Vodafone India Set to Surpass U.K. by Sales Within Years

May 22, 2014 3:40 am ET

(Updates with shares in 12th paragraph, potential IPO in 14th.)

May 22 (Bloomberg) -- Vodafone Group Plc is poised to claim more revenue from India than the U.K. in the coming years, a first for the British mobile-phone company.

India already commanded the largest share of the carrier’s subscribers and voice calls, and data usage has surpassed any other division. That means the country could overtake the U.K. and Italy in the next few years by revenue, according to Marten Pieters, Vodafone’s chief executive officer for India.

“We are already bigger than Germany in terms of data, which is amazing,” Pieters said this week. “We grow that by combining smartphone sales with cheap data packets.”

A boom in data demand has helped the Indian unit win one of the earliest cash infusions from Vodafone’s two-year, 19 billion-pound ($32 billion) global network improvement program. Vodafone said it was able to raise prices last year in the frenetic Indian market, where users often swap plans when a better deal comes up. That’s something the company isn’t able to do in much of Europe.

The investment in India will help cover 95 percent of the country with third-generation wireless technology by 2016, allowing smartphones to access the Internet and download music and video. Vodafone’s market share has plenty of room to grow, and that means “actively approaching smartphone users that don’t use data,” Pieters said.

Low Penetration

Of Vodafone’s 52 million Indian customers on data plans, just 7 million use the faster 3G network. The country had 405 million mobile users last year, or 32 percent of its population of about 1.26 billion, according to industry association GSMA. There are about twice as many mobile connections as customers switch between phones, compared with a 132 percent penetration rate in Europe.

Vodafone CEO Vittorio Colao has used India as a way to offset losses from shrinking European markets. He took advantage of relaxed rules on foreign ownership to buy out other investors in the Indian unit to bring the holding to 100 percent last month.

While Vodafone’s service revenue in India jumped 13 percent last year, Europe declined 9.1 percent. India is the fastest- growing smartphone market after China, according to researcher International Data Corp. The country is also a vehicle for Vodafone’s mobile payment platform M-Pesa, which will be introduced nationwide by the end of the year.

Price Increases

Unlike in the U.K. and Germany, there may be room to keep increasing prices in India, despite a plethora of providers. India’s tariffs remain among the lowest in the world, according to Nitin Soni, director of Asia-Pacific corporate ratings at Fitch Ratings.

Vodafone has 167 million subscribers in India, compared with 65 million at the South Africa-based business, its second largest, and 32 million in Germany, the biggest by revenue.

Bharti Airtel Ltd., the biggest wireless provider in India by subscribers, had 22.7 percent of the market in March, up from 22.2 percent six months earlier, according to the Telecom Regulatory Authority of India. Vodafone boosted its share to 18.4 percent from 17.9 percent.

Vodafone shares rose as much as 0.7 percent and were unchanged at 204.6 pence at 8:14 a.m. in London. The stock has declined about 31 percent this year.

Tax Dispute

One potential stumbling block in India is a dispute with the government over a tax bill stemming from the 2007 purchase of Hutchison Whampoa Ltd.’s Indian assets. Vodafone said it didn’t owe taxes because the acquisition was between two foreign companies. India countered with a law enabling it to retroactively tax cross-border deals.

More than $2 billion is at stake, as is Colao’s intention to consider an initial public offering of the Indian business. The CEO has said he envisions an IPO similar to what the company did with Vodacom in South Africa, where it retains a controlling stake, and that the strategy depends on the outcome of the tax battle. International arbitration is under way.

The dispute lingers as Narendra Modi comes to power promising sweeping change, with a mandate as prime minister that cuts across social divisions that have hindered India for decades. He’s also promising business-based diplomacy, in a country where economic growth tumbled since 2010, and a hard line against terrorism.

The tax dispute hasn’t prevented Vodafone from investing more in the country. It agreed in February to spend 1.9 billion pounds on spectrum licenses.

Spectrum Lacking

There’s not nearly enough spectrum in major markets like Mumbai to carry calls and data, making it difficult to maintain quality, Pieters said. Vodafone would like three or four times the current amount and will need the amount doubled to 10 megahertz “very soon” to keep up with growth.

“Nobody in the world has ever done this on 5 megahertz,” he said. “My colleagues in Vodafone, if they hear what we do, they really don’t understand how we do it.”

To pay for the global network improvement plan, Vodafone is using cash it pocketed from its $130 billion sale of its stake in U.S. mobile company Verizon Wireless last year, a deal that has turned Vodafone itself into a takeover target.

AT&T Inc. has been interested in buying the U.K. company since at least last year, according to people familiar with the plans. Still, AT&T’s agreement this week to buy U.S. satellite TV provider DirecTV for $48.5 billion is the latest sign that AT&T may set aside a long-held ambition for a big takeover in Europe.

Until then, Colao will have to continue to rely on India as what he called this week “one of the two or three great pillars” of the company.

“India was always lagging behind the rest of the emerging markets in terms of data usage because of low penetration of smartphones and perceived quality of 3G,” said Anand Kulkarni, a telecom analyst at Care Research in Mumbai. “With the growth of smartphones, obviously there is a lot of potential.”