Rostelecom Reports 10% Net Profit Growth in Q1
Rostelecom's net profit under IFRS in Q1 grew 10% year-on-year to RUB 7.44 billion. Revenue also increased by 10% to RUB 210 billion, mainly driven by a 24% rise in digital services income.
The Digital Facade: Why Rostelecom's 10% Profit Growth Is an Illusion Masking a Cash Crisis
The Real Story
Rostelecom reported a 10% increase in net profit for Q1 2026, reaching RUB 7.44 billion. Forum crowds are already buzzing about a "turnaround" and "dividends." But as someone who looks beyond the company's press releases and focuses on cash flow figures, I see the exact opposite. What has been presented as success is actually a sign of structural weakness disguised as positive news. Profit growth was achieved through aggressive cuts to the investment program (CAPEX down 35% year-on-year), not through operational efficiency. It's like a farmer reporting a record harvest while failing to mention he left half his fields unseeded and sold the tractor.
Timeline and Context: Why 10% Growth Is Not an Achievement
To understand the drama, we need to go back to 2025. That year, with revenue of RUB 872.79 billion, Rostelecom's net profit plunged 22% to RUB 18.715 billion. The state-controlled company found itself trapped by high interest rates. Now, Q1 2026 shows profit up 10% year-on-year. That sounds like a recovery. But the comparison base is a disastrous Q1 2025. A bounce from the bottom is not growth. The median analyst target for shares remains around RUB 70, and even bullish analysts maintain a "buy" rating with a one-year horizon. But dig deeper: the company generated negative free cash flow (FCF) of RUB 5.6 billion. Yes, that's better than the negative RUB 20.8 billion a year earlier, but it's still negative. The business is burning more cash than it earns. A 14% rise in OIBDA to RUB 83.87 billion looks impressive until you look at interest expenses.
Winners and Losers
The main beneficiary is the state as a customer. Rostelecom has been appointed the sole contractor for connecting schools to the internet in 2026–2027. Digital services revenue surged 24% to RUB 43.4 billion, thanks largely to government contracts and the Gosuslugi platform. So the 10% revenue growth is not a victory in a competitive market but the result of administrative leverage.
The main loser is the minority shareholder. Here's an insight that isn't obvious on the surface. The company's debt stands at RUB 712.3 billion—a colossal sum. Quarterly interest expenses amount to RUB 30.1 billion, almost the same as a year earlier (RUB 29.9 billion). The key rate has already dropped by 7.5 percentage points, but Rostelecom hasn't felt it. Why? Because the debt is long-term and expensive, with limited refinancing options. The company's operating profit is about RUB 138 billion annually, of which nearly RUB 122 billion goes to debt servicing. That's a massive leverage that eats up any profit. A net profit of RUB 7.4 billion per quarter is a statistical error given the scale of debt and revenue.
What the Media Leaves Out: The IPO Carrot and Pitfalls
Mainstream media talk about "digital services" and "stability." They omit three critical risk factors.
First, the 35% CAPEX cut to RUB 28.6 billion is a time bomb. Rostelecom is saving on infrastructure to show improved cash flow. Amid the AI boom and rising server equipment costs, underinvestment means losing competitiveness in 2–3 years. The annual CAPEX target is 20% of revenue, but in Q1 it was only 13.7%. This means the company will have to ramp up investments sharply in the second half, sending free cash flow deep into negative territory again.
Second, the "carrot" of an IPO for subsidiaries. The market hopes that listing RTK-DC or other "daughters" will bring cash and reduce debt. But BCS analysts point out that RTK-DC's Q1 performance was weak—revenue did not grow and even fell 1%. Taking a company with negative revenue growth public under current conditions is nearly impossible. This means the "rescue IPO" could be postponed indefinitely.
Third, the dividend trap. The state, as the controlling shareholder, demands 50% of net profit be paid out. After a disastrous 2025, dividends are expected at RUB 5–6 per share, yielding 9–11%. MTS, with similar metrics, offers 15–16% yield. Holding Rostelecom shares for dividends means consciously choosing lower returns with higher debt risk.
Forecast: Next 30 Days and 90 Days
Next 30 days (until mid-June 2026):
Range of RUB 65–72 per ordinary share. A short-term spike is possible if the company announces dividends for 2025 by the end of May. Analysts already have a target price of RUB 70, and the market may try to reach it. But this will be a speculative wave, not a fundamental turnaround. Trading volumes will remain low, and institutional investors will continue to wait for clarity on cash flow.
Next 90 days (until mid-August 2026):
Turbulence zone. By mid-August, Q2 results will be released. I expect CAPEX to start moving toward the target of 20% of revenue, which will worsen FCF again. If interest expenses remain at RUB 30 billion per quarter, net profit could turn zero or even negative. The Net Debt/OIBDA ratio stays at 2.1x—acceptable for a telecom, but only if rates continue to fall. A pause in monetary easing, as warned by Freedom Finance analysts, could trigger a risk reassessment. If the IPO of subsidiaries is officially postponed, shares could fall below RUB 60.
Summary: Rostelecom's 10% net profit growth is a facade. Behind it lies a business with a giant debt of RUB 712 billion, negative cash flow, slashed investments, and a phantom hope for an IPO of its subsidiaries. This is not an investment but a bet that the state will continue to pour money into its favorite at the expense of minority shareholders. Until the company generates sustainable positive cash flow and refinances its expensive debt, the shares remain a speculative instrument for the patient, not an asset for earning.
— Editorial Team
