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Russian telcos under pressure from rising competition and weakening economy

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The profitability of Russian telecommunications companies will remain under pressure due to high inflation and foreign exchange losses, as well as rising mobile market competition, says Moody's Investors Service.

"Inflation will pressure the profitability of the 'Big Three' mobile operators given their focus on the domestic market," said Julia Pribytkova, a Moody's Vice President -- Senior Analyst. "EBITDA margins will weaken as a result of cost inflation driven by rouble depreciation, which operators will only be able to partially pass on to subscribers in a highly competitive and saturated market."

However, Moody's expects the Big Three -- MTS, VimpelCom and MegaFon -- to see stable or slightly higher rouble revenues in the next 12-18 months. Services remain adequately priced and demand is relatively inelastic.

Furthermore, data usage will likely increase as consumers seek alternatives to expensive entertainment, according to a Moody's report published today.

"Still, as Tele2, a new entrant in the Moscow mobile market, rolls out its network in Moscow, competition in the Russian telecoms market will increase," added Pribytkova. "However, given the near-term scope of investment planned by Tele2 compared to the Big Three, Tele2 will lag behind them in terms of service quality, at least in the next two or three years".

In addition, heightened competition will drive the Big Three to focus on service quality, network enhancement and marketing to retain price sensitive customers. Sustainably high capex will protect revenue stability and stimulate growth in the medium term, though it will weigh on profitability and free cash flow generation in the next 12-18 months.

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Tags: moodys  mts  vimpelcom  megafon  Russia