Vodafone is seeing revenues being hit in Europe, but it’s increasingly becoming an Indian growth story with almost 50m customers already on the sub-continent.
Vodafone (LSE: VOD) has been very good at hitting corporate targets over the years so today’s 10%+ share price fall following its latest trading statement looks a little harsh. It’s also not the farewell the company’s chief executive, Arun Sarin, would have liked. He is stepping down at next week’s Annual General Meeting after five years in the role.
During this time at the top Sarin has consolidated Vodafone’s portfolio, exiting maturer markets such as Japan, Sweden, Switzerland and Belgium and entering faster growing ones such as Romania, Czech Republic, Turkey and India. In fact, last year’s £7bn purchase of a 67% stake in Hutch Essar, the third-largest Indian mobile company, is looking more astute with every passing quarter.
India’s mobile revolution
The growth in Indian mobile customers is remarkable. The 1 million barrier was only breached in 1998 but 10 million was passed in 2002 followed by 100 million in 2006. Gartner is predicting over 700 million by 2012. Vodafone India, as Hutch Essar is now called, has 49.2 million customers and a 23% market share.
Revenue per customer is much lower in India but the profit margins are only a little bit less than those achieved in Vodafone’s main European markets. Vodafone is hoping it can learn from its Indian experience and lower costs per subscriber across the rest of its operations. Prepaid phones are dominant in most emerging markets and India is no exception. This is an additional challenge in terms of higher churn rates.
India only accounted for 5% of Vodafone’s revenues last year but at this rate of growth it could reach around 20% by 2012. For the moment though, Vodafone’s five major markets of the UK, the US, Germany, Italy and Spain still dominate its results, accounting for over 70% of revenues. In all of these markets it’s the second largest player, and it intends to get to at least this position in India as well.
In the other BRIC countries, Vodafone has a far weaker presence. It has a 3.3% stake in China Mobile but only a partner presence in Brazil and nothing in Russia. Africa represents another opportunity and Vodafone is hoping its 50% holding in South Africa’s Vodacom will provide a launch pad for the rest of the continent.
Slower growth elsewhere
Spain in particular is struggling at the moment and regulatory pressures are continuing to force down unit rates for voice calls and messaging across Europe. As has been the case for a few years now, growth in data revenues is offsetting these declines, although other areas like broadband and mobile advertising are now increasingly helping out.
Vodafone’s other major thrust at the moment is its push from being a pure mobile company to a ‘total communications’ outfit. Already 15% of sales come from these other revenue streams and the target is to hit 20% within a couple of years.
Other forecasts intact
At the time of writing Vodafone’s share price was 13% lower on the day at 130p. This seems a very short-sighted reaction to its comment that it expected revenues to be at the lower end of its stated £39.8bn to £40.7bn forecast range.
Although the economic decline has made an impact and will continue to do so, its other targets for profitability, free cash and capital expenditure remain unchanged. Other factors, like customers delaying handset replacements and on-going cost cutting, are helping profitability in the near term. Revenues will still be up this year, but mostly due to currency exchange factors. The decline in the pound against the euro has helped Vodafone in this regard.
The share price fall leaves Vodafone on a forward price earnings ratio of 10 times, which looks pretty cheap considering that its business is more resilient than most. It may a tiny bit less resilient than investors were hoping before this morning’s statement but the overall story remains intact. As ever, the stock market prefers to obsess about the short term.
The forecast dividend yield is now well over 6%, which is highly attractive. Another one of Sarin’s legacies has been to transform Vodafone into an income share, with the dividend per share more than quadrupling during his five-year tenure.
Vodafone will never be a high-growth business again. Those days are long gone. But if you’re looking a bottom-drawer investment in one of the few global success stories that the UK has to offer, it’s certainly worthy of consideration.
More: Growth Eludes Vodafone
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