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Vodafone writes off due to Rs 36,500 cr due to Reliance Jio launch

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vodafoneVodafone Group has taken an impairment charge of 5.0 billion euros — equivalent to Rs 36,540 cr, due to the increased competition in the Indian market after the launch of Reliance Jio.

“A new entrant has recently launched free trial services for an extended time period and commercial price plans that were at a significant discount to prevailing market pricing, resulting in competitive responses from other operators.

“This has created a high degree of uncertainty over a range of commercial planning assumptions including future pricing, profitability and market structure.

“Accordingly there are a wide range of potential outcomes which the group has had to assess to derive its current view of future business performance and cash flows for impairment valuation purposes,” it said.

An impairment charge is essentially an amount that the company recognizes as a ‘loss’ on its profit and loss statement when the value of any of its investments declines.

For example, if the value of a big building falls due to a fire or accident, the company will write off that value as an impairment charge.

In case of Vodafone India, the global parent believes the cash flows will reduce going forward, affecting the value of the Indian unit. This difference has been written off.

Impairment charge, in this case, is a non-cash item, and not money that the company has lost in material terms immediately. If the value of the asset is revised upwards, it can write the cost back.

“The impairment charge relates to goodwill, other intangible assets and property, plant and equipment. The impairment charge was driven by lower projected cash flows within the business plans resulting from our reassessment of expected future business performance following the recent change in competitive dynamics,” Vodafone said.

“To the extent that future commercial outcomes are different to those assumed within our plan, this valuation may need to be revised,” it added.

Vodafone is one of the most expensive operator in India for data, and likely to be the worst affected by Jio’s launch. Jio, still under trial, is carrying 10-20 times the data traffic of all other Indian operators combined.

INDIA SERVICE DETAILS

Service revenue from India grew by 5.9% on year, excluding the impact of currency fluctuations.

Data revenue increased 16% year on year while voice revenue increased 2.7%.

Excluding regulatory drags including mobile interconnect charge cuts, roaming price caps and an increase in service tax, the quarterly rate of growth slowed to 6.3% in Q2, it added.

“This underlying slowdown was mainly driven by lower data revenue growth resulting from increased competitive pressure.”

Data revenue growth slowed from 22% in Q1 to 16% in Q2. This was driven by a flattening of unique data user growth quarter-on-quarter, reflecting the impact of ‘free’ promotional offers from a new entrant.

Vodafone’s data customer base at the end of September was 69.6 million, down from 69.7 million three months earlier.

Overall data pricing declined 14% year-on-year, while data usage per customer continued to grow strongly to 504 MB on average, up 28%.

“Our 3G and 4G customer base continued to grow to 36 million, up 51%, and smartphone penetration is now 35%,” it added.

Voice revenue growth increased to 2.7% in Q2 from 2.2% in the preceding quarter. Total mobile customers increased 2.8 million over the period, giving a closing customer base of over 200 million for the first time.

During the period, the company added 4,100 new 3G sites, taking the total to 63,000. Total 4G sites was at 13,000. In comparison, Idea Cellular had around 25,000 4G sites at the end of September.

“We now have a strong position for our future 4G needs and plan to extend our 4G footprint from 9 to 17 circles by the end of the current financial year. These circles cover around 91% of our service revenues and 94% of our data revenues,” it said.

Vodafone said it intends to proceed with an IPO of Vodafone India as soon as market conditions allow. “We do not expect this to take place during the current financial year,” it added.

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