Join our community of smart investors

Vodafone defies Indian troubles

Although the future of its business in India hangs in the balance, the telecoms giant has raised profit guidance for the full year
November 13, 2019

Vodafone (VOD) has reported a €1.9bn (£1.6bn) loss in the first half of the year after writing down the value of its Indian business to zero. Following a Supreme Court ruling that telecoms companies must pay levies on all spectrum and license fees, the group’s joint venture, ‘Vodafone Idea Limited’ (VIL), is on the hook for at least €3.7bn in back payments, penalties and interest. The merger arrangement means group exposure is capped at €1.1bn. Yet with doubts VIL can generate the cash flow to settle these obligations, Vodafone’s Indian operations might be on shaky ground.

IC TIP: Hold at 161.5p

Despite this setback, the group is looking in better shape. This loss is narrower than the staggering €7.8bn seen at this point last year following heavy impairment charges. Adjusted cash profits have increased by 1.4 per cent to €7.1bn, with the margin on track for five consecutive years of expansion. Organic service revenue growth of 0.3 per cent may seem modest, but this is an improvement following two quarters of negative momentum. Anticipating a €0.8bn net benefit from the addition of Liberty Global’s cable assets and selling the New Zealand business, full-year guidance for adjusted cash profits has been upgraded from €13.8bn to €14.2bn to €14.8bn to €15bn.

Unlike BT (BT.A), Vodafone cut its dividend back in May to address spiralling debt. But assuming €18.5bn in debt from the Liberty Global acquisition, net debt (excluding lease liabilities) ballooned by almost half to €48.1bn. On a pro-forma basis, full-year net debt is expected to be around three times adjusted cash profits, the higher end of target multiple range between 2.5 and 3. Potential balance sheet relief could come from plans to monetise the group’s European mobile tower network, with a spin-out planned by May next year.  

Meanwhile, free cash flow plunged from €566m to just €34m following higher working capital outflows, €302m in restructuring costs and €58m in license and spectrum payments. Full year free cash flow expectations (before spectrum payments) have been moderated from “at least” €5.4bn to “around” that figure.

Bloomberg consensus forecasts are for adjusted pre-tax profit of £3.2bn and EPS of 8.2p for the full year, rising to £3.9bn and 9.9p in 2021.

VODAFONE (VOD)   
ORD PRICE:161.5pMARKET VALUE:£43.2bn
TOUCH:161.4-161.5p12-MONTH HIGH:172pLOW: 122p
DIVIDEND YIELD:4.6%PE RATIO:na
NET ASSET VALUE:217ȼ*NET DEBT:81%**
Half-year to 30 SepTurnover (€bn)Pre-tax profit (€bn)Earnings per share (ȼ)Dividend per share (ȼ)
2018 (Restated)21.8-2.85-16.04.84
201921.9-0.51-7.24.50
% change----7
Ex-div:28 Nov   
Payment:7 Feb   
*Includes intangible assets of €58bn, or 217ȼ a share **Excludes lease liabilities of €10.5bn
£1=€1.16