Vodafone hails solid European trading to offset tougher India

An encouraging performance in Germany and Italy lifted first-half trading at Vodafone slightly above the telecoms giant's expectations, offsetting a more competitive market in India.

The dividend was lifted 1.9% to 4.74 eurocents as group revenue slipped 3.9% to €27.1bn in the six months ended 30 September, with organic service revenue up 2.3%.

Organic service revenue growth accelerated in the second quarter to 2.4%, led by improvement in Europe to 1.0% from 0.3% in the first, while the Africa, Middle East, Asia, Pacific region grew 7.1%, down from 7.7% in the first three months of the year.

For the first half, organic earnings before interest, tax, depreciation and amortisation growth of 4.3% to €7.9bn, with breakeven free cash flow reached thanks to lower capital additions and seasonal working capital outflows.

At the statutory level, Vodafone fell to a €5.4bn pre-tax loss due to a €5bn non-cash impairment in India net of tax due to increased competition, where the company has looked to fight back by strengthening its commercial offers and buying in the recent spectrum auction in the more profitable areas of the country.

Guidance for the full year was narrowed moderately, with management now predicting organic EBITDA growth of 3-6% to €15.7-16.1bn, with free cash flow of at least €4.0bn.

"We have further improved our performance during the first half of the financial year with Europe modestly ahead of our expectations - led by Germany and Italy - and good execution in AMAP," said chief executive Vittorio Colao.

He said the group's massive investment in its network and 'more-for-more' propositions have allowed it to capture opportunities from strong data demand, supporting European mobile contract ARPU and continued growth in emerging markets.

"As Europe's fastest-growing broadband operator, we are driving rapid uptake of our consumer fixed and TV services while our wholly converged Enterprise business continues to outperform its peers. We are now translating faster revenue growth into margin expansion, supported by our focus on cost efficiency," he said.

Also expanding is debt, which has risen to €40.7bn.

Mostly positive reaction

Investors were being pragmatic to concentrate on progress on pre-tax profits, operating cash flow and net debt, rather than negatives including weakness in handsets, FX, a doubling of the net loss and lower than hoped capital expenditure, said analyst Mike Van Dulken at Accendo Markets.

A large impairment such as that taken in India is never nice, said George Salmon at Hargreaves Lansdown, especially it is in one of its key emerging markets.

"The group’s strategy is to focus on selling ‘more for more’, expanding its data packages, and increase the roll-out of fixed line broadband and TV services across Europe. With customers always on the look-out for the cheapest deal, Vodafone’s strategy of bundling services together to reduce customer churn makes sense to us," he said.

Having spent huge amounts on the infrastructure that allows for its broad 4G roll-out, Salmon said group debt will grow even further in the second half and now at close to three times what the group expects in earnings this year, "the pressure is on the group to pull-off its plans".