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Fitch: Rouble Weakness to Weigh on Russian Telecoms' Margins, Capex

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Fitch Ratings says prolonged rouble weakness will likely shave off up to two percentage points of Russian telecoms operators' profit margins and trigger a revision of capex plans but will not lead to significant changes in the competitive environment.

Fitch estimates the negative impact of rouble weakness on EBITDA margin is likely to be modest to moderate for most operators, due to a low percentage of FX costs in the total.

Large Fitch-rated Russian mobile and fixed-line operators estimate the FX share of their costs at between 5% and 15% while they generate almost all of their revenues in roubles. Revenues from FX mobile guest roaming are typically significantly smaller than FX costs on own customers roaming internationally, and are insufficient to fully hedge against FX volatility.

With average Russian telecoms EBITDA margins in the range of 40%, a 10% rouble depreciation against major currencies would likely shrink the margin by 0.3%-0.9%, by our estimates. Operators are likely to respond with additional cost-cutting and efficiency improvement efforts to mitigate the negative impact.

Rouble weakness will also be a significant contributor to higher cost inflation, affecting margins in the medium-term as telecoms companies struggle to keep revenue growth in line with general price increases, due to intense competition. Competition is intensifying in the largest regional market of Moscow after LLC T2 RTK Holding, a joint venture of Rostelecom and Bank VTB operating under 'Tele2' brand, launched its services at end-October 2015. Operators are reluctant to increase tariffs as customers become more price-sensitive in an economic downturn and particularly with the arrival of a new operator in certain key regions, including in Moscow.

Fitch also believes that rouble weakness will trigger a review of capex plans by most telecoms operators, forcing them to cut back the physical volume of new equipment installed. Some operators had flagged earlier in the year that a weaker rouble to above 60 USD/RUB would likely prompt a downward capex revision.

As a result, the roll-out of LTE networks may slow, although capex cuts are unlikely to trigger significant competitive changes with all operators having completed their active development phase. Capex rationing will also discourage new backbone network construction, protecting the revenues of operators that specialise in providing network capacity on a wholesale basis, such as Transtelecom and, to a lesser degree, Rostelecom.

The Russian rouble has been under significant pressure since October 2015, shedding 15% of its value against the US dollar to an official exchange rate of around 72.5 USD/RUB on 30 December 2015.

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Tags: Russia