How the transition to 5G may impact the sector’s financial indicators

Russian telecommunications market: forecast until 2024

  • According to ACRA, the total volume of the Russian telecommunications market is expected to amount to RUB 1.79 tln as of the end of 2020 (+2% compared to 2019). In the medium-term, the Agency expects the market to grow in step with inflation (around 4% annually).
  • The telecommunications sector is among those that have suffered the least from the pandemic. The coronavirus had a negative impact on the mobile segment, but simultaneously contributed to higher revenues from broadband internet access. In addition, the pandemic did not lead to a significant decline in capital expenditures of the sector’s major players or a deterioration in their credit quality.
  • Profitability of telecommunications companies will remain high in forthcoming years. In the medium-term, the profitability of the sector will largely depend on whether telecommunications companies are able to shift operational and capital expenditures to end users.
  • Substantial capital expenditures on deploying 5G networks may lead to negative free cash flow (FCF). The final approval of frequencies will have a determining impact on the volume of capital expenditures for deploying fifth generation networks. ACRA predicts that total investments in 5G networks in Russia from 2021 to 2027 may amount to RUB 1.0–1.1 tln. Significant growth in capital expenditures may in turn lead to negative FCF and lower dividend payouts.
  • The leverage of the sector will grow under pressure from capital expenditures. According to ACRA’s estimates, the ratio of adjusted total debt to FFO prior to fixed payments and taxes may grow from 2.7x in 2020 to 2.8–2.29x in 2023–2024.

Table 1. Forecast of operational and financial indicators














Operational indicators










Number of subscribers










Mobile communications

mln subscribers









Broadband internet access1

mln subscribers









Other segments




















Mobile communications










Broadband internet access










Financial indicators











RUB bln









FFO before net interest payments and taxes

RUB bln









FFO profitability before net interest payments and taxes










Adjusted total debt/FFO before fixed payments and taxes










FFO before fixed payments/fixed payments





















1 Only includes fixed-line broadband internet services.
Source: ACRA

ACRA aggregated the data provided by rated companies and publicly available data released by other players in the sector when analyzing the financial and operational indicators of the market and building its forecast. The Agency applied its own methods to calculate some financial indicators (for example, like in its rating methodology, ACRA continues to take operating lease payments into account as part of operating expenses, capitalizing them and thus obtaining the adjusted leverage).

Mobile communications: slowdown in growth due to the pandemic and moderate medium-term growth

This forecast has been created in line with ACRA’s General Principles of Socioeconomic Indicators Forecasting.

The mobile segment’s revenues grew by 3% in 2019 compared to 2018 thanks to higher ARPU and an increased number of subscribers. At the same time, it should be noted that the segment’s revenues grew more in the preceding two years — by 4% in 2017 and around 5% in 2018.

The pandemic did not have a critical impact on the mobile segment, which accounts for a significant part of the telecommunications sector. Despite a decline in income generated by roaming, the duration of telephone calls increased because consumers switched to working from home. However, most of the growth of voice traffic was within the boundaries of consumers’ tariff plans, and consequently operators did not record tangible growth in revenues.

In Q1 2020, the mobile segment’s revenues grew slightly compared to the previous year (+3.85%). The closure of borders in Q2 2020 resulted in reduced demand for mobile communications services from migrant workers and falling income from roaming, which led to revenues for this period shrinking by 1.6%. However, already by the third quarter revenues returned to positive growth, having increased by 0.7% compared to the same period in 2019. ACRA estimates that the mobile segment’s revenues grew by around 1% in 2020 and assumes that growth rates will recover to their pre-crisis levels 2021 on the condition that borders are opened by summer this year. In the medium-term, annual growth may amount to around 2.5–3.0%. This is slower than historic growth due to the gradual exhaustion of opportunities for increasing revenue per user as a result of the improvement of tariff plans, as well as the high degree of market saturation.

Figure 1. The mobile segment’s performance has been determined by falling ARPU

Sources: corporate data, ACRA

Broadband internet access: growth to decelerate after 2020

See ACRA’s economic forecast for Russia up to 2024 “Structural and temporary factors of economic growth in Russia” dated November 19, 2020.

Revenues of the broadband internet segment increased by 3% in 2019 (growth was comparable to the 2018 level) amid a 1.4% increase in the size of the subscriber base. As the market is saturated, bringing new residential buildings and the private sector online is a significant factor impacting the development of the B2C segment of the broadband internet market. ACRA does not rule out further intensification of price and non-price competition in the segment, which will most likely lead to a slowdown in growth rates in the medium term.

The pandemic has had a positive impact on the development of the broadband internet segment due to the transition to working and studying from home and also thanks to increased demand for computer games and other online entertainment. In Q1 2020, revenues from the fixed-line segment, in which broadband internet occupies the lion’s share, increased by 6.3% compared to the same quarter in the previous year. Revenues grew by 7.4% and 6.5% in Q2 and Q3, respectively, compared to the same periods in 2019. This was largely the result of faster-than-anticipated growth in the number of subscribers. As for ARPU, growth in Q1 2020 was followed by decline in the second quarter of the year, and then stabilization.

It is possible that the segment’s growth will decelerate during the pandemic. ACRA expects growth of revenues in this area of business to stand at 5–6% for 2020. In the medium-term, average annual growth rates may amount to around 2% on the back of falling growth in the number of new subscribers due to market saturation; ACRA sees limited potential for higher ARPU. The Agency expects growth in broadband internet subscribers to decline from 3–4% in 2018–2020 to no more than 1.5% in the next few years.

Figure 2. Dynamics of the broadband internet access market

Sources: TMT Consulting, ACRA

Stagnation of revenues and consistently high profitability

According to ACRA, the total volume of the Russian telecommunications market is expected to amount to RUB 1.79 tln as of the end of 2020 (+2% compared to 2019). The mobile segment and broadband internet will continue to be the main sources of the sector’s revenue in the coming years. ACRA expects the decline in the number of subscribers in the fixed-line telephony segment to continue over the next five years (at about 10% annually) due to the popularization of mobile communications and various instant messengers. In general, according to ACRA’s forecasts, in 2021–2024 the average annual growth rate of the telecommunications market in Russia will be comparable to the inflation rate (about 4% annually).

Figure 3. The market’s development is driven by mobile communications

Source: ACRA

The profitability of the sector will largely depend on whether telecommunications companies are able to shift operational and capital expenditures to end users. Mass migration to 5G may result in a considerable increase in ARPU in the medium term. Nevertheless, currently it is hard to assess the possibility of operators transferring costs related to the development of fifth generation networks to end users, especially in the mass segment. ACRA expects operators’ profitability to remain high at around 33%, despite a slight decline.

Figure 4. The sector’s profitability is stable

Source: ACRA

New investment phase for telecom service providers

See ACRA’s forecast Telecom providers expect CAPEX to grow  published on October 12, 2018.

According to ACRA’s previous forecast, the ratio of CAPEX to total revenue of the sector was 22% (RUB 363 bln) at the end of 2019. Despite the pandemic, TSPs have not significantly cut capital expenditures compared to the same periods last year: the ratio of the sector’s total capital expenditures to revenue in the second and third quarters of 2020 was 21% versus 19% and 18% y-o-y, respectively.

Figure 5. CAPEX growth is sustainable regardless of the pandemic

Sources: corporate data, ACRA

The main driver of TSPs’ CAPEX in the coming years will be the rollout of 5G networks. However, the prospects for 5G networks in Russia remain uncertain because no frequency range has been determined and allocated and there are proposals to use only Russian equipment. These factors largely determine the amount of investments required and the timing of the introduction of new technology. In case the frequency band of 4.8–4.99 GHz is allocated for 5G networks, capital expenditures will be higher due to higher power consumption requirements, as well as higher equipment costs, which is due to the fact that most vendors focus on other frequencies, more common for 5G networks. According to ACRA’s calculations, which are based on currently available information, total investments in 5G in Russia in 2021–2027 may amount to RUB 1.0–1.1 tln. The Agency also expects that the active phase of 5G rollout in Russia will start in 2024, but it will depend on the end-user demand.

Figure 6. Investments in 5G networks will drive up CAPEX

Source: ACRA

Growing investments will affect leverage and coverage

In 9M 2020, TSPs demonstrated relatively sustainable operational and financial performance, including sufficiently high credit quality metrics. ACRA notes an absolute growth in the debt portfolio and the ratio of adjusted total debt to LTM FFO before fixed charges and taxes in early 2020.

Figure 7. Leverage of the key sector companies

Sources: corporate data, ACRA

Regardless of moderate growth in FFO before fixed charges and taxes, ACRA expects the loan portfolio to grow in the mid-term amid growing CAPEX. In the  forecast period, the ratio of adjusted total debt to FFO before fixed charges and taxes may grow from 2.7х (2020 estimate) to 2.8–2.9х in 2023–2024. Irrespective of a growth in the lease liabilities taken into account in assessing the leverage[1], their share in the aggregate adjusted debt will not change significantly in the forecast period.

The forecast includes an outflow of funds intended for the buyback of shares in MTS PJSC in 2020. However, in the future, any M&A transactions, increased dividend payouts or share buybacks may push up the leverage and negatively affect the creditworthiness of certain companies.

In the medium term, the sector will see significant debt repayments. In 2021, 23% of the total debt of the industry is expected to be repaid, which may put some pressure on the liquidity and cash flows of companies. Nevertheless, ACRA does not expect a negative change in the financial position of major TSPs, since most of such repayments may can be refinanced.

2 To calculate lease liabilities, ACRA applied the capitalized lease method.

Figure 8. Investments in 5G networks will push up the leverage

Source: ACRA

Figure 9. Major repayments in the medium term

Sources: corporate data, ACRA

Fluctuations in the total amount of fixed charges in 2016–2018 were associated with both a decrease in interest payments on the backdrop of a decline in the key rate and a slowdown in the growth of the total loan portfolio of TSPs. The increase in interest expense in 2019 compared to 2018 was driven by a more noticeable increase in the aggregate leverage of TSPs, which put pressure on coverage levels amid lower effective interest rates. In the forecast period, ACRA expects an increase in fixed charges due to an increase in lease payments, as well as an increase in interest payments due to an increase in the debt portfolio.

Figure 10. Coverage levels depend on leverage trends

Source: ACRA

Figure 11. The effective interest rate declines; the lease rate is stable

Source: ACRA

Free cash flow and dividends are under pressure

Russian telecommunications service providers have historically allocated significant amounts to dividend payments, largely due to the industry maturity and stability of cash flows. However, since 2017, there has been a decrease in the volume of dividend payments (in 2018 and 2019, the total amount of dividends paid was 33% and 26%, respectively, of FFO before interest and taxes less capital expenses). In ACRA’s opinion, the amount of dividend payments may recover to some extent in 2021 due to an increase in revenue and operating cash flow, with capital expenditures comparable to those in 2020.

However, an increase in capital investments in the medium term will push FCF down to negative values, despite the projected growth in operating cash flow. Such scenario, in the Agency’s opinion, may lead to a gradual decrease in dividend payments after 2021.

Figure 12. Negative FCF and declining dividend payments

Source: ACRA

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