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Zoozoos Are Doing Well, But Vodafone Is Still Reeling In Pain

27 April, 2011

The Zoozoo ads of Vodafone are ruling the airwaves in India, but don't get swayed by that. The UK-headquartered telecommunications giant is not really encouraged by what they have experienced in India on various fronts the return on equity, the multi-crore tax case slapped on it, the huge investments made in 3G spectrum and finally, the highly competitive and margin-shrinking telecom business itself (add to the list the entry of new players through the controversial 2G licence route in 2008 at 2001 spectrum prices).

All this is now causing some heartburn at Vodafone Plc. HQ in London. Except for that, it can only wait and watch and not roll back its investments.

Vodafone global CEO Vittorio Colao isn't happy with what is going on. "Has India been a good case in terms of return on investment?" Colao had asked on a recent visit to India, according to an AFP report. "Unfortunately, the answer is no."

In 2007, when Vodafone paid $11.1 billion to buy 67 per cent stake in what was called Hutchison Essar at that time, it was considered a dream deal for any global telco executive. In fact, the then Vodafone CEO Arun Sarin said after the deal, "This kind of deal is what we all dreamed about when we were students."

Sarin was not wrong. India was, and still is, one of the fastest growing wireless markets. When you get to buy one of the top three private sector telcos (after Bharti Airtel and Reliance Communications) in India, then why wouldn't you be happy?

Sarin is not at Vodafone now to take stock of the deal. But his successor Colao is. It is true that India is an extremely promising market, especially when your home market and also the operations elsewhere in the developed world are saturating. In India, Vodafone has grown from 23 million subscribers in 2007 to 127 million subscribers currently. Very impressive, indeed! But the question is, at what cost?

The domestic market became highly competitive and the prices started crashing soon after the entry of Vodafone. The result: The UK parent had to write off $3.7 billion from Indian operations last year.

To stay competitive, you need to launch new services, especially 3G, and for that you need to buy spectrum for which you need capital. So Vodafone spent an additional $2.4 billion to buy the 3G spectrum. The investment is not ending there. As part of the original deal, Vodafone was to buy the remaining stake (33 per cent) held by the Indian partner Essar and that would cost the company at least $5 billion, if not more (as Essar is clamouring for more).

To add insult to the injury, the Indian tax authorities have also slapped a case on Vodafone demanding $2.5 billion in taxes, which should have been withheld when paying Hong Kong-based Hutchison Whampoa for its stake in Hutchsion Essar. The case is being heard in the Supreme Court which will pronounce its verdict in July. (Vodafone's argument is that the deal happened in Cayman Islands and the shares were transferred outside Indian jurisdiction. But taxmen argue that the assets transferred are in India, so the taxes needed to be paid. Even though the capital gains were made by Hutchison Whampoa, taxmen argue, the onus was on Vodafone to withhold the taxes. The jury is still out on that.)

All told Vodafone’s investment in Indian ops is in the north of $20 billion, and the question is all that worth it?

Colao is not agreeing for now.

But, thank you Vodafone for the Zoozoo ads, which are the best thing on air right now.


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Zoozoos Are Doing Well, But Vodafone Is Still Reeling In Pain

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