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Vodafone India: On a strong wicket despite tax twist

July 31, 2012
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Vodafone India is a key example of successful foreign investment in India. Legal tangles and an uncertain regulatory environment notwithstanding, Vodafone India has secured its place among the country’s top three telecom companies and is the largest operator in revenue terms.

Unlike many of its rivals, which have been reporting declining net profits, Vodafone India closed the year ended March 31, 2012 on a positive note, with a 19.5 per cent growth in service revenues, from Rs 269.37 billion in 2010-11 to

Rs 321.84 billion in 2011-12. The company also witnessed a strong cash flow – an operating free cash flow of Rs 42.41 billion in 2011-12 as compared to Rs 32.56 billion in the previous year. The operator’s earnings before interest, taxes, depreciation, and amortisation grew by 21.6 per cent from Rs 70.30 billion in 2010-11 to Rs 85.49 billion in 2011-12.

“We have had a really good year with a very strong operational performance, continued revenue market share (RMS) growth and an improvement in margins. The new circles have performed very well and we now have over 10 per cent RMS in four of the seven circles,” says Marten Pieters, managing director and chief executive officer (CEO), Vodafone India.

Globally, the Vodafone Group’s Indian business is performing at par, if not better, with subsidiaries in other countries. According to a company release, Vodafone India was the sixth largest revenue contributor for the Vodafone Group in 2011-12. The core profits from India operations grew by 21.6 per cent over 2010-11 to reach Rs 85.49 billion.

Therefore, India will continue to be an important market for the Vodafone Group. “We have a long-term commitment to the Indian market and aim at enhancing its contribution to the group’s overall growth and development,” says Pieters.


Vodafone entered the Indian telecom space in 2007 by buying Hutchison Telecommunications International Limited’s 67 per cent stake in Hutchison-Essar from Li Ka Shing Holdings (the chief promoter of the Hutchison Group) for $11.1 billion. The transaction was completed on May 8, 2007.

Hutchison Whampoa, the company’s former promoter, had entered the Indian market in 1992. Initially, it tied up with local partners to establish a company to provide GSM services in Mumbai. Commercial operations were launched in 1995. Between 2000 and 2004, the company expanded its presence to 13 of the 23 telecom circles. By 2008, the operator had established a pan-Indian presence.

After Vodafone’s acquisition of Hutchison’s stake, the company came to be known as Vodafone Essar. Over the years, differences arose between Vodafone and the Essar Group, and in July 2011, the Essar Group exited the venture, selling its 33 per cent stake in the company. In August 2011, the Piramal Group picked up about 5.5 per cent of the issued share capital of Vodafone India from Essar. Recently, it paid Rs 30 billion to pick up an additional 5.5 per cent stake in Vodafone India  through Piramal Healthcare, thereby taking its total stake in the company to 11 per cent.

Currently, Vodafone Plc owns 64 per cent stake in Vodafone India, Analjit Singh and IDFC hold 25 per cent, and the Piramal Group owns 11 per cent.


Vodafone, the world’s leading telecom operator, brought to the company its global expertise and financial strength. This led to the company scaling new heights.

“Vodafone has been very competitive since its entry into the Indian market. It has developed a brand name for itself by offering quality services to users,” notes Kunal Bajaj, an independent consultant and entrepreneur.

As on May 31, 2012, Vodafone India had a user base of 152.48 million, comprising a market share of 16.41 per cent. It trailed Bharti Airtel and Reliance Communications (RCOM), which had a subscriber base of 185.30 million (19.94 per cent market share) and 154.05 million (16.58 per cent) respectively.

Vodafone’s strategy for the Indian market includes tapping high-value users, aggressive branding and marketing initiatives, and a strong enterprise service portfolio. “Vodafone is viewed by the industry as the leader in terms of offerings for high-end users,” says Bajaj.  “Even though Bharti Airtel is the market leader, Vodafone has a larger proportion of higher-ARPU users owing to its product portfolio.”

Having crossed the 150-million subscriber mark in the last quarter of 2011-12, the operator is on a strong wicket in terms of operations. The company registered an ARPU of Rs 180 per month for the quarter ended March 2012. This is higher than the all-India blended ARPU of Rs 96 per month.

Unlike competitors such as Bharti Airtel, RCOM and Tata Teleservices Limited, which are integrated players, Vodafone India has preferred to remain a pure-play GSM operator. Though industry analysts have been concerned that this may prove to be limiting for the company given the intense competition in the sector, Vodafone India has continued to register steady year-on-year growth.

“Vodafone India is neither a converged operator nor a fixed line player. Also, its efforts in the enterprise segment are focused on voice and the company is not offering significant enterprise data. Despite this and the fact that it did not have a pan-Indian presence for long, the operator has managed to maintain its third rank in the market,” says Bajaj.

Most industry experts agree that high-ARPU customers and a strong brand image are Vodafone India’s key strengths. “It is also doing well in terms of revenues and market share. In fact, in terms of revenues, Vodafone is nearly twice as big as RCOM,” says Dr Mahesh Uppal, director, ComFirst.

The introduction of mobile number portability has also worked to the company’s advantage and Vodafone India, along with Idea Cellular, has received the highest number of port-in requests, according to industry estimates. As of March 31, 2012, Vodafone India had received 1.7 million net port-in requests.

In terms of infrastructure, the operator currently has more than 80,000 sites across the country and supports over 1.4 million small businesses. So far, the Vodafone Group has invested Rs 500 billion in the Indian market. Since 2007, it has contributed Rs 450 billion to the exchequer.

3G outlook

Vodafone India launched commercial 3G services in February 2011. Over the past year, it has witnessed an increase in data revenues. For the quarter ended December 2011, data revenues grew by 29 per cent (year on year) to Rs 6.47 billion. Currently, the company provides 3G services in 683 towns and cities across 20 circles. As of March 2012, Vodafone India’s data service subscriber base stood at 35.4 million.

Despite the initial positive response to 3G, the uptake of these services has been slow. This is largely owing to high and complicated tariff plans, poor coverage and lack of affordable devices.

To make good the high investments in acquiring 3G licences and to provide a fillip to these services, most operators cut down 3G tariffs sharply in June 2012. Vodafone became the fourth telecom service provider after Bharti Airtel, Idea Celluar and RCOM to slash 3G tariffs by as much as 80 per cent. It also launched 13 new 3G data plans, which are priced at between Rs 25 and Rs 1,599 and entail data usage of 25 MB-12 GB with a validity of 1-30 days.

To make the services more affordable, the operator also plans to allow its customers to use data from their bundled package while on data roaming without any additional charges.

Meanwhile, there may be some respite for mobile operators, including Vodafone, in the long-standing 3G roaming agreement issue. The Telecom Disputes Settlement and Appellate Tribunal (TDSAT) has given a split verdict on the petition filed by the operators in response to a government directive asking them to stop offering 3G services beyond their licensed circles through roaming agreements. Companies like Bharti Airtel, Vodafone India and Idea Cellular are currently providing 3G services across the country through mutual agreements. These operators claim that their roaming pacts are in compliance with the stipulations of the current telecom licences. In 2011, the Department of Telecommunications (DoT) had said that such roaming agreements were illegal as they were tantamount to the operators functioning as mobile virtual network operators, which is not permitted as per the licence conditions. In its verdict, TDSAT has said that the operators and DoT should approach a high court. Also, TDSAT has permitted the operators to continue providing roaming services until a final decision is taken by the high court.

Issues and challenges

Vodafone, the biggest overseas corporate investor in India, has grown rapidly since its entry into this market in 2007, but it has had its share of challenges.

Apart from market competition and escalating spectrum costs, the operator faces a tax bill of Rs 200 billion, including interest and penalties, for its 2007 acquisition. Also, there seems to be no end in sight to the long-standing tax issue. In January 2012, the Supreme Court exempted Vodafone from paying $2.3 billion as capital gains tax on the 2007 transaction, the agreement for which was signed outside the country.

However, while presenting the union budget for 2012-13, then finance minister Pranab Mukherjee proposed to retrospectively amend the Income Tax Act from April 1962 in order to levy tax on cross-border deals involving overseas companies for assets based in India.

The proposed amendment could have a huge financial implication for the company. Recently, Vodafone sent the government an arbitration notice under the India-Netherlands bilateral investment protection agreement. The interministerial panel established to file a reply to Vodafone India’s notice has reportedly decided against providing any relief to the operator. The final call on the notice will be taken by the Prime Minister’s Office.

Spectrum pricing is another area of concern for the operator, particularly with the Telecom Regulatory Authority of India’s (TRAI) proposed base price of Rs 36.22 million for 1 MHz of pan-Indian 2G airwaves in the upcoming auction. This base price is around ten times higher than the price of the 2G licences allocated in 2008.

Senior officials from Vodafone India, Bharti Airtel, Uninor, Videocon and Idea Cellular have written to minister of communications and IT Kapil Sibal stating that the guidelines are “retrograde” and will adversely affect the industry. They have requested the minister to reduce the reserve price by 80 per cent. They have also stated that TRAI’s proposed spectrum price may lead to a 25-30 per cent increase in call rates.

Another point of contention is the TRAI recommendation on re-farming spectrum in the 900 MHz band. This will have major cost implications for existing operators. Currently, DoT is working on a proposal that will see existing telecom operators free up a part of their spectrum to the government for re-farming.

An empowered group of ministers (EGoM) has been established to settle the controversies related to spectrum pricing, re-farming, the one-time market-determined fee for excess spectrum over 4.4 MHz or 6.2 MHz, among others, prior to spectrum auctions.

Moreover, the TRAI recommendations for a high base price for spectrum auction and redistribution of spectrum have reportedly delayed the company’s plans of issuing an initial public offering.

Industry view

According to analysts, the tax issue is unlikely to have any major impact on Vodafone’s operations. “Tax-related issues will have little impact on Vodafone’s position in the country. Most global corporates are quite capable of handling such issues. It is not a big crisis for Vodafone. Also, I do not see it impacting the Indian telecom sector,” says Uppal.

According to market experts, the issue of retrospective taxation is not limited to Vodafone, it will apply to all potential foreign investors. “The only concern for Vodafone will be the potential impact of the tax issue on its return on investment. Again, developments related to retrospective taxation are not something that Vodafone had foreseen. It is not a positive development, but, having said that, the issue will not have any adverse impact on the company’s operations. It is just a setback that it will have to deal with,” says Bajaj.

However, Harish Bijoor, brand expert and CEO, Harish Bijoor Consults Inc., believes that the tax issue will impact the company. “India is not a market that the company can ignore. There is too much at stake here despite the low ARPUs,” he says.

There is no denying the fact that Vodafone India has a lot going for it. It has been able to retain its position in the market owing to its first-mover advantage in several areas. Also, the company has the ability to stand out from others and enjoystrong brand recall.

Nevertheless, there are a few issues that the operator must address. “Once the legal issues are addressed, Vodafone will be a force to reckon with in the Indian market. The ideal strategy for the next two years should be to insulate itself. It might want to create a separate response cell that handles the tax issue and a separate business unit that looks after its operations,” notes Bijoor.

According to Uppal, Vodafone should concentrate more on strategy than on tactics. “In the recent past, its argument over the increase in tariffs as a result of the higher reserve price for spectrum auction was not strictly accurate. In the long run, this tactical approach does not help operators. Instead, Vodafone’s focus should have been on affordable spectrum,” he says.

According to analysts, the company’s key thrust area should be to improve data revenues and ARPUs. “These areas are going to grow hand in hand. Today, voice has become a commodity and there is  competition in this segment. It will not contribute significantly to operator revenues. Operators now need to start concentrating on other revenue sources. These include data and 3G services,” says Bajaj.

The way forward

According to Pieters, going forward, Vodafone India will focus on leading core businesses in the consumer and enterprise segments, increasing the uptake of mobile data and m-finance services, etc.

Providing 4G services is another priority, especially given Vodafone Plc’s extensive experience in this space. “We are interested in providing 4G services as and when we obtain spectrum. However, it is very premature to comment on this at this stage,” says Pieters.

Tapping rural areas and expanding the enterprise business segment are also on the operator’s to-do list. It is currently developing a profitable business model for the rural segment.

Recently, the company announced its plans of expanding its enterprise business in the country. To this end, it recently launched the customer experience centre for enterprises in Mumbai. The service provider plans to extend these facilities to other parts of the country as well.

Therefore, Vodafone is clearly a long- term player with major advantages. It may not occupy the top spot in subscriber terms, which industry experts say is not the company’s priority, but it is certainly placed strongly in terms of maximising its revenue market share

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