Vodafone India, a subsidiary of
Vodafone Group plc
), has received a tax reminder of $2 billion related to a
disputed tax issue on acquiring the assets of an Indian mobile
company. Issues surrounding one of Vodafone's most promising
markets not only calls for further financial distress in an
already stressful economy, but also creates uncertainty over it
future in that region.
The problem dates back to 2007, when Vodafone Group Plc
acquired the stakes of Hong-Kong based, Hutchison
Telecommunications International Limited in an Indian mobile
company -- Hutchison Essar Ltd. The transaction, which took place
through a Netherlands-based subsidiary of Vodafone Group,
resulted in the company acquiring a 67% stake in Hutchison Essar
Ltd. and gaining total control over Hutchison's Indian
The Indian Supreme Court bailed out Vodafone last year,
stating it does not hold any tax liability on transactions taking
place overseas. However, the Indian tax authorities seem to think
otherwise and changed the country's tax law retrospectively in
2012 to levy the tax on Vodafone. The case is still pending, with
nothing much being done in this regard.
We believe that if the case does not work in favor of
Vodafone, it may also hurt investment prospects as much of the
liquidity will have to be shelled out on regulatory charges. This
may ultimately forestall growth in one of its key markets. As of
September 30, 2012, the company had 153 million mobile
subscribers in India -- the largest mobile customer base under
its coverage across the globe.
Given the growth trajectory, the company is accelerating its
investments in India in building infrastructure. In recently
published reports, the company stated that it invested
approximately INR 10 billion in 2012 in major cities like Delhi,
Mumbai and Kolkata.
Based in Newbury, United Kingdom, Vodafone Group is the
world's largest revenue generating wireless communications
operator and the second largest carrier after
China Mobile Limited
) based on subscription.
For the short term (1-3 months), Vodafone has a Zacks #2 Rank,
implying a Buy rating. For the long term, we have a Neutral
recommendation on the stock.
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