Vodafone Wins Indian Tax Dispute

While we are excited that Vodafone has won the case, we will not be changing our fair value estimate

Allan C. Nicholls, 23 January, 2012 | 1:06PM

On Friday, Vodafone (VOD) announced the Indian Supreme Court ruled in its favour regarding its $2.5 billion tax dispute over its acquisition of Hutchison Essar in 2007. While we are excited that Vodafone won the case, we will not be changing our fair value estimate. We had not factored in any reductions to our base-case assumptions due to the potential of losing the case, although we noted its potential as a risk to our fair value estimate. While that risk is now gone, others still exist in India. The government continues to change telecom regulations, such as on operators' rights to previously granted 2G spectrum and the sharing of 3G spectrum. These issues, combined with the future ability for firms to merge, may actually become more relevant to Vodafone's ultimate success in India and its valuation. While we have been very impressed with Vodafone's ability to gain new subscribers in India, we have been disappointed with its weak free cash flow. However, we still think India provides the best source of upside to our current fair value estimate.

We hope this ruling demonstrates to the government that clear and concise regulation is important and changes can't be made at a whim or retroactively. There has been speculation in the media that a negative tax ruling against Vodafone would hurt investment in India. While we think this scenario was overplayed--as India's potential is so large--we do think it could help speed up foreign direct investment that had been put on hold. This should benefit the economy as a whole, which in turn will indirectly help Vodafone.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Vodafone Group PLC195.04 GBX0.09