Friday, May 21, 2010

Vodafone - India is proving moreexpensive and too competitive to deliver expected benefits

[business week] For Vodafone Group Plc Chief Executive Officer Vittorio Colao, India is failing to become the emerging-market powerhouse the company had hoped for.

When the world’s biggest mobile-phone operator agreed to buy a 67 percent stake in Hutchison Essar Ltd. for $10.7 billion in 2007, it predicted “major contributions.” Instead, Vodafone yesterday booked a $3.3 billion charge for the unit, citing “intense price competition.”

“India continues to look a fiasco,” said Mark James, an analyst at Liberum Capital in London. “There’s no doubt that regulation and competition have moved against them since they went into the country.”

Vodafone’s difficulties in India, like those of Norway’s Telenor ASA, show the pitfalls of expanding in emerging markets as European phone companies counter slower growth at home. Vodafone’s outlook for India soured a year after its entry, when six new national licenses were awarded. Price competition has pushed call rates to among the cheapest in the world. India’s seven largest operators face rates of less than 1 cent a minute.

New operators “triggered very strong price declines,” Colao told reporters yesterday. “We are recognizing the pricing environment is different from what we had put in the acquisition business case.”

Vodafone shares fell 3.1 pence, or 2.3 percent, to 132.9 pence as of 3:07 p.m. in London trading. The stock has fallen 7.5 percent this year.

Seeking Partners

Vodafone may have to adjust its spending and seek partnerships with other operators to battle increased competition and rising spectrum auction costs, he said.

“They’ve had network-sharing agreements in many other markets, and this is a potential way of avoiding auction prices getting out of control in India,” said Paul Marsch, an analyst at Berenberg Bank in London.

Colao, the 48-year-old former McKinsey & Co. partner who took over in July 2008, is tweaking his predecessor Arun Sarin’s strategy. Under Sarin, Vodafone entered markets such as India and Turkey to counter a slowdown in Europe. Colao is pushing managers to eke out more profit from existing operations.

Newbury, England-based Vodafone and rivals are struggling to live up to investors’ expectations in India after growth in the world’s second-largest wireless market attracted a flurry of global companies, eroding prices and pushing up license fees.

Capital Expenditure

Telenor, the Nordic phone company that also made an Indian foray with the purchase of a majority stake in Unitech Wireless, on May 5 reported first-quarter income that missed analyst estimates as it extended spending on India.

Spending on capital expenditure and investment will be “compatible with the new environment,” Colao said at a meeting with analysts yesterday.

After the Essar acquisition in 2007, Vodafone had started a joint venture with Bharti Airtel Ltd., India’s largest mobile-phone operator, to share phone towers to help cut costs.

“Having a tower company, sharing and collaborating on the infrastructure front is a mitigation, but for sure there is a limit,” the CEO said.

The overcrowded India market also includes Reliance Communications Ltd. and Japan’s NTT DoCoMo Inc. India’s mobile market is still growing. About 19.9 million new mobile-phone connections were added in January, a record, according to an estimate by Shubham Majumder, regional head of telecommunications research at Macquarie Group Ltd. in Mumbai.

License Bids

Vodafone bid 116.2 billion rupees ($2.51 billion) for licenses to offer faster wireless services, the Indian department of telecommunications said today. Vodafone won permits for nine regions, including Mumbai and New Delhi, the nation’s biggest cities with the most expensive permits.

Vodafone considered “where the auction will end up” when it took the impairment charge and included possible costs, Colao said yesterday.

The charges in India may threaten Vodafone’s financial targets, says Morten Singleton, an analyst at Collins Stewart in London. The impairment on India “suggests costs are being squirreled away as exceptional items,” he said.

The company yesterday said it targets an annual dividend per share growth of no less than 7 percent for the next three financial years after a 1.7 percent increase in full-year operating profit on job cuts and higher emerging markets sales. The dividend target “will prove much harder to achieve,” Singleton said.

Spectrum Costs

With spectrum costs increasing, there may be a time this year “we might be uncovered for the dividend,” Chief Financial Officer Andy Halford said yesterday.

Colao remains confident that the Indian investment was the right decision. “We are very glad we have established the joint venture, I think it is a very good thing,” he said yesterday.

In the 12 months ended March, Vodafone’s Indian unit kept its No. 2 position in the market as it won 32 million customers and in March exceeded the 100 millionth customer mark. Since its entry into India in 2007, the division gained about 1 percentage point annually in revenue market share and moved the business into operating free cash flow generation.

The expansion has come at a price. Vodafone said yesterday profitability in the Asia Pacific and Middle East region, based on earnings before interest, taxes, depreciation and amortization, fell in the year ended March by 2.2 percentage points, “primarily reflecting lower margins in India.”

Essar Option

Colao’s pledge to cut spending in India may be tested, with another $5 billion investment around the corner. Essar Group’s option to sell its remaining 33 percent stake in the mobile-operator to Vodafone for $5 billion opened in May for 12 months.

An Essar spokesman said this month that the company “is happy with its investment in Vodafone Essar” and that “a decision on exercise of the put, if at all it is exercised, will only be taken at the appropriate time.”

“You’ve had severe competition, you’ve got a lot of players, you are about to get a spectrum differential between operators,” said Guy Peddy, an analyst at Macquarie Securities in London. “The status quo is probably the one thing that is unsustainable.”

Vodafone’s Colao Seeks More Cuts After India ‘Fiasco’

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