Vodafone Group has recently revealed some disturbing facts about its operations in the Indian telecom market.
What’s alarming?
CEO Vittorio Colao said that the overall performance of the Vodafone Group in the first half of the current financial year has been modestly ahead of its expectations. Europe is performing ahead of plan. However, competitive intensity in India, one of the main markets for Vodafone Group, due to the entry of Reliance Jio Infocomm has increased.
Incidentally, Reliance Jio has added nearly 30 million 4G subscribers thanks to its free offers that will be on till 31 December 2016.
Vodafone has posted operating loss of €4.7 billion, compared to an operating profit of €1.1 billion, due to the €6.4 billion gross impairment charge recorded in respect of its investment in India. Lower EBITDA, partly offset by lower depreciation and amortisation charges, lower restructuring costs and the improved financial performance of our Australian joint venture also contributed to loss.
EBITDA of Vodafone decreased 1.1 percent, including a 10.3 percentage point adverse impact from foreign exchange movements. On an organic basis, EBITDA grew 9.2 percent, driven by growth in all major markets. Vodafone recorded a non-cash impairment of €5.0 billion, net of tax, in the period relating to Indian business.
During the six months ended September 2016, an impairment charge of €6,375 million (2015: €nil) was recorded in respect of the investment in India which, together with the recognition of an associated €1,375 million deferred tax asset, led to an overall €5 billion reduction in the carrying value of Vodafone India.
Vodafone said the impairment charge relates to goodwill, other intangible assets and property, plant and equipment. The impairment charge was driven by lower projected cash flows within the business plans resulting from its reassessment of expected future business performance following the recent change in competitive dynamics.
A new entrant – Reliance Jio — has launched free trial services for an extended time period and commercial price plans that were at a significant discount to prevailing market pricing, resulting in competitive responses from other operators.
“This has created a high degree of uncertainty over a range of commercial planning assumptions including future pricing, profitability and market structure. There are a range of potential outcomes which the group has had to assess to derive its current view of future business performance and cash flows for impairment valuation purposes,” said Vodafone.
“What’s happening in India is interesting. You have somebody (Jio Infocomm) who invests $25 billion in a market whose EV is not known to me. It’s basically a massive investment relative to the size of the market,” said Vittorio Colao.
Vittorio Colao during an analyst call said a couple of telecom players are investing in India. Airtel, the market leader, is basically digging their heels in and Vodafone is strengthening its position a little bit more selectively.
“I think consolidation is the answer and there will be pressure on unit prices, not necessarily clients of ours are pushed but definitely there will be bigger volumes of minutes, bigger volumes of data, there would be a challenge on how to serve this from an Opex point of view but you cannot defy the rules of economics. The marginal players on the cost curve will eventually have to consolidate and so it will work back into the metric,” said Vittorio Colao.
Vodafone data user base dips
Vodafone India’s service revenue grew 5.9 percent against 6.4 percent in Q1 and 5.4 percent in Q2. The slowdown in Vodafone revenue was mainly driven by lower data revenue growth resulting from increased competitive pressure. Data revenue growth slowed from 22 percent in Q1 to 16 percent in Q2. This was driven by a flattening of unique data user growth, reflecting the impact of free offers from Jio.
Vodafone’s data customer base fell to 69.6 million from 69.7 million. Data pricing of Vodafone declined 14 percent, while data usage per customer grew 28 percent to 504MB. 3G / 4G customer base rose 51 percent to 36 million, while smartphone penetration is 35 percent.
Voice revenue growth increased to 2.7 percent in Q2 from 2.2 percent in Q1 supported by a growing customer base. Mobile customers increased 2.8 million to over 200 million for the first time.
Vodafone added 4,100 new 3G sites, taking the total to 63,000. Vodafone has 13,000 4G sites. In the Indian spectrum auction during October Vodafone increased total spectrum holding by 62 percent.
Vodafone plans to extend 4G footprint from 9 to 17 circles by the end of the current financial year. These circles cover around 91 percent of its service revenues and 94 percent of data revenues.
Vodafone India EBITDA grew 2.6 percent, with the EBITDA margin declining by 0.1 percentage points to 29.6 percent due to higher network and customer acquisition costs, which were largely offset by significant operating cost savings.
Baburajan K
[email protected]
