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Vodafone India: Soaring high on data

June 30, 2015
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It is difficult to overlook India’s significance in the international operations of British telecom major Vodafone. According to publicly available data, about 40 per cent of the Vodafone Group’s 446 million subscriber base is in India, and the country accounted for over 10 per cent of its global turnover in 2014-15. Thus, despite being beleaguered by issues related to taxation, regulatory uncertainties and hyper competition, the operator continues to exhibit strong commitment to the country’s telecom sector.

In April 2014, Vodafone became the first international operator to take full control of its Indian venture, after the government allowed 100 per cent foreign direct investment (FDI) in the sector. During the past five years, the operator has pumped close to Rs 750 billion into various circles, in a bid to expand and upgrade its operations. In 2014-15 alone, Vodafone invested Rs 85.98 billion in network expansion. It spent another Rs 258.1 billion in the recent spectrum auction to retain as well as augment its spectrum holdings in the 900 MHz, 1800 MHz and 2100 MHz bands. It now plans to make a foray into the 4G space with the recently acquired spectrum. More recently, the company announced the revival of its long-standing plan to list on the domestic bourses.

Vodafone India is currently the second-largest operator in the country with a subscriber base of 184.56 million. It caters to nearly one-fifth of the wireless market, second only to Bharti Airtel. Financially too, the operator is on a solid footing. During 2014-15, it recorded a double-digit revenue growth of 12.6 per cent and enhanced its earnings before interest, taxes, depreciation and amortisation (EBITDA) margin to 29.6 per cent.

The company believes that the opportunities arising from new growth areas such as the rural, data and enterprise segments outweigh all the operational and regulatory challenges that the sector poses.

Rural focus

Rural teledensity in India currently stands at less than 50 per cent and rural subscribers account for 42 per cent of the total telecom user base. This leaves enough room for growth for operators like Vodafone, which are looking for new avenues for growth as voice markets in urban centres hit saturation levels. The rural segment is currently one of the main focus areas for operators, given that it is witnessing a net addition of 8-10 million subscribers a month. During the past one year, the operator registered a growth of about 10 per cent in its rural subscriber base, which increased from 89.4 million as of end-March 2014 to 97.9 million as of end-March 2015. It accounted for close to one-third of the total rural telecom user base in the country as of end-March 2015.

Betting big on the rural space, Vodafone India recently launched an SMS-based service, KisaanMitr, which allows farmers to access real-time customised agricultural information services. The service is available in 10 languages and farmers can sign up to get three free SMSs every day. The company plans to make this an app-based service at a later stage. Currently, the process is a three-tiered one, which includes access to basic agricultural information, availability of market-related services and greater financial inclusion. Growing data access in these areas will allow new business models to flourish. The service will allow farmers to get personalised crop advice as well as information on the weather, pesticide composition and market prices. It is estimated that this initiative has the potential to benefit 70 million farmers by 2020.

Expansion drive

During the past one year, the country’s second-largest telecom player has undertaken a significant expansion drive to upgrade its operations in various circles. It invested over Rs 2.5 billion in the Bihar and Jharkhand circle between April 2014 and March 2015, in order to strengthen its network and expand distribution. This involved activating more than 1,250 new sites during this period. Vodafone now has over 8,700 2G sites in the circle, covering over 79 per cent of the population. Its investments in the circle so far stand at Rs 24 billion.

Similarly, the company has invested over Rs 4.8 billion in ramping up network and distribution in the Uttar Pradesh (East) circle during 2014-15. Investments of over Rs 10 billion have also been made in the Mumbai circle to upgrade the network, and increase the company’s distribution and retail presence during the same period. In Arunachal Pradesh, network roll-outs have been undertaken in Daporijo, Aalong and Basar. Further, the company invested over Rs 7.5 billion on augmenting its network and distribution in the Tamil Nadu circle during the same period. It expanded its network footprint by adding over 3,600 new sites, thereby taking its total network strength to around 6,300 3G sites and 10,500 2G sites across Tamil Nadu.

On the retail front, the company launched more than 160 Vodafone Stores and over 1,000 Vodafone Mini Stores across the country during the last fiscal. With over 9,800 stores, the operator claims to have the largest exclusive retail footprint in the Indian telecom space.

Further, with a view to upgrading and enhancing its spectrum holdings, Vodafone India acquired spectrum in 12 telecom circles in the recently concluded spectrum auction. It managed to buy back spectrum in six of its 900 MHz circles (Gujarat, Haryana, Kerala, Maharashtra, Rajasthan and Uttar Pradesh [East]), which were due for renewal in December 2015. In addition, it acquired spectrum in the 900 MHz band in the Odisha and West Bengal circles. Another 30 MHz of spectrum was purchased in six new circles (Assam, Karnataka, Kerala, the Northeast, Rajasthan and Uttar Pradesh [West]) in the 2100 MHz band. The company hopes that the newly acquired spectrum will help it expand its 3G services.

Vodafone also bought 5.6 MHz of spectrum in the 1800 MHz band in three circles (Gujarat, Kerala and Uttar Pradesh [East]) to complement the 49 MHz spectrum that it had acquired in the 1800 MHz band in the auction conducted in February 2014. A combination of the new and existing spectrum, will allow Vodafone India to expand its 3G coverage from nine circles to 16 circles.

Data edge

Data remains a key focus area for Vodafone, with the company deriving significant returns from the investments made by it in the 3G segment. According to the company, a 3G customer in India is potentially worth 3.6 times more than a 2G customer in terms of revenues. Vodafone’s revenues grew from Rs 376.06 billion in 2013-14 to Rs 423.52 billion in 2014-15, primarily aided by a 65 per cent jump in data revenues to Rs 56.9 billion during this period. Its data consumption volumes grew by almost 80 per cent during this period. The company’s active data user base increased to 64 million, exhibiting a year-on-year growth of 23 per cent. Vodafone currently has around 19 million 3G data users in India, up from 7 million as of end-March 2014.

With the company having utilised 90 per cent of its 3G bandwidth, its decision to acquire additional 3G spectrum in the recent auction will help it expand its data footprint. While Vodafone India plans to continue focusing on its 3G strategy by bringing more high-paying customers into its fold, the operator, like its peers, has started chalking out plans for a 4G foray as well. Although at present these plans are at a nascent stage, they are likely to fructify soon, as the operator now holds spectrum in the 1800 MHz band. It has already initiated 4G trials in select circles where it has the spectrum to support these services. It is now waiting for an adequate ecosystem to evolve, which would allow 4G services to flourish in the Indian market.

Other focus areas

Aside from data, Vodafone is now venturing into several other segments to diversify its growth avenues. Enterprise is fast emerging as a key focus area with Vodafone Business Services (VBS) – the operator’s enterprise business unit - aiming to double its revenues in the next four years. This will be made possible by tapping more small and medium enterprises and government organisations. The government’s “Digital India” and “Smart Cities” programmes are likely to throw up more opportunities for the enterprise business. In mid-2014, VBS opened a customer experience centre in Gurgaon, the third in the country after Mumbai and Pune. The operator is also betting big on the machine-to-machine (M2M) space to give a fillip to its enterprise business. The M2M market is growing exponentially in India and industries such as automotives, utilities, financial services and transportation are finding huge business value in this innovation. VBS, which already provides M2M solutions, is likely to expand its reach by offering solutions to verticals such as agriculture, healthcare, energy management, retail asset management and telematics. Vodafone’s foray into the 4G technology segment will also help it consolidate its position in the enterprise industry.

Another focus area for the operator is leveraging the opportunities arising in the mobile money market. In February 2014, Vodafone applied to the Reserve Bank of India for a payments bank licence in order to leverage its huge network coverage in the mobile payments space. The company’s M-Pesa initiative is already a success. According to Vodafone, it has seen exponential growth in this segment. With more than 3 million subscribers, 65 per cent rural penetration and 90,000 outlets, Vodafone M-Pesa claims to be the largest business correspondent in India’s mobile money transfer segment.

Key challenges

Despite recording a strong performance both operationally and financially, the operator has not had the opportunity to rest on its laurels. Aside from competition from its telecom rivals, it has been plagued by taxation and regulatory issues. It is engaged in a Rs 200 billion tax dispute with the government, which arose from Vodafone’s 2007 purchase of Hutchison Whampoa’s Indian assets. There are several other ongoing regulatory cases on matters such as one-time spectrum charges and 3G roaming, as well as tax cases. The company does not see these regulatory headwinds subsiding soon.

Further, like its peers, the operator is not very satisfied with the current structure for the auctioning of airwaves, given the exorbitant rates and piecemeal release of spectrum, which creates capital constraints for operators aiming to provide quality services to subscribers.

In the competitive space, Bharti Airtel continues to occupy the top spot with a market share of 23.3 per cent. As per a CSLA research report, following the spectrum auction in March 2015, Bharti now holds 18 per cent of the total operator spectrum in the country, while Vodafone has only around 11 per cent. Bharti, moreover, has stolen a march on Vodafone in the crucial 900 MHz band space (used for GSM), where it has 28 per cent of the total spectrum holding while Vodafone has only around 18 per cent.

The incumbents, including Vodafone, are also facing stiff competition from nimble-footed players such as Videocon, Uninor and Sistema Shyam TeleServices Limited, which have reduced their scope of operations since the cancellation of licences, and are thus adopting a niche market approach for acquiring subscribers.

Continued commitment

The challenges notwithstanding, Vodafone is optimistic about India’s telecom growth potential and as such, is ready to bring more investments into the country. In March 2015, it made a fresh equity infusion of Rs 60 billion in India. During 2014-15, the company recorded a capex spend of Rs 85.98 billion, marking an increase of 37.4 per cent over that in the previous fiscal.

Recent reports about the operator reviving its plans to make an initial public offering (IPO) also lend credence to the operator’s commitment to its Indian business. Although launching an IPO has been on the company’s agenda for several years now, regulatory uncertainty had prevented the operator from proceeding with it in the past. Vodafone is now reportedly planning to raise between $3 billion and $4 billion through the IPO. If it materialises, this IPO will become one of the largest ever in India. The Vodafone Group is expected to take a final call in the matter by August 2015, when N M Rothschild, which is working on the contours of a public listing, will submit its report. The report will help the parent company arrive at the subsidiary’s valuation (estimated at $30 billion) and make a decision on whether or not to go ahead with the listing next year.

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