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Bharti makes a stunning move!

We believe the Government of India’s (GoI) decision to roll back the duties imposed on ferrous and stainless steel products in May-22 (Link) is a welcome step. However, due to the falling steel demand and low prices, globally, the benefits are likely to be marginal. Key points: 1) Exports margin/volume is likely to improve; 2) domestic price hikes may remain muted in view of adverse import parity; 3) margins across secondary steel (DRI-IF) value chain may improve, resulting in iron ore prices bottoming out; and 4) stainless steel players are likely to benefit. Overall, while domestic steel prices are unlikely to increase substantially, we believe a significant sector headwind has been removed. That said, the street would be wary of the likely imposition of duties in future, if prices are sharply up. We perceive the event to be a sector re-rating, and hence, raise the valuation multiples of all ferrous stocks under our coverage by 10%- corresponding to similar profitability level, as pre-export duty. We retain BUY on JSPL with a revised TP of Rs605 (earlier: Rs550), Jindal Stainless- revised TP of Rs210 (earlier: Rs180) and Shyam Metalics- revised TP of Rs425 (earlier: Rs355). We upgrade NMDC to ADD (earlier REDUCE) with a revised TP of Rs120 (earlier: Rs102) and SAIL to REDUCE (earlier SELL) with a revised TP of Rs75 (earlier: Rs65). We maintain SELL on JSW Steel with a revised TP of Rs550 (earlier: Rs475). We keep the TP of APL Apollo unchanged (Rs1,225) as being a downstream convertor, it is unlikely to get impacted by any change in duty regime.

What happened? Bharti has started tariff intervention in two circles – Haryana and Odisha – where it has withdrawn its minimum recharge pack of Rs99. Thus its minimum recharge now starts from Rs155. The earlier Rs99 recharge had Rs99 talk-time value and very limited data of 200MB valid for 28 days. In contrast, the now-adopted Rs155 minimum recharge gives unlimited voice, 1GB data allowance and 300 SMSs. This is a massive 57% surge in minimum recharge value, and has been done in the customer segment where affordability matters the most. With removal of Rs99 recharge pack, Bharti’s all plans now have only unlimited voice offering (same as Reliance Jio) which save customers from multiple recharges when they exhaust recharge allowance during validity period. Bharti has thus taken a calculated risk to check how customers respond, and this pack is largely being sold to 2G customers only. It does not impact the remunerative 4G customers. Besides, peers cannot take advantage of the situation to poach its 4G customers. The Haryana and Odisha circles together contributed 4.4% of Bharti’ AGR in Q1FY23. Previously, the company did a similar exercise (market-testing) when it increased its minimum recharge offer from Rs79 to Rs99 in select circles in CY21.

Pros of large tariff hikes

* The important question that arises is: can Bharti, if competition supports, take larger tariff hike in 4G / 5G unlimited data packs where affordability is not a major issue, and the customers already enjoy huge consumption surplus?

* We are building-in much smaller tariff hikes of 5-6% pa going forward in our assumptions, and the quantum of tariff hike intention shown by Bharti through the trial in Haryana and Odisha, is beyond our best-case assumption, and means our EPS estimates have huge upside risk.

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