Telecommunications- Russia: Russian Wireless Sector (May 2005)
Telecommunications- Russia: Russian Wireless Sector (May 2005)
Russia has baffled us with its tremendous growth on the wireless front…both relatively as well as absolutely. During the full year 2004, it added a total of 37 mn wireless subscribers (the second highest additions in the world after China) totaling to around 74 mn, and its wireless penetration shot up by 25 percentage points (p.p.) to around 51% as at the end of 2004. The growth accelerated further during the last quarter of 2004, when a total of 14.8 mn wireless subscribers were added and the month of December alone witnessed a contribution of 8.3 mn to the total tally, with an increase of 5 p.p. in penetration!!!
Russia’s superlative performance clearly dwarfed the additions made by its emerging market peers, such as Brazil, Mexico, India, etc. During 2004, Brazil added a total of around 19 mn subscribers, Mexico added around 6.5 mn and India added a total of around 19 mn during the full year 2004. On the penetration front, Russia was again the clear winner in comparison to its peers during 2004, which saw Brazil increasing its wireless penetration by around 10.4 p.p. to 37%, Mexico by around 5.5 p.p. to 34.5% and India by around 1.7 p.p. to 4.5%.
The region continued its growth story during Q1 CY05 as well by adding close to 12 mn subscribers (after adding close to around 15 mn subscribers during Q4 CY04) to cross the 86 mn mark and consolidated as the No. 1 wireless market in Europe ahead of Germany by a huge margin. During Q1 CY05, the wireless subscriber addition in Russia was the largest in the world after China and the wireless penetration rate jumped to more than 59%, marking an increase of 9 percentage points from that in 2004 end, which was the largest increase in wireless penetration (with a sizable population, of course) in the world! We expect Russia to add close to 35 mn wireless subscribers during 2005 and to close the year with a wireless penetration rate of around 75%. However, going forward, we expect the subscriber addition to cool down during 2006, with the subscriber addition to be somewhere around 18 mn and the wireless penetration to be 87%.
Mobile TeleSystem (MBT) and Vimpel Communications (VIP), the top two American-listed Russian wireless companies in the region, have also been doing tremendously well. Having built up a strong base in Moscow and St. Petersburg, the top two wireless markets in Russia, these companies have been expanding their bases in regional parts of Russia, such as the Far East, Siberia, Urals, etc. primarily through the acquisition mode. Unlike global wireless giants, which went for high premium acquisitions that eventually hurt their profits (through huge write-offs), as well as their balance sheets (large debt for the funding of acquisitions), the duo have been amazingly enjoying handsome profitability and clean balance sheets, despite having done a deluge of acquisitions. MBT and VIP enjoy an EBITDA margin of around 45-50% (while the big players like Vodafone, T-Mobile, Verizon, etc. earn less than 40%) and a net profit margin of around 20%, while their balance sheets also remain attractive with a debt equity ratio of less than 1x, as a major portion of their acquisitions have been funded by their operating cash flows.
Not satisfied with the domestic expansion-led growth, these operators began to quench their thirst for growth by expanding in neighboring poorly-penetrated CIS countries, such as Ukraine, Belarus, Kazakhstan, Uzbekistan, etc. These operators are also exploring various opportunities for expanding their operations in other CIS regions that are poorly penetrated.
The only red signal on these stocks is the political risk that is country specific. The risk makes us a bit cautious on the stocks but the attractive valuations more than compensates for the risk and MBT and VIP are top picks in the market.
The wireless penetration in Moscow and St. Petersburg surpassed 100% and 90% respectively; henceforth the growth will come in from the regional part of Russia where the penetration level stood at around 42% at 2004 end. We believe that 2005 will be the last big year to witness a quantum jump in the wireless penetration level and subsequently, the subscriber base in Russia.
Russia has baffled us with its tremendous growth on the wireless front…both relatively as well as absolutely. During the full year 2004, it added a total of 37 mn wireless subscribers (the second highest additions in the world after China) totaling to around 74 mn, and its wireless penetration shot up by 25 percentage points (p.p.) to around 51% as at the end of 2004. The growth accelerated further during the last quarter of 2004, when a total of 14.8 mn wireless subscribers were added and the month of December alone witnessed a contribution of 8.3 mn to the total tally, with an increase of 5 p.p. in penetration!!!
Russia’s superlative performance clearly dwarfed the additions made by its emerging market peers, such as Brazil, Mexico, India, etc. During 2004, Brazil added a total of around 19 mn subscribers, Mexico added around 6.5 mn and India added a total of around 19 mn during the full year 2004. On the penetration front, Russia was again the clear winner in comparison to its peers during 2004, which saw Brazil increasing its wireless penetration by around 10.4 p.p. to 37%, Mexico by around 5.5 p.p. to 34.5% and India by around 1.7 p.p. to 4.5%.
The region continued its growth story during Q1 CY05 as well by adding close to 12 mn subscribers (after adding close to around 15 mn subscribers during Q4 CY04) to cross the 86 mn mark and consolidated as the No. 1 wireless market in Europe ahead of Germany by a huge margin. During Q1 CY05, the wireless subscriber addition in Russia was the largest in the world after China and the wireless penetration rate jumped to more than 59%, marking an increase of 9 percentage points from that in 2004 end, which was the largest increase in wireless penetration (with a sizable population, of course) in the world! We expect Russia to add close to 35 mn wireless subscribers during 2005 and to close the year with a wireless penetration rate of around 75%. However, going forward, we expect the subscriber addition to cool down during 2006, with the subscriber addition to be somewhere around 18 mn and the wireless penetration to be 87%.
Mobile TeleSystem (MBT) and Vimpel Communications (VIP), the top two American-listed Russian wireless companies in the region, have also been doing tremendously well. Having built up a strong base in Moscow and St. Petersburg, the top two wireless markets in Russia, these companies have been expanding their bases in regional parts of Russia, such as the Far East, Siberia, Urals, etc. primarily through the acquisition mode. Unlike global wireless giants, which went for high premium acquisitions that eventually hurt their profits (through huge write-offs), as well as their balance sheets (large debt for the funding of acquisitions), the duo have been amazingly enjoying handsome profitability and clean balance sheets, despite having done a deluge of acquisitions. MBT and VIP enjoy an EBITDA margin of around 45-50% (while the big players like Vodafone, T-Mobile, Verizon, etc. earn less than 40%) and a net profit margin of around 20%, while their balance sheets also remain attractive with a debt equity ratio of less than 1x, as a major portion of their acquisitions have been funded by their operating cash flows.
Not satisfied with the domestic expansion-led growth, these operators began to quench their thirst for growth by expanding in neighboring poorly-penetrated CIS countries, such as Ukraine, Belarus, Kazakhstan, Uzbekistan, etc. These operators are also exploring various opportunities for expanding their operations in other CIS regions that are poorly penetrated.
The only red signal on these stocks is the political risk that is country specific. The risk makes us a bit cautious on the stocks but the attractive valuations more than compensates for the risk and MBT and VIP are top picks in the market.
The wireless penetration in Moscow and St. Petersburg surpassed 100% and 90% respectively; henceforth the growth will come in from the regional part of Russia where the penetration level stood at around 42% at 2004 end. We believe that 2005 will be the last big year to witness a quantum jump in the wireless penetration level and subsequently, the subscriber base in Russia.
posted by Vikas Maheshwari, CFA at 7:38 PM
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