Vodafone has made good calls in emerging markets

If there were any doubt about the credit crunch hitting the high street, the grisly headlines of the past few weeks have firmly dispelled it. In such a turbulent financial environment, established stocks such as BT are traditionally regarded as a safe haven.

But investors with an eye for telecoms might do better to turn towards the mobile sector and its flagship player, Vodafone.

Likes its landline peer the group, which boasts 241 million global subscribers, offers the reassurance of ‘sticky’ customers: While its average revenue spend - currently around £24 a month in the UK - may slow if a finanical downturn does take hold, it would require nothing short of financial Armageddon for most of us to give up our mobile subscriptions.

But while BT struggles to convince many investors that its ambitions for serving global corporates as a multinational IT player can be pulled off – it has yet been unable to report progress towards a 15 per cent profit margin target for its Global Services division – Vodafone has two convincing growth paths opening up to it.

The first is in data. Revenues from this area - the downloading of music clips, e-mailing and so on – surged nearly 50 per cent in the first half to £1 billion. Data revenues now account for 7.3 per cent of the group’s total Western European revenues.

Admittedly the uptick has come seven years later than expected. It also does little to justify the £6 billion splashed out by the mobile group on it 3G licence during frenzied bidding at the height of the dot-com boom.

It does however mark a turning point in Vodafone’s future prospects, giving an indication that consumers are finally banishing their reluctance to spend on more lucrative services instead of just calling and texting.

In the current environment the group’s diversified geographic portfolio and critically its exposure to markets outside of the UK and US is also a strong plus point While a foothold in such markets does not come cheap – it splashed out $11.1 billion for a 67 per cent stake in Hutchison Essar, India’s fourth-biggest mobile operator, earlier this year – Vodafone has presented convincing evidence of a significant payback.

In contrast to the 2 per cent revenue growth in Europe at the half year, revenues in Vodafone’s emerging markes regions jumped an impressive 39.9 per cent.

Vodacom, in which Vodafone is desperately seeking to boost its 50 per cent stake, recently reported an envious 15.1 per cent growth in profit – the kind of double-digit growth associated in the UK with the mobile heyday of the late 1990s.

Of course emerging markets do not come without risk– a combination of mischevious interfering by rival bidders and local bureaucracy saw the Hutchison Essar deal drag on for many more months than expected.

But far from aggressively leaping in to such markets as the buccannering Vodafone of past days might, the group has also illustrated an ability to adapt sensitively to the different types of environments it is presented with.

It recently announced, for example, plans to squeeze value out of the India deal through a network-sharing alliance with local rivals. including Bharti, The deal will significantly cut the cost of rolling out its network across the country’s vast landmass.

Less reassuring in the current climate is the group’s exposure to the US. – through its 45 per cent holding in Verizon Wireless, the country’s second-biggest mobile operator.

So far at least though, the decision to remain in the market – despite strong calls from some investors to pull out – has been vindicated.

In the 2006-2007 financial year alone, the carrier enjoyed a 15 per cent increase in its customer base to 62 million, and a 17 per cent increase in its revenues.

Analysts’ estimates now put a value on Vodafone's holding in the business of $54 billion (£26 billion), up from $38 billion a year ago.

The icing on the cake – the reinstatement of the dividend, which it stopped issuing two years ago – remains, however, contentious. Payments are not expected to resume until 2009.

Like BT, Vodafone has displayed strong resilience. Just one year ago investors concerns about an apparent lack of strategy and a flailing share price saw those holding 15 per cent of the stock fail to back its chief executive, Arun Sarin, at the group’s annual meeting.

The sniping – both externally and internally amidst the group’s board members – has long ended. The group, for now at least, is managing a careful balancing act between its traditional Western markets and the emerging regions into which it is piling in.

The problems presented by Europe are being manned well by Vittorio Colao – who is also regarded as a potential future successor to Mr Sarin.

At 183.20p, up 29 per cent in the year, the group trades at 16 times next year’s earnings.

Although the shares can no longer be called cheap, Vodafone’s strong cash generation and defensive qualities mean they should be held onto.