Gains in India Reward Vodafone’s Continued Ambitions

The Operator Is Enjoying Solid Growth in the Market

One market in the Vodafone group stood out for strong performance amid the company’s generally downbeat set of financial results for its fiscal 4Q13/14 that ended 31 March.

On a call for analysts, CEO Vittorio Colao described India as one of its success stories of the past year. Service revenue in the region was up by nearly 12% in the final quarter of the group’s fiscal 2013/14. This was the fourth consecutive period of double-digit growth for an operation that has, until recently, endured a turbulent time.

Vodafone India has more than 160 million subscribers, which represents nearly 40% of the group total. The company has about 40 million more customers in India than its entire European coverage, and recent solid growth in the market has been offsetting some of the decline Vodafone continues to see in Europe, where it was forced to write down £6.6 billion of assets.

However, competing in India has been far from plain sailing. The large number of rival operators resulted in a brutal price war that has hit profits for all players. Average monthly spending per customer is still just 192 rupees (€2.4), and the market is about 95% prepaid — India represents a large share of customers but accounts for only about 10% of service revenue. Leading European markets such as Germany and the UK still make up a large proportion of Vodafone’s service revenue despite the well-documented challenges in these countries (see charts below).

In addition to tight margins and low tariffs, Vodafone has been embroiled in a lengthy tax dispute which dates back to its original purchase of Hutchison Essar in 2007. Earlier this month, the company sought international arbitration against the Indian government after talks failed to find a solution.

However, market conditions in India are finally improving. Tariffs appear to have reached their lowest as Vodafone again said that price per minute increased during the last quarter. Data from GSMA Intelligence reports that the market share of India’s leading three operators (Bharti Airtel, Vodafone and Idea Cellular) grew from 53% to 56% over the last 12 months, a sign that the biggest players are finally beginning to dominate.

Recent legislation increasing the market share limit of merged companies could trigger a wave of consolidation. This would be positive for Vodafone as a smaller number of competing players should help accelerate tentative moves to increase prices. In February, Bharti Airtel had already agreed to buy smaller rival Loop Mobile.

Vodafone is rumoured to be considering a major acquisition in India, and could use some of the proceeds from its exit from Verizon Wireless to buy Tata Teleservices. This would create a new leader in the world’s second-largest mobile market. Such a deal would tap into the high growth potential of emerging markets, consistent with one of Vodafone’s principal strategies. This was reinforced by Mr Colao during the annual results presentation.

Vodafone took advantage of another relaxation in Indian law to acquire full ownership of its local subsidiary last month. The £1 billion deal to buy the remaining 15% shows the company’s optimism for further growth in India and follows the purchase of 3G and 4G spectrum in February 2014.

India is enjoying encouraging economic performance, which is underlying the more upbeat outlook for the telecoms sector. Vodafone recently said that it expects real GDP in India to grow faster than in its other leading emerging markets of Turkey, Egypt and South Africa.

Vodafone clearly has strong ambitions in India. It is accelerating network roll-out as part of a drive to become market leader in mobile data. Its 3G customers are already using an average of more than 700MB of data per month, higher than in most European markets. Vodafone has developed a convergent strategy aimed at increasing its share in the enterprise market, supported by a 14,000-kilometre fibre network and ambitious plans to deploy small cells. The recent launch of the successful M-Pesa mobile payment service in India offers another growth opportunity.

Vodafone has endured a rocky road in India and it would be naive to suggest that the operator will not continue to face significant challenges. However, its patience is finally showing some reward and the market’s huge potential offers relief at a time of continued pressure in its core European markets.