Last Tuesday, a smiling Arun Sarin welcomed analysts to a new venue for Vodafone’s results presentation, an auditorium in the Fleet Street offices of Goldman Sachs, its adviser.

Vodafone’s chief executive proceeded to give an upbeat account of what he called “another strong set of results”. Operating cashflow for the half-year had risen to £6.1 billion, dividends and share buybacks were up again, and the company was making good progress on switching customers to third-generation (3G) phones that will enable video, entertainment and other advanced services.

“We’re making very strong returns to our shareholders,” Sarin said. “Fundamentally, we’re on track . . . we are clearly returning to health in Japan . . . our 3G programme is going well . . . the promise that 3G will give us a higher ‘share of wallet’ is actually coming through.”

A newcomer to the company might easily have concluded that Vodafone’s business was firing on all cylinders.

Yet even as Sarin spoke, its shares were falling sharply in heavy trading on the London stock market. And as the presentation continued — and as Andy Halford, in a miserable debut as chief financial officer, revealed Vodafone was facing a £5 billion tax bill — analysts grew increasingly worried.

By the end of the day, Vodafone’s shares had fallen nearly 11%, and they fell further by Friday’s close. For one of Britain’s largest and most financially strong businesses, this was an enormous drop — a bigger one-day fall than at any time during the “telecoms winter” of 2001-3.

Part of the explanation could be found on Sarin’s final slide. For all his sunny words, the outlook for the next 18 months is full of clouds. Revenue growth is slowing in increasingly mature markets and profit margins are under pressure, particularly in Japan where they have already fallen by six points. Increasing investment and that huge tax bill are going to cut into cashflow.

Ted Scott, a fund manager at F&C Asset Management, which has a £1 billion stake in Vodafone, said the £5 billion tax liability was “totally unexpected”.

“The analysts are saying that came completely out of the blue. Management guidance did not get to the analysts. The struggling Japanese business showed no visible sign of improving,” said Scott. “On the contrary, it seems to be getting worse.

“Although the dividend increase was generous, it was not as generous as the market had been led to believe. That’s not acting as a prop for the share price. The shares have been derated. The market is viewing the company as a utility.”

Brad McMaster, telecoms analyst at ABN Amro, who strongly believes that Vodafone should pay much higher dividends, issued a research report entitled Dead in the Water. And that was a buy note.

McMaster said: “Credibility is quite extensively damaged — to the point where Sarin has been advised to apologise for any misconceptions there might have been.” Sarin’s “bullshit spin” was too smooth, he said. “He’s more of a management consultant than a chief executive. He talks about a mobile-phone company being a bit like a movie, giving goodness to (its) customers. It does not work for the market.”

McMaster said Sarin probably had “another year or so” to solve the problems. After that, “it does have to be asked whether he does deserve to continue as Vodafone’s chief executive”.

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