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Mobilink and Banglalink both have growth potential, despite regulatory challenges

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Moody's Investors Service says that Pakistan Mobile Communications Limited (Mobilink) and Banglalink Digital Communications Limited (Banglalink) exhibit similar growth potential, but that Banglalink faces greater challenges from potential spectrum auctions and sizeable foreign currency exposures.

"Both Mobilink and Banglalink have significant potential for revenue growth, since wireless penetration and average revenue per user in Pakistan (B3 stable) and Bangladesh (Ba3 stable)are lower than in other emerging Asian countries," says Gloria Tsuen, a Moody's Vice President and Senior Analyst.

"Banglalink has an adequate liquidity profile before any new spectrum auctions. However if the government holds auctions in the next 12 months, it will need to obtain funds from its parents or banks," adds Tsuen. "In addition, about 84% of its debt is denominated in US dollars with no foreign-currency hedges, which means its interest payments could increase if the Bangladeshi taka depreciates against the dollar."

Tsuen was speaking on Moody's just-published report on Mobilink and Banglalink, entitled "Pakistan Mobile Communications, Banglalink Digital Communications - Peer Comparison: Similar Growth Potential And Regulatory Challenges", co-authored by Tsuen and Associate Analysts Carole Herve and Maisam Hasnain.

Moody's report compares the two companies in terms of their credit quality and the operating environments in Pakistan and Bangladesh. The two telecom operators share the same immediate parent -- Egyptian telecom operator Global Telecom Holdings -- and ultimate parent -- VimpelCom.

Despite the strong growth potential for both telecom operators, evolving regulation in Pakistan and Bangladesh will prevent their subscriber numbers and revenues from rising as much as they otherwise would have.

In June, Pakistan's government doubled the sales tax on various categories of imported mobile handsets to PKR300-PKR1,000 ($3-$10) from PKR150-PKR500 ($1.50-$5.00). Although the tax may seem low, it affects low-income cellphone users in Pakistan, who are more price-sensitive and represent a large proportion of Pakistan's cellphone users.

The higher sales tax follows the Punjab government's imposition of a new 19.5% sales tax on Internet usage. Similarly, the introduction of a 3% supplementary duty on mobile usage in Bangladesh in July will likely weigh on revenue growth.

Moody's updated Banglalink's rating by one notch on 13 October to reflect its improving operating performance. Mobilink's financials are also strong, but its rating is constrained by Pakistan's sovereign rating.

While both companies have received financial support from their shared parent companies, Moody's does not include any uplift for parental support in Mobilink's or Banglalink's ratings.

This is because the credit profile of their shared immediate parent, GTH, is not strong enough to provide substantial support. In addition, Vimpelcom, their ultimate parent, has a stronger but still limited ability to provide support as indicated by its rating, which is only one notch above Mobilink's and the same as Banglalink's.

As of August 2015, Mobilink had the largest subscriber market share of 29% among the five major operators in Pakistan, according to the Pakistan Telecommunications Authority.

At the same time, Banglalink was the second-largest player with a 25% market share among the six operators in Bangladesh, according to the Bangladesh Telecommunication Regulatory Commission.

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