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Telecom providers expect CAPEX to grow

ACRA estimates show that in 2018 the Russian telecommunications market may grow by 3.7%, up to RUB 1.64 tln. Afterwards, the experts expect the market to grow by 2.7% annually, with the growth rate slowing down by 2022. Mobile communications remain the key segment of the market, covering 50% of the market volume.

Sector’s profitability will continue to restore. Reintroduction of unlimited mobile data tariff plans should not affect ARPU (average revenue per user). Strong competition may prevent companies from passing the growing data storage expenses down to users, which may restrict the profitability.

Starting from 2019, ACRA expects that TSPs’ CAPEX (capital expenditures) will surge. According to ACRA estimates for the next five years, CAPEX for data storage infrastructure may reach RUB 250 bln, peaking in 2019-2020. In 2021-2022, TSPs will start investing into 5G networks. As a result, the CAPEX to sales ratio in the sector may grow from the current 16% to 24% by 2022.

The CAPEX growth may push down the sector’s FCF (free cash flow) to negative values. Besides, the sector’s FCF will be affected by large-scale investment programs and substantial annual dividends. As a result, ACRA expects the sector’s aggregate FCF to enter negative territory in 2019-2022 which will lead to a further rise of debt in absolute terms. At the same time, ACRA predicts that owing to higher growth rates of FFO (funds from operations before net interest and taxes), the tendency towards a slow decrease in the sector’s debt burden will continue.

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