Sarin’s big gamble has yet to pay off

WHEN Vodafone bought a controlling stake in Hutchison Essar for $10.9bn in 2007, it was seen as the deal that would come to define the rein of chief executive Arun Sarin.

Sarin, who was born in India, made an expensive bet on that country’s telecoms market; the deal implied an $18.8bn enterprise value for the firm, which was renamed Vodafone-Essar, around 17 times its 2007-8 underlying earnings. It is still unclear whether that gamble will pay off.

No one is doubting the huge potential of the Indian telecoms market, which grew by 18 per cent last year, outpacing GDP growth of around nine per cent. But with fast growth comes fierce competition. There are no less than 15 mobile operators in India, compared to the standard three or four, partly because the government hands out licenses as though they were sweeties to drive competition and boost mobile phone penetration. Vodafone-Essar’s profit margin fell from 33 per cent in 2007-8 to 26 per cent in 2009-10. Last year, Vodafone took a £2.3bn writedown on the value of the Indian business.

The joint-venture has also been plagued by problems. Vodafone is in dispute over an unpaid tax bill of $2.5bn with the Indian government, which is also considering imposing a retrospective $1bn bill for spectrum.

Still, Vodafone has made a good fist of it. It grew service revenues by 15 per cent in its last half year and holds the number two spot in terms of revenues. Having bought out Essar, it has ended a famously acrimonious partnership, paving the way for an IPO. But shareholders will still have to wait to see if Sarin’s big wager comes good.