Tata Steel targets 30% ROC in 5 yrs

The precious metals have bounced back drastically. So gold and silver had 11-15% rallies but base metals generally have been grinding down globally over the last couple of months.

Q: How will companies like you fund yourselves going forward given the turmoil that you are seeing?

A: I think structurally the world is a better place than where we were 10-15 years back. But event risks are something which can always happen and we need to see as to how we can manage it. What's going on now would be classified more as event risk. The world of finance is volatile and turbulent. Moreover, at this point of time one needs to focus on the fundamentals because it will carry companies and organisations through and that's why we have been focusing on our own performance improvements and cash flows which will fund our growth in the short-term. External capital will be difficult; the global cost of capital has increased significantly.

Q: Does it have balance sheet ramifications for a company like you which is just digesting a very large global acquisition?

A: Fortunately enough we have syndicated the entire acquisition debt which was done well in time last year. So there are no immediate capital requirements apart from our planned growth which is anyway funded from internal generations. So there aren't any balance sheet issues as far as we are concerned. But to tide over all of this, it's important that the real sector continues to perform well and that is something that we are focusing on just now.            

Q: What's your sense of Indian corporate's leveraged issues? Many of these companies in the past few years went via the FCCB, or Foreign Currency Convertible Bond, route?

A: There are two issues; one is the servicing which would depend on Indian companies own cash flow generation and how does the Indian economy pan out in the next 6-12 months. Fundamentally, if the leverage position in most of the capital goes for capex it would create capacity and therefore have the cash flows to service. But incremental external capital would certainly be more difficult than in the past. That's a reality; the cost of capital will be higher because the cost of risk or the premium on risk is much higher than before. 

Q: How are you feeling about the business itself? There have been lots of concerns on base metals and steel?

A: As far as steel outlook is concerned, if one is looking from an overall perspective the steel growth this year was forecasted to grow at around 6.5% for the year. That is around the number, maybe a little lower now because of the US housing construction being much lower. But there is also another element which has come in. We track demand growth as the key driver for the industry but the supply growth has also become very important aspect in the last couple of years and is not coming into stream as was predicted.

If one would expect 5-6% growth in steel consumption every year, the global capacity has to increase by 50-70 million tonne every year and that kind of capacity is not coming on easily. The costs of new build are at a much higher level and therefore it's also very slow. So from that perspective there is an issue as far as the demand supply gap is concerned. So even at a lower demand one would have supply constraints which would inevitably push the steel prices higher. The fact is the marginal cost of production is also higher because of iron ore and coal prices being higher.

Q: Though prices have corrected globally in last couple of months. Do you see a more significant correction? What's the sense from a Corus perspective?

A: When one looks at prices in the short-term, one critical data point is the inventories. And the data which came out yesterday for e.g. US inventories on an absolute terms is lower than on a month-on-month basis. Therefore, it is showing the fact that in the system there is not too much of over-stocking. It needs perhaps some correction to align with the current spot prices.

The service centres are not buying to the extent it was buying earlier and spot prices are therefore softened a bit. But if one looks at averages, these prices are much too higher compared to what it was earlier on. So there is a band and if one looks at the raw material metal spread, it determines the profitability or the scrap it will spread. These are still quite comfortable for companies to continue their profit run. So there aren't any significant issues in the industry as yet. One has to look at where this whole demand impacts move on to.              

Q: One thing which would be worrying your investors is whether the cycle has turned or not? Is it a temporary aberration or do you have any apprehension that we could indeed be sitting on the top of the cycle?

A: The question of the cycle has come in from late 70s till 90s. It was a time when cyclical ups and downs used to happen because capacity was in a way constant. The global gross domestic product has moved in the last eight years or so. The metal intensity triggers in different geographies are different. Today the risks are much more diversified than where we were in 1980s or 1990s. You have US as an economy, China, West Asia, India, Russia and Brazil; so there is a lot more spread-out of risk.

Therefore, the cyclicality - first the cycle has stretched much more than before because in 2004 and 2006 people said that China bubble has burst or the steel cycle has gone. But it has not happened in that manner and therefore this cycle will continue. There will be quarterly or six monthly blips, that is when one needs to have a safety belt around to ensure focus on not being too expansive in terms of production or in terms of supplies.

There has also been a fair bit of consolidation in steel, so people first look at production cuts. Some companies have already mentioned that there will be production cuts. So to maintain the price there has been more demand-supply balance, which is much more favourable than before. So I wouldn't say that there is anything doomsday or downturn, which is going to be very severe. There will be corrections, there will be softnesses but if you look at the trend, it is certainly on the upswing and that is because the world needs more metals now than before.

Q: There has been margin compression though. Do you see that problem remaining over the next few quarters especially as you try to align Corus to Tata Steel's levels?

A: The profitability of our European operations is very different to where Tata Steel India operations are. Our focus has been to move on to combined return on capital of around 30% in five years time, on a pro-forma basis 2006-07 we were 14%. In 2007-08 we are more around 19%. There is a significant performance improvement programme that is embedded in Corus and our European operations have delivered USD 600 million last year. In the begining of this year our guidance has been to be another USD 600 million. So that continues for sometime and will enable us to improve the combined profitability significantly over the next two years or so. So leave the cost price equation aside as Corus does not have its own captive raw materials, it buys raw materials. So leaving that aside the fundamental focus has been on the profitability of the company. So it's lower than Indian operation but it is certainly going to pick up as we move. Q1 has demonstrated the same.

Q: In the next couple of months though in the domestic market do you see yourself cutting prices?

A: The domestic scenario is very different and perhaps more sensitive in relation to announcements etc that happens. But the key part from Tata Steel point of view has been the contract prices or the negotiation prices because that's a larger part of our portfolio compared to the spot. The spot still is perhaps at a discount to the international prices even after softening. So there is always a room for moving up the prices as far as contracts are concerned and that will happen not before next year on a long-term contract.

Q: But spot rates will be cut?

A: Spot rates are a question of each consignment. So one can't have a trend of saying that it will come down or it will get cut. We haven't seen anything in the July-September quarter which has been pretty much okay.