Vodafone's complex valuation exercise

Worth of its Indian arm seems higher than initially thought but the final picture is still shrouded, a closer look shows

Vodafone's valuation of its Indian arm might be higher than it initially seemed, though the company itself preferred to keep the details unclear.

UK-headquartered Vodafone Plc was initially thought to be paying Rs 10,141 crore for a 35.62 per cent stake, to raise its equity holding from 64.38 per cent to 100 per cent.

According to Vodafone's application with the Foreign Investment Promotion Board (FIPB), reviewed by Business Standard, it also indirectly holds part of about 24.65 per cent of equity in Vodafone India which is currently owned by Indian investors.

In Vodafone India, Piramal Enterprises has 10.97 per cent. The remaining 24.65 per cent is held by Telecom Investments India Pvt Ltd (12.96 per cent), Usha Martin Telematics (6.07 per cent), Omega Telecom Holdings Pvt Ltd (5.11 per cent) and Jaykay Finholding (India) Pvt Ltd (0.51 per cent).

These four companies are indirectly owned and controlled by Scorpios Beverages Pvt Ltd, in which Analjit Singh and Neelu Analjit Singh together have 51 per cent stake. The remaining 49 per cent of Scorpios Beverages Pvt Ltd is owned by CGP India Investments Ltd, an indirect Mauritian subsidiary of Vodafone International Holdings BV.

According to Vodafone's FIPB application, CGP will buy the 51 per cent stake of the Analjit Singhs in Scorpios Beverages to have 100 per cent equity control. This will enable CGP, an indirect subsidiary of Vodafone International Holdings BV, to have indirect equity stake of 24.65 per cent in Vodafone India through the four subsidiaries of Scorpios Beverages.

And, Vodafone will buy the 10.97 per cent stake of Piramal Enterprises in Vodafone India through Prime Metals Ltd, a subsidiary of CGP (thus an indirect subsidiary of Vodafone International Holdings BV). Prime Metal already has a 1.53 per cent stake in Vodafone India. After the transaction, its stake will increase to 12.5 per cent.

If FIPB approves, foreign shareholders will directly own 75.35 per cent stake in Vodafone India and the remaining 24.65 per cent indirectly.

Vodafone has not cleared the confusion about how it has valued the Indian subsidiary and for how much direct equity stake it is paying Rs 10,141 crore. A spokesperson at Vodafone Plc declined comments on the valuation.

Vodafone, according to a report by Reuters, is paying the price for just 15.5 per cent stake in Vodafone India. In this case, Vodafone India is valued at Rs 67,606.66 crore.

This shows the valuation of the company has increased by 23.65 per cent since February 2012, when Piramal Enterprises bought a 5.5 per cent stake in Vodafone India for Rs 3,007 crore (the company was valued at Rs 54,672.72 crore that time). This also meets the expectations of the Ajay Piramal-controlled Piramal Enterprises, as it had said it expected to get a 17-20 per cent return on investment.

This valuation is also in sync with what Vodafone Group Plc had indicated in its 2012 annual report, stating the British company would pay Piramal Enterprises between Rs 7,000 crore and Rs 8,300 crore for its 11 per cent stake if the latter was not given an exit through an Initial Public Offering between August 18, 2013 and February 8, 2014 or if Piramal chose not to participate in an exit through IPO. This shows Vodafone Plc had benchmarked the valuation of its Indian entity entity between Rs 63,636 crore and Rs 75,454 crore.

Also, this valuation is 18.6 per cent higher than the Rs 57,000-crore valuation that Vodafone had paid Hutch in 2007 to buy 67 per cent stake in the company.

But, if the price is for more than 15.5 per cent, then the valuation would be different.

However, Vodafone Plc has still kept the valuation of its Indian entity at a much lower level, as compared to its peers in the market. India's largest telecom carrier (21.9 per cent market share with 192 million subscribers) Bharti Airtel's market cap is Rs 1,45,765 crore. So, as the second largest telecom operators in India with 17.6 per cent market share with 154 million subscribers, Vodafone's valuation is expected to be much higher. Idea Cellular, which has a 14.3 per cent market share with 126 million users in India, has a market cap of Rs 57,304 crore.

DIAL V FOR VALUE

• UK-headquartered Vodafone Plc was initially thought to be paying Rs 10,141 crore for a 35.62 per cent stake in its Indian arm, to raise its equity holding from 64.38 per cent to 100 per cent
• According to Vodafone's application with the Foreign Investment Promotion Board (FIPB), reviewed by Business Standard, it also indirectly holds part of about 24.65 per cent of equity in Vodafone India, currently owned by Indians
• If FIPB approves, foreign shareholders will directly own 75.35 per cent stake in Vodafone India and the remaining 24.65 per cent indirectly
• Vodafone has not cleared the confusion about how it has valued the Indian subsidiary and for how much direct equity stake it is paying Rs 10,141 crore