BHARTI introduces recharge vouchers with no processing, lower airtime charges:

According to the Economic Times, Bharti Airtel (BHARTI) introduced a new set of recharge vouchers (Happy Recharge) last week. These vouchers offer full talk time as compared to INR 90-150 processing charges in the existing one-month validity products. Additionally, airtime charges for these products are lower than other existing products. According to our calculations, this effectively translates into a 25% tariff cut on lower-end products.

Happy Recharge could adversely impact mobile EBIDTA margin in near term:

These products are introduced after a long period of tariff stability. The last cut in tariff was in December 2005, which saw the introduction of Lifetime pre-paid scheme. The current tariff cut could put pressure on margins in the near term as processing charges account for around 20% of the mobile revenues.

Number of levers to maintain margins in medium term:

In the medium term, the impact on margins is likely to be cushioned by higher usage and expected decline in per-minute cost as site sharing accelerates. Note that the new recharge vouchers start at INR 249 as compared to minimum monthly recharge voucher of INR 200 currently available. Additionally, our comparison is based on the tariffs published on the company’s website. However, there are several schemes running at circle level, which bring down the effective tariffs. Accordingly, any tariff cut involves a part of tariff repackaging and our calculation of cut in effective rate per minute is higher to that extent. In our view, these factors should provide cushion to margins in the medium term.

Timing of tariff cut is surprising, may be to pre-empt competition:

BHARTI’s additions have averaged 1.7m for the past three months and are in line with market expectations. In the recent past, competitors have not launched any disruptive tariff package. Hence, this tariff cut by BHARTI takes the market by surprise. With smaller operators set to expand footprint and the 60m-line roll out by BSNL, the competition is set to increase over the next 18 months. BHARTI may be trying to leverage its pan-India presence by pre-empting competition. Also note that BHARTI has been a most aggressive participant in the capex. With lower tariff, usage can be increased without much increase in operating costs.

We remain positive on the stock and maintain Buy. Our price target is INR 806 for year-end FY08, which we will upgrade shortly.