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Vodafone's Indian headache

RESULTS : Vodafone is facing a cut-throat price war in India, although the group's tasty dividend looks secure.
September 26, 2011

Last year it was Spain and Turkey that hit Vodafone's earnings - the group's operation there took a hefty £5.9bn impairment charge in 2008-09. This year, it's India that's proving painful - Vodafone India, with over 100m subscribers, suffered a £2.3bn impairment charge.

That's because the group now needs a 3G network license to push through high-end mobile services. Yet 3G spectrum license prices soared to $3.4bn (£2.3bn) last week; that's about four-times the original reserve price. What's more, Bharti Airtel and Reliance Communications - the biggest mobile network operators in India - are fighting hard for market share.

With such challenges, comfort can at least be taken from Vodafone’s 44 per cent stake in Verizon Wireless - now the biggest mobile operator in the US. Verizon reported 6.2m net new customers in the period, bringing its overall user base to 92.8m; that meant a 23 per cent hike in Verizon generated sales for Vodafone, to £17.2bn, along with a 21 per cent hike in cash profits, to £6.7bn.

Overall, Vodafone did manage to beat analysts' guidance - largely thanks to a better final quarter. Indeed, revenue was up 2.4 per cent in Africa and central Europe and grew 5 per cent in Asia Pacific and the Middle East. So group cash profits rose 1.7 per cent in the period to to £14.7bn, although organic service revenue did fall by 0.2 per cent in the fourth quarter.

Still, the dividend looks set to remain tasty and Vodafone is targeting dividend growth of about 7 per cent each year for the next three years. That's underpinned by annual free cash flow of £6bn-7bn and should mean a dividend of no less than 10.18p per share by 2013. And there's a two-year £1bn cost saving programme, too.

Prior to these figures, brokers' consensus estimates for 2010-11 stood at pre-tax profits of £10.3bn and EPS of 15p.

ORD PRICE:135pMARKET VALUE:£71,066m
TOUCH:135-136p12-MONTH HIGH:154pLOW: 111p
DIVIDEND YIELD:6.2%PE RATIO:8
NET ASSET VALUE:172p*NET DEBT:37%

Year to 31 MarTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
200629.4-14.9-27.76.07
200731.1-2.38-8.946.76
200835.59.0012.67.51
200941.04.195.847.77
201044.58.6716.48.31
% change+9+107+181+7

Ex-div: 2 Jun

Payment: 6 Aug

*Includes intangible assets of £74.3bn, or 141p per share

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