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No longer a jewel? Vodafone's Indian adventure flounders

india Updated: Sep 12, 2010 22:06 IST
Manoj Gairola

UK-based Vodafone Group's Indian operation, which was termed as a "jewel" by its CEO Vittorio Colao in January, may be losing its sheen.

The group had in May slashed the estimated valuation of its Indian arm Vodafone Essar by $3.2 billion (R14,848 crore) following an industry price war and higher spectrum charges for mobile phone services.

Last week's Bombay High Court judgment, in which the court clearly held that Indian tax authorities had jurisdiction over the overseas sale of stakes involving an Indian company, may make the company poorer by another R12,000 crore in capital gains taxation.

In 2007, the Vodafone Group bought 67 per cent in the joint venture by acquiring HongKong group Hutchison's equity in Hutch Essar for $11.1 billion (R51,504 crore). Three years later its value was cut to $8.2 billion (R38,048 crore).

Not to hit deals

Consultant Ernst & Young said the Bombay High Court judgment over Vodafone-Hutchison deal will not dampen sentiments for cross-border mergers involving Indian assets. Players in the cross-border mergers assets used to factor that there will be a taxation.

Vodafone Essar's subscriber base in India increased from 2.92 crore to 10.6 crore over this period as it rose one slot to the second position in the GSM market. But that has come at a price. First, there was a fierce price war that was initiated by the new entrants in GSM services such as Reliance Communications and Tata Teleservices. On May 31, the company paid a fee of R11,618 crore to the government for acquiring 3G spectrum. Vodafone was the second largest bidder after Bharti Airtel.

When Vodafone bought a stake in Hutch Essar, the cellular industry body was lobbying for free spectrum to the incumbent players. Their focus was how to avoid new players from entering into mobile services. No one had imagined that the industry might have to pay to pay R67,719 crore for four slots of 3G spectrum.

However, in May, the Telecom Regulatory authority of India (TRAI) made a key recommendation that the existing players should pay a one-time charge for the excess spectrum they had been using in the past.

If accepted by the Department of Telecommunications (DoT), this would also add to Vodafone's Indian burden. "Earlier in the industry the valuations were higher because there was higher ARPU (average revenue per user) and a higher EBITDA (earning before interest, taxation, depreciation and amortisation) but now those margins are falling month on month," said Romal Shetty, telecom practice head at consulting firm KPMG.