Vodafone (LSE: VOD) (NASDAQ: VOD.US) has had more than its fair share of difficulties in India, with various tax disputes dominating what should have been a successful venture for the telecoms operator.
However, India’s government has recently announced possible reforms to potentially end a spate of taxation disputes where there is disagreement over how much tax should be paid when services are offered abroad via an Indian subsidiary. This could potentially include the dispute with Vodafone.
Of course, while the possible reforms are undoubtedly good news for Vodafone, I’m still not convinced about the investment case for three main reasons.
Firstly, Vodafone’s strategy leaves me puzzled. Why sell the asset (a 45% stake in Verizon Wireless) that is not only the most lucrative, but which also has the most potential?
Certainly, Vodafone has been generous in returning the cash to shareholders, however I would rather the company put this capital into a productive return rather than simply give it back to shareholders.
Furthermore, I appreciate that shareholders will now have a stake in Verizon Communications, the parent company of Verizon Wireless, and in doing so will maintain an exposure to the US.
However, Verizon Wireless was, in my view, the area with the most potential for profit growth and, I feel, was fundamentally a better proposition in terms of cash flow and balance sheet strength than the parent company.
Selling the 45% stake in Verizon Wireless still leaves me scratching my head and questioning whether management strategy has been sound.
Secondly, there seems to be only relatively minor growth prospects for Vodafone. Earnings estimates are not all that impressive, with the market forecasting earnings per share growth of 0% this year and 7% next year.
Of course, such numbers are of little surprise when Europe and India (both of which are not performing as well as the market had hoped) are the main markets for your products.
Thirdly, Vodafone’s forward price to earnings (P/E) ratio of 14 matches the telecoms industry group, so it does not appear to offer relatively good value. In addition, the P/E only offers a small discount to the wider FTSE 100 (which has a P/E of 14.8) and so I’m unsure that Vodafone offers good value for money.
So, while the proposed reforms in India could be good news for Vodafone, I’m still unconvinced that it has the right strategy, sufficient growth prospects and a low enough P/E ratio to merit investment.
