Stellar Performance of Russian Telecoms in March

March was a good month for Russian-listed telecoms companies, who handed in their strongest performance report since the crisis broke out. There were several gainers among the telecoms giants and a very positive Q4 report.

The highest gainer was JSFC Sistema, who advanced an impressive 64 percent in the first 3 weeks of March. Comstar followed with a 40 percent advance, while the mobile operators MTS and VimpelCom locked in 24 percent gains. This compares to the 28 percent upside in benchmark RTS and 4.5 percent in the S&P 500 over the same period of time. The renewed interest in Russian stocks has been helped by a stable ruble and higher oil prices. In addition, March was quite a positive month for telecoms stocks.

Sistema's performance was based on several positive news items. The most important of these was the Russian government's allocation of 23.7 billion rubles in its 2009 federal budget to Sistema's Indian subsidiary, Shyam Telelink. This meant that the government could acquire a 20 percent stake in the telecom company, which is worth about $700 million. Russia has reportedly already received $700 million from India as part of the settlement for India's debt, and this money needs to be invested in Indian projects. Shyam Telecom matches the criteria for such investment. An investment of this magnitude will allow Shyam Telelink to roll out its infrastructure without the need for debt financing in 2009. The deal is beneficial to all parties, and should also help boost Sistema's creditworthiness among investors. Other positive news regarding Sistema was the announcement of the sale of a 50 percent stake in LD operator MTT for $54 million and antimonopoly clearance for Sistema to raise its stakes in 5 Bashkir oil companies.

The market was anxiously awaiting the first data on Russian consumer behavior since the start of the economic downturn, and in early March MTS delivered its long awaited financial report on the Q4. The main thing to take away from the report is that usage has continued to rise, while prices fell as customers found less expensive ways to communicate. The MTS management added to the results that revenues had stabilized during the first two months of 2009, especially among business customers

VimpelCom's strong performance was more surprising since the company has been locked in a shareholder conflict. In March, that conflict gain momentum as an Omsk court attached a 30 percent stake in VimpelCom owned by Telenor. The shares might be sold on the open market to compensate the $1.7 billion damages that the court ordered Telenor to pay VimpelCom. The potentially severe share overhang threat and VimpelCom's shares performed as well as its nearest rival, MTS. More information on this is expected in the upcoming month when VimpelCom delivers its Q4 results. There is little reason to believe that these results will be any weaker than the MTS results. On the contrary, since VimpelCom has fewer business customers and more mass market clients, which is the right segment to be exposed to during an economic downturn.

Of course, the new management's comments about customer behavior in the first two months of 2009, will also be very important, though these are expected to be positive. The only caveat concerning VimpelCom's results is the possibility of massive financial write-downs that are of non-cash nature and thus should not be a concern to investors. It is unlikely that VimpelCom's management will be able to predict the outlook for 2009, as it is still unclear how deep the pockets of Russian consumers will be in 2009, and how highly they place the use of mobile services in their pyramid of needs. Given the already low expectations, there is good chance that reality might not be quite as harsh as financial markets are pricing in and therefore we believe investing in Russian telecom stocks offers a good risk/reward balance for investors.