Vodafone Group Plc signalled increasing frustration with its key Indian unit on Tuesday, taking a charge of 2.3 billion pounds ($3.3 billion) due to fierce competition and rapidly escalating spectrum costs.
The world's second-largest mobile operator by revenue entered the Indian market in 2007 after beating rivals in a high-profile auction to make it the key territory in its faster growing emerging markets portfolio.
But the country has since handed out licences to many more operators, resulting in a fierce price war. A spectrum auction has gone far higher than any analyst had expected and major consolidation moves among operators are still not allowed.
The impairment charge on the value of the India assets, along with comments by Chief Executive Vittorio Colao that India's telecoms rules did not make sense, cast a shadow on otherwise solid full-year results.
"We have seen very strong price declines," Colao told reporters. "I don't think these rules (on consolidation and spectrum) make sense. India needs investment. India is a vast country with a vast population still not fully able to communicate.
"What India needs is investment and good technology and this will not come in an environment with too many operators and fragmentation of investment."
SingTel, southeast Asia's biggest telco, has also warned of slower than expected gains in India through its associate Bharti Airtel.
Vodafone is engaged in a spectrum auction in India which has exceeded most expectations. Bids for one set of nationwide third-generation (3G) mobile spectrum licences reached $3.54 billion on Monday, the 32nd day of the auction.
Most analysts had expected all-India spectrum to cost between $1.3 billion to $2 billion.
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The 3G spectrum would allow firms to offer high-speed Internet and other premium services in the highly competitive market, which would prove highly attractive to major operators.
But on top of the auction, the Indian telecoms regulator has called for mobile operators to pay a one-time fee for the 2G radio spectrum with high bandwidth which they won several years ago, a move that has drawn fierce criticism from all involved.
Vodafone Finance Director Andy Halford told reporters the impairment did not include any costs for a possible 2G bill and said the company expected to negotiate with the regulator.
Analysts said the impairment indicated Vodafone had overpaid and said problems in the market, where Vodafone has over 100 million customers, overshadowed improvements elsewhere.
Britain, Germany and Italy all showed signs of improvement while Turkey continued its turnaround and Africa performed strongly.
"Assuming Vodafone buys both Indian and German spectrum (at least $3.6 billion + 1 billion euros) the full-year 2011 dividend will be uncovered, with further spectrum auctions in full-year 2012 and governments becoming ever keener to maximize revenues," Morgan Stanley said in a note.
The Britain-based group, which has 341 million subscribers including its share of those from affiliates, said its 1 billion pound cost savings programme was delivered a year ahead of schedule and a new two-year programme designed to save a further 1 billion pounds would begin.
It reported yearly revenue and adjusted operating profit slightly ahead of expectations and core earnings in line with forecasts. Group revenue declined 2.3 percent to 44.5 billion pounds after excluding benefits from foreign exchange and acquisitions.
Core earnings or EBITDA reached 14.7 billion pounds in the year ended March 31 against an average forecast of 14.8 billion.
Free cash flow exceeded expectations by growing 26.5 percent, while capital investment was maintained at prior year levels. Vodafone said it would target dividend growth of 7 percent a year through the next three years.
"We are creating a stronger Vodafone, which is positioned to return to revenue growth during the 2011 financial year, as economic recovery should benefit our key markets," Colao said.
Shares in Vodafone were flat in early morning trading, compared with a FTSE 100 index up 0.6 percent.
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