Vodafone: Middle age is often tough on people and companies. The heady days of youth, or easy growth, are followed by dull maturity, or declining profit margins. But Vodafone, which has reached that unhappy phase in its traditional home markets, seems to have sniffed out a hint of continuing youth—in developing markets. The prospect helped lift Vodafone’s shares up 4%, despite an unexciting full-year results announcement.
The UK-listed mobile operator is coming under intense pricing pressure in its core European markets. Revenues and margins in the region, which generates 80% of the group’s profits, are flat and declining. With almost 100% penetration, growth opportunities are limited. It’s particularly difficult in Germany, Vodafone’s most profitable market, where prices are falling by 20-30% a year. Even Spain, which is currently defying the trend with double-digit growth, is set to take a battering as new competition enters the fray. Among rich countries, only the US, where mobile phone penetration remains relatively low, still offers double-digit growth. Vodafone’s joint venture with Verizon is flourishing. But in Europe, the talk is of cost-cutting, hardly a strategy to get investors’ pulses racing.
Fortunately, it’s the opposite tale in emerging markets. Its EMAPA region (Europe, Middle-East, Africa, Asia Pacific and Affiliates) has seen a revenue growth of 40% over the last year. Organic revenue has risen 41% in Egypt, 28% in Romania and 22% in South Africa. Growth opportunities in India—where Vodafone has just overcome regulatory obstacles to complete its £11 billion (Rs88,000 crore) acquisition of Hutchinson Essar—are huge. Only 14% of the country’s 1.1 billion population own mobile telephones. Even the high price Vodafone paid last year for Turkey’s Telsim seems excusable.
It has taken some time for investors to believe that Vodafone chief executive Arun Sarin has the company on the right track. He came close to losing his job last year. But the board approved his strategic orientation to emerging markets. To judge from the strong performance of shares—currently near a five-year high—it looks like investors are also persuaded.