Vodafone Q3 profit falls as Indian competition crimps forecast

Bloomberg

Wireless carrier Vodafone Group Plc forecast full-year profit at the low end of its previous range, saying investments required to prop up its Indian unit will continue to hurt results as it negotiates to combine the business with a rival.
“We anticipate intense competitive pressure in India in the fourth quarter and are taking a series of commercial actions,” including expanding the number of service areas using current fourth-generation technology, Chief Executive Officer Vittorio Colao said Thursday in a statement as Vodafone released third-quarter results.
Organic earnings before interest, taxes, depreciation and amortization for the fiscal year will be toward the bottom of Vodafone’s previous estimate of 3 percent to 6 percent growth, the Newbury, England-based company said.
Colao is working to resolve major challenges in India, where billionaire Mukesh Ambani’s carrier has roiled the market by offering free wireless services. Organic service revenue in the country fell 1.9 percent in the third quarter, and Vodafone said it expects the business to decelerate in the fourth quarter. The company is in discussions to merge its Indian unit, the country’s No. 2 carrier, with the third-largest operator, Aditya Birla Group’s Idea Cellular Ltd, to fend off Ambani’s Reliance Jio Infocomm Ltd.
“This is not retrenching,” Colao said on a conference call with reporters, citing the large amounts of spectrum and network infrastructure the combined company would have. “This is about creating the leader in the telco sector in India, with a little bit short of 400 million customers.”
The talks with Idea could lead to Vodafone splitting off its Indian business into a separate entity, which would smooth out the volatility in reported financial results that have hit revenue growth and profits. Vodafone last year wrote down the value of the Indian business by more than $5 billion.
The company reiterated its forecast for free cash flow of at least 4 billion euros ($4.31 billion) for the full year.
“Indian uncertainty is the key negative, but a deal with Idea could improve the outlook,” Andrew Lee, an analyst at Goldman Sachs in London, wrote in a note. Sustained intense Indian competition is among key risks for Vodafone, as well as regulation, capital discipline and foreign exchange, he said.
Vodafone advanced 0.2 percent to 193.40 pence at 11:05 a.m. in London, after dropping to 186.50 pence, its lowest intraday since October 2014. The stock has dropped 13 percent in the past year.
Idea Cellular has gained 41 percent this week in India on optimism that an agreement with Vodafone will be reached. Shares of Idea are trading at the high end of where the companies are likely to value the company in a deal, Sanford C Bernstein HK Ltd. analysts led by Chris Lane wrote in a research note on Thursday.
“Our analysis leads us to believe the stock market has overreacted to the news,” Lane said.
Italy, Spain
The outlook came as Vodafone reported 1.7 percent growth in organic service revenue, the money the company gets from customers’ plans and traffic on its networks excluding handset sales. That beat analysts’ forecasts for growth of 1.5 percent, the average of seven estimates compiled by Bloomberg.
Third-quarter revenue for the group declined 3.9 percent to 13.7 billion euros, including the negative impact from currency swings, as the British pound, South African rand, Indian rupee, Turkish lira and Egyptian pound all depreciated relative to the euro.
Vodafone broadly made gains in its Europe and Africa business, including customer growth in Turkey, South Africa, Spain and Germany, while increased competition in the enterprise business in the U.K. led to a decline in that country. Vodafone sees more opportunity in the U.K. public sector business, Chief Financial Officer Nick Read said on the conference call, even as rival BT Group Plc last week forecast lower growth from government contracts.
Dutch Venture
While Colao has stoked expansion by making investments in 4G mobile roll-out, broadband and enterprise services, he’s battling tighter competition in the Netherlands and Italy and regulatory headwinds in Germany that all risk slowing revenue. Vodafone in December completed a Dutch joint venture with Liberty Global Plc, seen by some as a precursor to a broader deal after talks about asset swaps between the companies in recent years.
“We continue to believe that a tie-up with Liberty Global (both companies officially discussed this in 2015) is the best option for Vodafone,” Stephane Beyazian, an analyst at Raymond James in London, said in a note.
The only current discussions between Vodafone and Liberty Global concern business plans for the joint venture in the Netherlands, Read said.
Asked on the call whether the attractiveness of a broader Liberty deal would be reduced if Vodafone were to work with other companies to build out fiber-optic networks in countries like Germany, Colao agreed.
“It’s just math,” Colao said. “Given that these combinations create great advantages with cost, if you have another alternative, you don’t have as high a synergy. There are still other reasons, commercial reasons, why of course having a single operation nationwide in any country, not just in Germany, makes sense,” he said. “Technically, you’re right, these alternatives are in a way reducing synergies of a possible combination.”