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| India biz weighs down Vodafone's books |
| Katya B Naidu / Mumbai Sep 10, 2010, 01:42 IST |
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British telecom major Vodafone Plc’s Indian telecom operations turned cash-positive in the last quarter ended June. But the relief was short-lived, as this year the parent company has had many bad experiences in India.
Yesterday, a Bombay High Court verdict went against the company, in its battle against the Income Tax department. This is the third time an Indian court ruled against the company and the fresh judgment could result in a tax liability of Rs 12,000 crore.
“The matter has not been decided in finality as of date. But if Vodafone has to pay this kind of a tax, it will definitely be a huge setback,” said an analyst who refused to be identified.
But Vodafone had a taken bigger hit thanks to competition and rate pressures in India. Three months back, the British major wrote down the value of its Indian operations by Rs 15,156 crore.
This depression in asset value, the company said, was because of change in business conditions in India, ever since it acquired 67 per cent stake in Hutch Essar for $11.2 billion, since re-named Vodafone Essar. Vodafone Essar is now the second largest telecom company in India with a subscriber base of over 100 million.
All the major telecom companies in India have suffered due to the entry of six new telecom players who have been reducing rates to get market share. This has triggered a rate war, leading to margin cuts across all incumbents. Vodafone was no exception.
“So far, it has not been turned out to be a great investment for Vodafone Plc. It seems that Hutch made a very smart move when they sold in the peak and since then valuations and market cap has only gone down,” said Sanjay Chawla, research analyst at Anand Rathi.
In addition, Vodafone recently paid Rs 11,617 crore to acquire 3G spectrum licences in nine circles.
While this will give an edge to the company to provide high-end services to their subscribers and help them remain competitive, it will also increase interest costs and depreciation, thereby reducing any possibility of a quicker turnaround.
Last quarter, service revenues from India increased by 26.4 per cent to £954 million (Rs 6,868 crore). But analysts say the Indian operations were cash-positive because their 2G capex investments were low. After investments in 3G technology, its capex would increase again. “I don’t think cash flow is sustainable after 3G investments,” said Chawla.
While profitability has clearly reduced, the outflow from the parent company has increased in value. This year, Vodafone hiked the value of put option by Rs 3,400 crore; which is available to Essar, a 33 per cent partner in its Indian joint venture.
According to the agreement signed at the time of the acquisition, if Essar decides to sell its shares to Vodafone, then the valuation will be independently appraised based on the fair market price.
As the company decided to acquire 3G licences and Essar was unhappy with the aggressive bidding, Vodafone had to make this adjustment to the floor price.
This amount is payable only if Essar decides to exercise its put option by next year. An official from Essar who refuses to be identified, said these issues would not have any effect on the operations of Vodafone Essar.
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