New Delhi: When Arun Sarin, then chief executive, led Vodafone Group Plc’s buyout of India’s Hutchison Essar Ltd in February 2007 paying $11 billion (Rs52,030 crore today), some analysts and investors in the acquirer’s home country saw the deal expensive.
Most among the suitors, including Reliance Communications Ltd and the London-based Hinduja family, had indicated bids some 30% less than what Vodafone, even then the world’s largest mobile phone services firm by revenues, paid.
The enterprise valuation, sceptics pointed out, worked out at an estimated 16.4 times Ebitda of the unlisted Indian target, compared with the 13.6 times and 11.7 times that larger rivals such as Bharti Airtel Ltd and Reliance Communications traded at.
Right call: Sarin defended his decision to buy out Hutchison Essar for $11 billion, saying Vodafone was buying into future growth. Harikrishna Katragadda / Mint
Ebitda is short for earnings before interest, tax, depreciation and amortization, a key measure of operations profitability.
Sarin, who’s fought off shareholder resistance more than once, defended his decision saying Vodafone was buying into future growth. “India is 13% penetrated, China is 40% penetrated. While India goes from 13% to 40%, China is going from 40% to 60% or 70%. There’s a lot of headroom here in terms of growth,” Sarin said in a brief interview that February.
With India’s teledensity today inching towards 40% and showing little signs of slowing its pace of expansion (about 10 million customers are added every month), what some call Sarin’s signature deal—it remains the largest acquisition in India to date—has the promise of a priceless legacy.
Vodafone executives were not available to be interviewed for this story. (Sarin ended his CEO term in June 2008 making way for Vittorio Colao.)
In the two years since February 2007, Vodafone Essar Ltd, as the acquired entity changed its name to (the main Indian shareholder, the Ruia family of the Essar Group, remains the same), customer additions here account for 93% of new subscribers joining Vodafone networks worldwide. To be sure, India is the fastest growing mobile phone services market in the world.
Vodafone Essar had 68.8 million users on its network at the end of the March quarter behind market leader Bharti Airtel with 96.6 million subscribers and Reliance Communications with 72.66 million customers.
In revenue terms too, Vodafone’s India business shone. India was the main driver behind Asia Pacific and West Asia showing the highest revenue growth of 32.3% of among all the regions that the telco has a presence in.
The Indian arm saw revenue jumping 41% to $791 million in the March quarter. This is still a small percentage of Vodafone’s global revenues and the company lags Bharti Airtel by 59% but here’s the surprise: Vodafone Essar made the revenues with 29% less phone subscribers, implying it was able to get its customers to pay more for its services than rivals. Vodafone Essar as of 31 March enjoyed revenue per minute of 86 paise, at least one-third more than that of Bharti Airtel, estimates telecom consulting firm BDA Connect.
“They were present in 16 of the 22 service areas as opposed to the others who are present in all the service areas. These are mainly the higher revenue earning metro, A and B areas, which give higher revenues as compared to the rest,” Kunal Bajaj, a director at BDA Connect, said. “Another reason is that they have been able to maintain a larger corporate user base, which traditionally gives higher revenues.”
“They paid a full price for their entry into the market. The growth that they have seen so far has been good in terms of subscribers. They are posting good growth in revenues, Ebitda margins,” Guy Peddy, another analyst with Macquarie in London, said. The Indian market has still a long time to go in terms of penetration and it is too early to judge the investment in terms of long-term sustainability,” Peddy added.
Vodafone expects revenue growth in emerging markets, in particular India and Africa, to continue. “During the 2009 financial year we added 24.6 million customers in India and ended the year with the highest rate of net additions in the market,” Vodafone said in its recent statement announcing its results for the fiscal.
The growth will come at a higher cost as customer concentration in villages is much less that in cities and, so, investments are likely to ratchet up for Vodafone Essar. India already accounts for one- fourth of Vodafone’s global investments—£1.4 billion during the last year—and the group said it was committed to making higher investments in India during the current fiscal.
To sustain growth, that spending will have to continue. “For growth, the question is whether you have the capex (capital expenditure) to spend or not,” Asim Ghosh, chief executive of Vodafone Essar until 31 March, told Mint in mid-2007. “We haven’t been able to spend much since we were constrained for cash.”
Also, the group’s problems—industry-wide, to be sure—will increase as competition increases. Already, “the Ebitda margin in the region fell by 3.7 percentage points, reflecting lower margins in India caused by the pricing environment, the impact of our IT outsourcing agreement and investment in new circles,” the company said after its March quarter results.
Revenues are bound to fall as the company expands to all the service areas in the country. “They may not fall to as much as the rest of the operators but by virtue of being a late entrant in the circles, they will have to go after the customers more aggressively,” BDA Connect’s Bajaj said.