How Vodafone could be worth 20% more

Indian spectrum auctions are underway. They’ve been an overhang on investor sentiment recently, but should be over in the coming weeks. Once cleared, Vodafone's shares could do very well, says broker UBS, as focus shifts to strong underlying trends in India and possible catalysts for earnings upgrades elsewhere.

Much of the competition in India is for 900 Megahertz (MHz) spectrum, with other bands experiencing limited excess demand. "Bidding activity also seems to be more focused on the areas where RCOM and IDEA are seeing renewals," says UBS telecoms analyst Polo Tang. "We factor in $3bn (£1.9 billion) of spectrum costs for VOD."

In a recent note, the broker said: "Vodafone is in a strong position in most service areas where it is coming up for renewal in 900MHz, with sufficient 1800MHz spectrum to fall-back on, except for in Maharashtra and Rajasthan."

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Vodafone has six service areas up for renewal, which currently contribute 38% to the company's India mobile revenues. Recently announced cuts in Indian mobile termination rates (MTR) will cause a -4% drag on services revenue from 1 March and wipe out £70 million of cash profit, reckons UBS. An increase in service tax could cost another £30 million, proposals to reduce national roaming charges about £50 million, and a possible new ‘Clean India’ tax £25 million. Worst case is a £175 million hit to annual cash profit.

It’s why Tang trims estimates for full-year 2016 cash profit by £260 million from £12.1 billion to £11.9 billion. Just £70 million of that is India related. The rest is due to the weaker euro given Vodafone makes half its money in the common currency.  

However, the broker repeats its Buy rating and 265p target price. Says UBS:

We believe Indian spectrum auctions have been an overhang on investor sentiment, but the auction is likely to be over in the coming weeks. We reiterate our view that group organic service revenue trends will continue to improve and we see a dividend yield of 5% as attractive. We see upside to estimates from market repair/mobile data and do not believe VOD will undertake any transformational M&A nearterm.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.