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Vodafone India: Scoring high

August 08, 2014
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The world’s largest telecom player, Vodafone Group Plc, lends strength to the widely held management strategy, under which global firms have forayed into emerging economies to drive profitability. Its 100 per cent subsidiary, Vodafone India, has had a very successful run in the Indian market since its entry in 2007.

Mumbai-based Vodafone India is today the country’s second largest telecom service provider, with a subscriber base of 168.27 million as of May 2014. The operator caters to about one-fifth of the Indian wireless market, second only to Bharti Airtel. In terms of revenue, it held a market share of about 24 per cent as of the quarter ended March 2014.

For the year ended March 2014, Vodafone India registered its first ever net profit from its Indian operations. It posted revenues of Rs 376.06 billion (an increase of 13 per cent) and earnings before interest, taxes, depreciation and amortisation (EBITDA) of Rs 133.99 billion (up 26 per cent). EBITDA margins have also risen by 3.1 percentage points to 31.8 per cent. Although the exact profit figures are not known as Vodafone is not listed in the country, its Indian operations are now the third largest contributor to the group’s overall revenues and operating cash flow and account for 10.1 per cent of its total revenues. The other two leading markets are the UK and Germany, which account for 14.7 per cent and 19.1 per cent respectively.

Vodafone India’s strong performance can be attributed to its well-defined strategies, which include targeting high-value customers, offering a strong enterprise portfolio and innovating on branding and marketing. Further, the operator’s investments of over Rs 500 billion in the country have helped it expand its geographical and service reach, apart from making inroads into the rural segment through its strong retail network.

In recent years, Vodafone has been actively promoting 3G services in line with the growing adoption of data services in the country. This has resulted in a 72 per cent increase in the operator’s data browsing revenues to Rs 34.36 billion, accounting for 10.7 per cent of the overall revenues. During 2013-14, the operator recorded  more than twofold growth in mobile internet usage. Data usage increased by 125 per cent during the year, primarily due to a 39 per cent increase in mobile internet users and a 67 per cent increase in per-customer data usage. The company’s 3G customer base also went up by 114.8 per cent. Currently, the operator has 52 million data users (31.2 per cent of the base), of which 7 million are 3G users. The exemplary growth achieved by the operator in the data segment is no mean feat given that it holds 3G spectrum in only nine circles in the country and 3G intra-circle roaming (ICR) was not allowed. With the ban on 3G ICR being lifted in April 2014, the company can expect to attract more data users to its network.

Strong performance

Besides registering outstanding financial performance, Vodafone India witnessed significant growth on the operations front. Its extensive retail network has helped the service provider to add 14.2 million mobile customers during 2013-14, thereby increasing its subscriber base to 168 million as of May 2014. According to a company spokesperson, “Vodafone India has one of the largest retail footprints in the country, covering 8,500 stores. On an average, it serves 5.5 million customers each month across 23 circles. In terms of rural operations, it catered to about 24 per cent of the total Indian rural user base as of December 2013. The company attributes its success in rural areas to its aggressive marketing strategies and a customised distribution model aimed at shoring up sales in the rural market. Vodafone’s retail strategy in the rural areas included the setting up of associated distributor Vodafone mini stores, commonly known as Laal Dukaan.

Further, in 2013, Vodafone launched its popular M-Pesa service, which is expected to play a key role in financial inclusion in the country. From Vodafone’s viewpoint, the service will drive the operator’s rural penetration to over 65 per cent. Currently, Vodafone has over 64,000 agents and 1.4 million M-Pesa customers in the country.

Data-driven growth

As the voice market in the country reaches saturation, Vodafone India, like its peers, is betting big on data. Although the country is yet to reach the inflection point, where data will outscore voice as the key revenue generator, the growth in data revenues has been very promising.

The operator has resorted to several strategies, ranging from reducing data tariffs and increasing awareness to introducing a strong branding exercise to enhance its data uptake. With 3G spectrum in nine circles, it has entered into ICR pacts with other operators to offer services in unlicensed circles. Under Project Spring, the company intends to reach out to about 95 per cent of the population through its 3G services by 2016 and has earmarked Rs 70 billion for the same. Earlier, in March 2014, it piloted Wi-Fi hotspots in several cities, including Mumbai,  as a part of this initiative.

In February 2014, Vodafone India spent Rs 196 billion on acquiring spectrum in the 900 MHz and 1800 MHz bands. The operator plans to utilise spectrum in the 1800 MHz band to offer 4G services in the future. However, it is not pushing aggressively on 4G at the moment and is waiting for the 4G ecosystem to evolve. At present, the operator is focusing on establishing a stronger 3G base. According to a company official, as of March 2014, only one-fourth of Vodafone’s 160 million subscribers used smartphones, of which about 50 per cent used 3G services. It plans to enhance its 3G spectrum base through acquisition from auctions or trading and sharing of airwaves.

In fact, the operator has urged the government to address its concerns regarding spectrum allocation. Additional spectrum would help incumbents such as Vodafone India, Bharti Airtel and Idea Cellular to address the capacity crunch they face and will increase the proliferation of data services to a wider audience. To this end, the Department of Telecommunications’ plan to auction spectrum in the 2100 MHz, 900 MHz and 1800 MHz bands during the current fiscal year will bring some relief to Vodafone India, which has been facing challenges in extending high-speed mobile internet services across the country.

Targeting enterprise customers

Besides data, the enterprise segment is a key business area for the company. Vodafone has already gained strong momentum in the fixed line data services business, which was started in 2012.  With a base of over 5,500 wireline data links, it is moving beyond mobility by offering total communications solutions and is well placed to deliver enterprise solutions given the reach of its widespread mobility network and cloud services, and its domestic and international fixed line presence. Vodafone Business Services (VBS) contributed over 11.8 per cent of the company’s service revenues during 2013-14, up from about 7 per cent four years ago. The operator intends to ensure that the VBS contribution increases to over 20 per cent in the next five years.

However, the operator is going to face tough competition from companies like Reliance Communications, Bharti Airtel, Tata Teleservices Limited (TTSL) and Bharat Sanchar Nigam Limited in terms of enhancing its enterprise reach. Despite being a leader in mobility services, Vodafone India currently ranks fourth revenue-wise due to limited fixed line infrastructure vis-à-vis its competitors. In order to fix this, the operator may consider opting for the acquisition route to strengthen its enterprise portfolio. There are already speculative reports about Vodafone’s acquisition of TTSL. However, the huge debt burden on the latter’s books may prove to be a deterrent.

Vodafone India operates in four key segments – very large global enterprise, large companies, government and small and medium enterprises (SMEs) – and has an enterprise customer base of 65,000. The company aims to double its revenues from the enterprise vertical in the next four years.

In a bid to further improve its enterprise business, Vodafone has recently unveiled its Super Network Operations Centre (SNOC) in Pune. The centre will provide insights into the working of over 120,000 sites that enable remote network coverage across the country. The SNOC, spread across 20,000 square feet, has been set up through the consolidation of almost 20 NOCs across India. It allows the operator to monitor and service customer complaints on a real-time basis, which will lead to a 20 per cent gain in efficiency and a 40 per cent reduction in alerts for VAS activation, caller ring back tones, missed call alerts and cell tick services. Vodafone India has also launched the Super Network Experience Centre, which offers its enterprise customers business communication solutions.

Tackling concerns

In its seven years of operations in India, Vodafone has achieved some important milestones. However, it has not been a smooth journey all the way. Over the years, it has found itself at loggerheads with the tax authorities regarding  Rs 270 billion of tax demands, of which Rs 142 billion relates to the acquisition of Hutchison Essar in 2007.

With a new government at the centre, there was hope that the budget would offer some clarity on the retrospective tax amendment implemented in 2012, which is likely to impact Vodafone’s finances significantly. However, in his budget speech, finance minister Arun Jaitley disappointed investors with his decision to retain the retrospective tax amendment. Jaitley said, “The ongoing disputes at various courts and legal fora will reach their natural conclusion.”

Market analysts believe that the government may eventually take the middle path to resolve the tax dispute with Vodafone. Waiving off the interest by amending the law, while retaining the principal demand, seems to be the best solution in the circumstances. Meanwhile, with no immediate resolution, Vodafone has stated that it will continue the process of international arbitration initiated under the India-Netherlands Bilateral Investment Treaty. Further, the operator continues to face a severe spectrum crunch and has expressed concerns with regard to the inadequacy and high price of spectrum. It is awaiting a clear road map for 3G spectrum auctions in the 2100 MHz band, which would fuel the uptake of these services.

Vodafone also believes that the recently announced budget has not provided any major stimulus for growth of the telecom industry. As per the company, the government’s proposal to impose a 10 per cent customs duty on specified telecom equipment is likely to add to the cost burden of the debt-laden telecom industry. The move is likely to result in an increase of about Rs 10 billion in the annual capex outflows.

Going forward

Regulatory challenges aside, Vodafone Group Plc remains committed to the Indian market. Earlier in the year, the service provider increased its stake in Vodafone India, thereby making it a fully owned subsidiary. Further, under Project Spring, investments of Rs 3 billion have been earmarked for the Indian data market in the next two to three years. A part of the funds raised by the group’s recent stake sale ($130 billion) in Verizon Wireless is expected to be used for expanding its Indian operations.

India is a strategic growth market for the Vodafone Group. According to Dr Mahesh Uppal, director, ComFirst, “Its commitment to the Indian market is reflected in its aggressive stance in the recently concluded spectrum auction.” Continuing on its growth trajectory, the company has set ambitious targets for 2014-15. Undoubtedly, data will remain central to these growth plans with the company looking to invest Rs 40 billion-Rs 60 billion per year to deliver a high quality mobile data experience to its customers. Further, it plans to enhance its geographical and technological  reach and expand its enterprise operations in the country. To this end, Vodafone may acquire smaller players in the sector in order to leverage their assets such as spectrum, optic fibre and enterprise expertise.

Riding on the growing data demand, the enterprise and rural segments will continue to be a key focus area, going forward. Vodafone India ranked seventh in the enterprise business segment in 2009, rose to fourth position in 2012 and aims to be the third largest player by 2015. Further, the contribution of rural and semi-urban markets to the company’s data service growth is on the rise. For instance, the year-on-year growth in data consumption for 2013-14 in the Uttar Pradesh (East) circle stands at 93 per cent vis-à-vis the national average of 70 per cent. This can be attributed to the increasing proliferation of affordable smartphones in rural and semi-urban markets.

Besides enhancing its 3G subscriber base, the operator already has its eyes set on the 4G space and plans to complete the groundwork in the next two to three years, followed by a commercial launch.

With a clear growth strategy and a road map for service expansion, Vodafone India has its plate full and it would be interesting to see how the year unfolds for the country’s second largest operator. Uppal observes: “The advantages in terms of incumbency, a nation-wide presence and powerful branding ensure strong prospects for the company.”

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