
until 1999. From 1986 until 1988, he served as a scientific research
officer at the Moscow Institute of Chemical Machinery (currently Moscow
State University of Engineering Ecology). Mr. Skrynnik has more than
20 years of science and management experience. He graduated from the
Sumy branch of the Kharkiv Polytechnic Institute w ith a degree
in mechanical engineering in 1983. He w as aw arded a PhD in engineering
science from The Moscow Institute of Chemical Machinery (currently
Moscow State University of Engineering and Ecology) in 1988. Mr.
Skrynnik is the author of more than 50 scientific publications and
20 inventions.

Mr. Nikolai N. Yam burenko

Mr. Vladim ir V. Lukyanenko

Member of the Board of Directors

Member of the Board of Directors,
Non-executive Director

Mr. Yamburenko w as appointed as an executive member of the Board
of Directors in October 2010. He is currently the Head of the Industrial
Pumps Business Unit, the position he has held since 2005. Prior to joining
the Group, Mr. Yamburenko w as the CEO of Livhydromash (HMS
Pumps), w hich is now part of the Group. Mr. Yamburenko has more than
30 years of industry experience. He graduated from the faculty of radio
electronics of Moscow Aviation Institute named after S. Ordzhonikidze,
w here he gained a degree in radio electronics.

Mr. Lukyanenko w as appointed as a non-executive member of the Board
of Directors in October 2010. He also served as the Chairman of the
Supervisory Board of OAO Sumy Frunze NPO (Ukraine) from 2003 until
2007. Mr. Lukyanenko has more than 20 years of industry experience.
He graduated from the Moscow Institute of Chemical Machinery
(currently Moscow State University of Engineering Ecology) w here
he gained a degree in mechanical engineering in 1991.

Mr. Philippe Delpal

Mr. Andreas S. Petrou

Member of the Board of Directors,
Non-executive Director

Mr. Petrou w as appointed as a non-executive member of the Board of
Directors in June 2010. From 1989 until 1998, Mr. Petrou served as a
member of the Board of The Cyprus Tourism Development Public
Company Ltd, representing interests of the Government of the Republic
of Cyprus. From 1987 until 1990, Mr. Petrou served as the General
Secretary of Cyprus Dairy Organisation. In 1986, Mr. Petrou established
his ow n law office. He is an honours graduate of the Law School of
Democrious University of Thrace. Mr. Petrou has been a member of the
Cyprus Bar Association since 1985.

Mr. Delpal w as appointed as an independent non-executive member
of the Board of Directors in December 2010 and is the head of the Audit
Committee. Mr Delpal has had a career in banking, most recently
as Chairman of BNP Paribas Vostok in Moscow . He is now
an Operational Partner for Financial Services in Baring Vostok Capital
Partners, one of the largest private equity firms in Russia. He is also
currently serving as a non-executive director for Orient Express Bank
OJSC (Russia), Eastern European Trust (London, LSE listed investment
trust managed by Blackrock) and Komercijalna Banka AD (Serbia). Prior
to that, Mr. Delpal founded Cetelem Russia in 2006 and served as its CEO
from 2006 until 2010. From 2004 until 2006, as a CEO, he developed
Rusfinance Bank (Societe Generale Group) up to the #2 position
in Russia for car lending. In addition, Mr. Delpal has over eight years
of experience as an auditor at Societe Generale. He graduated from the
Telecom Paris University w ith a degree in IT, Telecoms and Economics.
He has been living in Russia since 2004.

Mr. Gary S. Yam am oto

Member of the Board of Directors,
Non-executive Director

Mr. Yamamoto w as appointed as an independent non-executive member
of the Board of Directors and a head of remuneration committee
in December 2010. Prior to joining the Group he served as Chief
Executive Officer at Borets International during 2009. Mr. Yamamoto has
served as the President of Yamamoto Consulting since 2008. He served
as a member of the Board of Directors at Radius Servis from 2007 until
2008. Prior to this, Mr. Yamamoto enjoyed a 20-year career w ith
Schlumberger Limited, and from 2003 until 2008, served as Vice
President of Schlumberger Russia. Mr. Yamamoto has more than
20 years of management experience. He graduated from the University
of California, Berkeley, w ith a degree in engineering in 1988. Mr.
Yamamoto is a member of the Society of Petroleum Engineers and the
Independent Directors Association.

Performance of the Board in 2012

In 2012, the Board of Directors held 4 ordinary meetings, w hich occurred in Limassol, Cyprus. During the course of 2012 the Board of Directors
continued w orking on the development of the Company’s mid-term and long-term financial and business strategy, including investment plans, M&A
activities, the budgeting process and general corporate development.

Throughout the year the Board of Directors closely monitored the ongoing improvement of the Company’s internal control and risk management
systems.

At its meetings the Board of Directors review ed these and other issues connected w ith the activities of the Company w ithin its remit, including
approval of corporate reports, a long-term incentive program for senior management and a bonus scheme for the CEO.

Committees of the Board of Directors

The Company has established tw o committees: the Audit Committee and the Remuneration Committee. A brief description of these Committees’ main
activities during 2012 is below .

Audit Committee

General Overview

The Audit Committee comprises three directors, tw o of w hom are independent, and expects to meet three to four times each year. Currently the Audit
Committee is chaired by Philippe Delpal and the other members are Gary S. Yamamoto and Vladimir V. Lukyanenko.

The Audit Committee is responsible for considering, amongst other matters: (i) the integrity of the Group’s financial statements, including its annual and
interim financial statements; (ii) the effectiveness of the Group’s internal control and risk management systems; (iii) auditors’ reports; and (iv) the terms
of appointment and remuneration of the auditor.

The Audit Committee supervises and monitors, and advises the Board of Directors on, risk management and control systems and the implementation
of codes of conduct. The Audit Committee also supervises the submission by the Group of financial information and a number of other audit-related
issues in addition to assessing generally the efficiency of w ork of the Chairman of the Board of Directors.

Performance in 2012

In 2012 the Audit Committee held three meetings. The main issues the Audit Committee oversaw in 2012 w ere the preliminary review of IFRS financial
statements, internal control and risk-management, including the insider policy implementation and audit plan.

The Audit Committee supervised the internal and external audit procedures and annual tax strategy implementation w ithin the course of the year. The
Audit Committee adopted relevant decisions and recommendations to the Board of Directors w ith regards to internal control efficiency.

Remuneration Committee

General Overview

The Remuneration Committee comprises four directors and expects to meet at least once each year. Currently the Remuneration Committee is chaired
by Gary S. Yamamoto, an independent director; the other members are Vladimir V. Lukyanenko, Yury N. Skrynnik and German Tsoy. The Remuneration
Committee is responsible for determining and review ing, amongst other matters, the Group’s remuneration policies. The remuneration of independent
directors is a matter for the Chairman of the Board of Directors and the executive directors. No director or manager may be involved in any decisions
as to his/her ow n remuneration.

Performance in 2012

In 2012 the Remuneration Committee held tw o meetings. The main matters review ed by the Remuneration Committee w ere the long-term motivation plan
for key managers of the Company, the remuneration package for the Company’s CEO and implementation of the KPI policy.

The Remuneration Committee assessed best international practices in order to adopt relevant decisions and make its recommendations to the Board
of Directors w ith regards to the Company’s mid-term and long-term remuneration and motivation policies.

External Audit of Financial Statements

Every year HMS Group elects an external auditor w ho is responsible for the auditing and inspection of the consolidated financial statements of the
Company in compliance w ith IFRS and w ho prepares review s of the consolidated interim condensed financial information of the Company in
accordance w ith IFRS requirements. The external auditor of the Company is selected from the “top four” auditing companies after a thorough review of
their proposals. Follow ing the review of the auditors’ proposals, the Audit Committee gives its recommendations to the Board of Directors regarding the
candidacy of the auditor and the amount of the auditor’s compensation, and advises the Board of Directors on other terms and conditions of the
contract w ith the auditor. In 2012, based on the recommendation of the Audit Committee, the Board of Directors selected Pricew aterhouseCoopers
Limited to conduct the audit of the financial statements of the Company for the year 2012.

Directors Compensation

The compensation of Directors consists of annual remuneration paid to independent directors for their services in full positions. The total compensation
of the independent directors, w hich is reflected as short-term employee benefits in the consolidated statement comprehensive of income in the
Company’s financial statements, w as Euro 195 000 for the year ended December 31, 2012.

HMS Global Depository Receipts

Global equities had a strong start of 2012, mainly on the back of liquidity injection from long-term refinancing operation, the European Central Bank’s
mechanism for providing financing and maintain liquidity cushion to Eurozone banks and the Fed’s policy stance of ‘at zero for longer’, keeping short-
term interest rates at record low s in order to stimulate spending and support assets prices.

Russia follow ed suit. After the set back at the end of 2011 in light of the post-Duma elections protest rallies, Russian equities enjoyed a strong catch-
up, peaking at a positive 28% YTD return of the MSCI Russia index (Russia’s strongest YTD gain since 2000) by the end of March. HMS Group GDRs
enjoyed investor’s risk appetite increase and grew by 22% in Q1 2012.

Shareholders

28.5%

27.4%

19.8%

24.4%

Vladimir Lukyanenko
Management
German Tsoy
Free-float

Despite generally strong oil prices during the w hole H1 2012, a negative scenario for HMS and Russian equities materialised since the middle of April.
The European sovereign debt situation turned more perilous, shaping risk sentiment. The elections in Greece, the suffering Spanish banking sector, the
ongoing discussion betw een Germany and the EU over the bailout mechanism as w ell as the global economy decelerating due to issues in EU economy
balancing on the edge of recession, w eaker grow th in China and US turned into major headw inds in 2Q12. Follow ing the strong performance
of Russian equities in Q1 2012, the second quarter appeared to be w eaker. HMS shares lost 10.5%, w hile MSCI Russia index declined by 14.7%

The pattern in the second half of the year varied from the first six months significantly. In 2012, according to EPFR datasets, Russia-dedicated funds
experiences USD 583mn of inflow s in 1H12 and USD 383mn of outflow s in 2H12 due to generally negative investor’s attitude to Russia. These
outflow s couldn’t help but affected small cap stocks performance.

Follow ing the acquisitions made in early July, w hich resulted in debt increase and SnP’s corporate rating reduction to B+, HMS shares nosedived for
three w eeks as there w ere increasing concerns over the Group’s ability to grow the business of the acquired assets fast enough to justify the price
HMS Group paid for M&As. How ever, the share price bounced back by the end of July follow ing the w ide efforts to communicate the strategy of the
new assets. As a result, in Q3 HMS share performance w as flattish, just 0.6% QoQ w eaker by the end of the 3rd quarter, w hile MSCI Russia
gained 9% in Q3.

The fourth quarter w as the w orse from the stock performance standpoint. Despite improved financial performance of 3Q12 and EBITDA grow th
of 41% QoQ in 3Q12, HMS shares lost 12% versus flattish performance of MSCI Russia Index.

Information on HMS Group Plc GDRs:

Ticker

CUSIP

Exchange

ISIN

HMSG

40425X209

London Stock Exchange

US40425X2099

Ratio, GDR : common shares

Effective Date

Underlying ISIN

Depositary bank

1:1

Feb 11, 2011

CY0094Q01570

BNY Melon

Shareholder`s information

GDRs of HMS Hydraulic Machines & Systems Group Plc are traded on the London Stock Exchange under ticker HMSG.

Company Name

Company Type

Fiscal Year-End

Disclosure

Managing Director (CEO)

First Deputy CEO (CFO)

HMS Group Plc GDR details:

Ticker

CUSIP

Exchange

ISIN

Ratio

Depositary

Effective Date

Local Exchange

Underlying ISIN

Country

Industry

HMS Hydraulic Machines & Systems Group Plc

Public

December 31

LSE

Artem Molchanov

Kirill Molchanov

HMSG

40425X209

London Stock Exchange

US40425X2099

1:1

BK (Sponsored)

Feb 11, 2011

Not Traded

CY0094Q01570

Russia

OilEquip.,Serv.&Dist

Global Depositary Receipts shareholders’ contacts:

Contacts
for inquiries
regarding:

General
Shareholder
enquiries and
Investor
Relations
contacts

advise of a change of name and/or address
report lost/stolen GDR share certificates or the non-receipt
of a dividend check
request an election form for the scrip dividend program
request forms to transfer GDRs
report the death of a registered holder of GDR shares
request a duplicate account statement
have dividends electronically deposited to your bank account
consolidate similar account registrations
request general information about your shareholder account, etc.

The Bank of New York Mellon
BNY Mellon Shareow ner Services
PO Box 358516
Pittsburgh, PA 15252-8516
USA Tel: +1 888 737 2377 (USA only)
Tel: +1 201 680 6825 (International)
Email: shrrelations@bnymellon.com
Website: w w w .bnymellon.com

HMS Group
Investor Relations
7 Chayanova str.
125047 Moscow , Russia Tel:
+7 495 730 6601
Fax: +7 495 730 6602
Email: ir@hms.ru