Vodafone India: First Spain, then Turkey, now India. The subcontinent is the mobile operator’s latest problem area. Vodafone faces a price war, a $2 billion tax claim, and the exercise of a put option by local partner, the Essar Group. The extra costs of the 2007 deal which bought Vodafone the “crown jewel” of its global portfolio are now emerging.
Vodafone is India’s third largest operator with 70 million subscribers, and has tried to position itself as a premium brand. But it will find it hard to command premium pricing. Competitive pressure is bearing down on call charges, and this is likely to weigh on third-quarter results due on November 10. The major players have been using aggressive price cuts in a battle to grab market share before the arrival of new entrants awarded 3G licences by the Indian government. Results from Vodafone’s larger Indian rivals, Bharti Airtel and Reliance Communications, have shown the scars.
The pressure is unlikely to abate any time soon. India has 40 per cent mobile penetration and the market is gaining roughly 14 million subscribers a month. But the field is highly contested, with just 30 million subscribers between the second and sixth largest players. Vodafone’s ebitda margins are already low relative to peers as it is investing in its network.
Against that backdrop, Vodafone could do without some other big distractions. For starters, India is chasing Vodafone for $2 billion of unpaid taxes on its $11.2 billion acquisition of a 67 per cent stake in Hutchinson Essar. Vodafone says it is exempt from the charge as the stake sale took place between two off-shore entities. But the dispute threatens to drag on for three years. Investors may be nervous that Vodafone has not made a provision for the claim or any penalty fine, which could double the hit.
Then there’s the option that Vodafone gave Essar to sell its entire 33 per cent stake for $5 billion, or any amount between $1 billion and $5 billion at an independently appraised fair market trading value, in the twelve months running from May 2010. If Essar exercises the option, it could see Vodafone up its stake to the maximum 74 per cent threshold allowed for foreign operators. But the valuation is out of Vodafone’s hands.
Vodafone’s foray into India was by no means a mistake. And its problems there aren’t yet as bad as the difficulties it has suffered in Spain and Turkey — both relatively more mature markets where poor management or bad positioning cost Vodafone customers and led to impairment charges. Spain contributes 18 per cent of group ebitda, while India generates only 4 per cent. Investors will be hoping that the considerable management time being put into India will eventually pay off.
