Vodafone’s future in India in doubt after latest setback

Vodafone said its future in India could be in doubt unless the government stopped hitting operators with higher taxes and charges, after a court judgement over licence fees resulted in a 1.9 billion euro group loss in its first half. Chief Executive Nick Read said India, where Vodafone formed a joint venture with Idea Cellular in 2018, had been “a very challenging situation for a long time”, but it remained a sizable market where Vodafone had a 30% share.

“Financially there’s been a heavy burden through unsupportive regulation, excessive taxes and on top of that we got the negative supreme court decision,” he said on Tuesday.

Vodafone had asked the government for a relief package comprising a two-year moratorium on spectrum payments, lower license fee and taxes and waiving of interest and penalties on the Supreme Court case, which centred on regulatory fees.

Asked if it made sense for Vodafone to remain in India without any relief package, he said: “It’s fair to say it’s a very critical situation.”

Read said Vodafone was not committing any more equity to India and the country effectively contributed zero value to the company’s share price.

Vodafone’s shares were up 0.6% at 161 pence as investors focused on an upgrade to its earnings forecast rather than India.

Vodafone, the world’s second largest mobile operator, reported improving organic revenue growth as it saw signs of improvement in Spain and Italy and as it integrates its German cable acquisition.

It reported organic service revenue growth of 0.3% in the first half, as it returned to growth in the second quarter, while organic core earnings rose 1.4%.

It increased its forecast for adjusted core earnings to 14.8-15.0 billion euros from its previous forecast of 13.8-14.2 billion euros, but said India and lower cash flows following the sale of assets in New Zealand meant free cash flow would be “around” 5.4 billion euros, rather than “at least” 5.4 billion euros, as it previously forecast.

Read said he was pleased with progress in executing his strategy.

“This is reflected in our return to top-line growth in the second quarter, which we expect to build upon in the second half of the year in both Europe and Africa,” he said on Tuesday.

Read cut Vodafone’s dividend for the first time in May after tough market conditions and a need to invest in its networks and airwaves caused him to backtrack on his pledge not to reduce the payout.

But it tempered it forecast for free cash flow to “around” 5.4 billion euros, from “at least” 5.4 billion euros, as it said lower cash flows from India and the sale of New Zealand offset the initial accretion from its Liberty Global acquisition.

Shares in the firm have recovered 30% from a trough since the dividend cut.

Virgin Media, which offers cable TV and broadband services, pioneered the mobile virtual network operator (MVNO) model, whereby a company offers own-branded mobile on an established partner’s network.

It has used BT’s EE network for nearly 20 years, including before BT owned it, but its customers will be switched onto Vodafone’s network in 2021 after the company won the new contract.

BT, Vodafone and Telefonica’s O2 have all launched 5G services for their own customers, and Hutchison-owned Three has a 5G home broadband product.

MVNOs typically target the value segment and rarely lead with innovations like 5G, which requires an expensive compatible handset and a top of the range contract.

A source close to BT said the company was not prepared to offer Virgin the mix of technology and data it wanted at the price it was willing to pay.

Virgin wanted significantly higher data allowance growth, requiring more investment, and 5G from the start of the contract, which would have eroded BT’s technological advantage, the source said.

Jefferies analyst Jerry Dellis said Vodafone was likely to have offered much cheaper pricing than BT was willing to concede. “That represents a material strategic shift for Vodafone, which previously stressed the importance of not allowing MVNOs to undermine retail pricing levels,” he said.

The market was exaggerating the impact for BT, he said, calculating that free cashflow would be reduced by about 100 million pounds, or 4% of the total forecast in 2023.

Vodafone had largely shunned major MVNO in its home market, unlike rivals such as BT’s EE and Telefonica’s O2, which provides the network for Tesco Mobile and Sky Mobile.

Reuters