FOCUS: Russian telecom market seen resisting crisis, not without losses

By Yekaterina Yezhova

MOSCOW, Feb 2 (PRIME) -- Russian telecom companies are likely to demonstrate stable results in 2015 despite what Economic Development Minister Alexei Ulyukayev called “a perfect storm” as the firms invest in new businesses to diversify away from voice services, analysts said.

“The telecommunications business is characterized by a rather high stress resistance and demonstrates stable results even in periods of crisis and recession thanks to inelastic demand for services,” Ilya Frolov, senior manager at the research department at Promsvyazbank, told Russian Connection.

A research by Synovate Comcon said that 13% of households cut Internet spending and 23% in mobile connection in October–December 2014.

“Operators find new ways of increasing incomes, with major points being data transfer services, broadband expansion and sales of online content,” Frolov said.

Companies’ revenues are still rising, though slower. Incomes from voice services, operators’ key business, are falling because of a slowdown in the growth of subscriber base, the introduction of cheaper ‘package tariffs’, higher popularity of data transfer services, UFS IC analyst Anna Milostnova said.

“Telecom companies have been investing into 3G and 4G networks lavishly in order to raise revenues from data transfer. For example, MegaFon’s revenue from mobile data transfer accounted for 12% of total revenue in 2011, and stood at 25% as of the end of September 2014. The number of data transfer users is rising in line with traffic,” Milostnova said.

MegaFon along with MTS and VimpelCom, working under the Beeline brand, constitute the country’s top three mobile operators.

Shrinking revenue from voice services is offset by a growth in revenue from data transfer and equipment sales, like at MegaFon, where revenue from equipment sales increased to 7–8% in 2014 from 3–4% in 2011, Milostnova said.

“The weakening of the ruble could also reduce capital expenditures of telecommunications companies, as expenses on the purchase of foreign equipment are denominated in foreign currencies,” the analyst said.

Frolov from Promsvyazbank said the ruble-denominated average revenue per user (ARPU) will not change strongly compared to 2014, but foreign currency revenues, including revenues from operations in the CIS, will be dented by the weaker ruble. “According to our estimates, revenue and OIBDA in foreign currencies in 2015 may plunge by a third as compared to the previous year at MTS and MegaFon, but margins are safe,” Frolov said.

The analyst said that creditworthiness of companies raise no worries: after the 2008–2009 crisis, the largest operators handle current capital more reasonably. “For example, MegaFon transferred a part of monetary reserves into Hong Kong dollars amid threats of tougher sanctions. Companies reduced foreign borrowings in 2011–2014 curbing risks of refinancing significantly,” he said.

According to Frolov, operators will continue to generate a positive spare monetary flow in 2015 that enables shareholders to expect dividends. “We estimate that dividend yield of MTS and MegaFon shares could be 6–8% as of the end of 2014 given the current quotes,” Frolov said.

View from inside

Mikhail Dubin, MegaFon’s executive director for consumer business, said although people became thriftier in October–December 2014 due to the economic difficulties, they did not significantly cut mobile connection spending, which accounts for about 1% of an average household’s income, or the ARPU of 200 rubles a month for operators.

The executive said MegaFon will introduce more options and tariffs this year to allow subscribers to save more.

MTS’ press secretary Dmitry Solodovnikov said that the operator so far plans to stick to the current investment plans, but does not rule out revising them in case of a dramatic worsening of the economic situation.

But he said higher banking rates already translate into higher debt servicing costs, while the weakening ruble means higher prices for equipment and network servicing.

Alternative operator Tele2, which is going to enter the Moscow market, will also stick to the earlier approved plan in 2015. “We believe that the economic situation will not hurt Tele2’s strategic program strongly, because the company traditionally offers the lowest prices on the Russian market and offers good terms of contracts,” Konstantin Prokshin, head of the strategic communications department at Tele2, said.

The operator’s strategy stipulates a dramatic expansion of the market share thanks to the construction of new generation networks and entrance into new regions. “Our target as a new federal mobile operator is to reach full coverage of Russia,” he said.

(68.9291 rubles – U.S. $1)

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