Jefferies downgrades Vodafone ahead of annual results on tough industry conditions

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(Reuters) - Jefferies on Friday downgraded Vodafone Group Plc for the first time in two years, citing the telecom group's vulnerability in tackling rising inflation and headwinds in Germany, ahead of the company's annual results next week.

The world's second largest mobile operator must be "cautious" while providing outlook as the company is facing intense competition in several key markets amid rising costs, analyst Jerry Dellis said, after downgrading the company to "hold" from "buy".

Vodafone is set to announce its annual results on May 17.

"There is no competitive let-up in most markets, and a high profile attempt to lead industry price indexation is not getting far... its lean cost base lacks the obvious inflation safety valves that may be available to incumbent peer," Dellis said.

Vodafone is already facing pressure from Europe's largest activist fund Cevian Capital to simplify its portfolio, enhance its strategy in key markets and boost returns.

The brokerage added the market is too optimistic about Vodafone's outlook in Germany despite pricing challenges and stiff competition from Telefonica Deutschland Holding and Deutsche Telekom. It said the company will need to spend more to fight off these rivals in its largest market.

Vodafone is pursuing mergers with rivals in multiple European markets and is looking to extract value from its controlling stake in Vantage Towers, including approaches from global infrastructure funds.

"Six months on from Vodafone's commitment to actively pursue market structure opportunities, including strategic network partnerships and in-market consolidation, the lack of visible progress is a problem," Jefferies added.

(Reporting by Subhadeep Chakravarty and Aniruddha Ghosh; Editing by Krishna Chandra Eluri)