Mumbai: A sharp fall in call rates and intense competition in India’s telecom market has forced Vodafone Group Plc to write off £2.3 billion (Rs15,157 crore) from the underlying value of its Indian unit Vodafone Essar Ltd in its financial results for the fiscal ended 31 March.
Vodafone, the world’s second largest cellphone company, entered India in 2007 by acquiring the 67% stake owned by Hong Kong billionaire Li Ka-shing’s Hutchison Whampoa Ltd in Hutchison Essar Ltd for $10 billion.
“The impairment charge essentially means that the future cash flows to be generated from Vodafone’s Indian operations will be less than what was earlier expected, back when Indian assets were bought,” said Prashant Singhal, head of telecom advisory services at the Indian arm of multinational consultancy firm Ernst and Young.
Vodafone Group chief executive Vittorio Colao says India’s telecom rules on consolidation and spectrum do not make sense. Ramesh Pathania/Mint
“The valuation of underlying assets and price paid in 2007 was made on certain assumptions vis-à-vis call rates or average revenue per user, but those parameters have dramatically changed,” Singhal said. “The impairment charges reflect those changes and the same is now being recognized and acknowledged as an accounting entry.”
The number of telecom service providers in India has doubled since Vodafone’s entry, causing call rates to decline under competitive pressure as rival operators chased market share. Bids at a 3G (third-generation) spectrum auction have gone far higher than expected and major consolidation moves are still not allowed.
The impairment charge on the value of the India assets, along with comments by chief executive Vittorio Colao that India’s telecom rules did not make sense, cast a shadow on otherwise solid full-year results.
“We have seen very strong price declines,” Colao told reporters in London. “I don’t think these rules (on consolidation and spectrum) make sense. India needs investment. India is a vast country with a vast population still not fully able to communicate.
“What India needs is investment and good technology, and this will not come in an environment with too many operators and fragmentation of investment,” Colao said.
In a statement, he looked at the brighter side, saying Vodafone had secured the No. 2 position in the Indian market by revenue despite the fierce price competition.
Singhal said that the expected capital outlay of several billions of dollars on account of 3G licence fees and the latest Telecom Regulatory Authority of India recommendations on 2G spectrum fees would likely be factored in when calculating impairment charges for the current fiscal ending March.
From the earlier estimate of around $1.2 billion for a pan-India 3G licence, the expected price has surged to around $3 billion as the auction of spectrum proceeds.
Operationally, Vodafone Essar posted revenues of £3.1 billion for the fiscal ended 31 March, an increase of 12.7% over the previous year, aided by robust growth in its subscriber base, which has crossed 100 million.
Voice revenue grew from £2.24 billion in 2009 to £2.55 billion, while messaging services revenue increased from £85 million in 2009 to £108 million. Vodafone’s revenue from data services such as Internet increased from £148 million in 2009 to £169 million in 2010.
According to Vodafone, customer penetration in the Indian mobile telecom market stood at 50% as on 31 March, an increase of 16% from a year ago.
Earnings before interest, taxes, depreciation and amortization, or Ebitda, a key measure of operating profitability, increased by 9.2%, driven by a higher customer base and the subsequent 37.6% increase in total minutes used by subscribers during the year.
Reuters contributed to this story.