Lifetime plan will dent Bharti’s earnings

Reliance Infocomm has claimed that it has added a million customers in December, which is a huge jump, considering that net additions in November were about 0.45 million. BSNL, the No. 2 player in the GSM space, reported record additions of 0.78 million in November and the trend is expected to continue, given the fast rate at which the company has added capacity across the country.

Tata Teleservices also reported an impressive 0.73 million addition in its mobile subscriber base in November, thanks to the launch of its innovative non-stop mobile scheme, which allowed users to enjoy unlimited incoming calls without having to recharge for two years. Considering that average monthly subscriber adds for the Tatas were only about 0.14 million in the 8 months prior to the launch of this scheme, it’s obvious that the scheme is a success.

Subscriber addition at Bharti Televentures, meanwhile, has remained steady between 0.65 million and 0.67 million in the past three months. With two players overtaking it in terms of net subscriber additions in November (which is very unusual going by recent history), and the possibility of a third doing so in December, it’s not surprising that the company has initiated a price war in the market.

Bharti was the first mobile operator in the country to offer consumers prepaid cards with a lifetime validity. Its lifetime prepaid cards, worth Rs 999, give users a talktime of only Rs 25, but allow them to continue receiving calls for a lifetime without having to recharge or worry about the validity period of the card or coupon. Competitors like Hutch, Reliance Infocomm and Idea have since announced similar schemes. Idea, in fact, has launched a similar offer even for postpaid subscribers, indicating that the pressure to drop prices to grow is immense.

Investors in Bharti Televentures, nevertheless, don’t seem too perturbed about the price war in mobile telephony. The new schemes announced by mobile firms last month will clearly result in lower revenues and profit from new subscriber additions, compared to earlier schemes.

Since analysts’ earnings estimates are based on the earlier schemes, it’s inevitable that most estimates would be cut. Yet, Bharti’s stock price has dropped only about 1.5% since December 23, 2005, the day on which it announced its Lifetime plan.
Prior to the launch of lifetime cards, Bharti’s prepaid users had to buy recharge coupons worth at least Rs 200 to remain activated for a one-month period.

These cards, which give users a talktime of Rs 50.9, ensured that the minimum income per prepaid subscriber was at least Rs 200 per month or Rs 2,400 per annum. Assuming that new subscribers are content with a talktime of Rs 50 every month, lifetime cards would ensure an income of only Rs 1,599 in the first year. Worse still, the annual income from these subscribers would be Rs 600 from the second year onwards, 75% lower than the current minimum income of Rs 2,400.

True, the company would be able to attract more subscribers with the drop in price levels. But net additions would have to be four times as high as previous estimates to make up for the drop in per subscriber income. For instance, if analysts’ estimates for future years was based on the assumption of a 50% jump in Bharti’s subscriber base, growth would now have to be 200% to make up for the drop in per subscriber income. The company would hope that subscribers would increase their talktime.

Besides, not all new subscribers Bharti will attract from now on will be on the lifetime plan. But going by the success of the Rs 200 recharge coupon, a large chunk of the growth in Bharti’s subscriber base should come from the lifetime plan. Prepaid customers currently account for 77% of the company’s subscriber base, and in the September quarter, which saw the full benefit of the Rs 200 recharge coupon, prepaid customers accounted for 90% of the subscriber growth.

Analysts had then said that much of the growth in the prepaid segment was thanks to the Rs 200 recharge coupon. Considering that the lifetime plan would bring down the entry barrier further, it would drive growth for the company. But as pointed earlier, one can’t expect growth to jump by three-four times current estimates.

While estimates vary on the impact the lifetime plans would have on Bharti’s earnings, it’s fair to say that current earnings estimates would have to be cut. It’s surprising, therefore, that the Bharti stock has barely budged. The only way Bharti’s current valuations of over 30 times trailing earnings can be justified is based on hopes of an increase in Vodafone’s stake in the company beyond 15% (currently 10%), which would necessitate an open offer.

(Contributed by Mobis Philipose)