MC Interview | First 2 quarters have been tough but too soon to give up on debt reduction goal, says Tata Steel MD

Excerpts from the interview follow:

Tata Steel’s consolidated net profit plummeted 93% in the first quarter of 2023-24. Many brokerages had expected you may report a loss in the quarter and may have been surprised by the improvement in realisation.

What was behind the Q1 numbers?

The expectation was that we will report a loss because we had guided that we will be completing the transaction on the British Steel Pension Scheme (BSPS) and will have to recognise some losses on that account. That’s where the analysts had assumed that we would be negative, but we had some positives as well. The performance, particularly in India, has been reasonably good despite the challenging environment. So, even after you take out the one offs, we have delivered numbers that are better than what people had expected. The volumes have been strong in India. The weakness in prices internationally is reflected in the pricing in India as well. In Europe, we have had some challenges. We had guided that the blast furnace in the Netherlands was down for relining; only one of the two blast furnaces were operational for six months. Our numbers are significantly lower than last year because last year Q1 was a period when steel prices were quite high and coal prices were not yet that high. What we were consuming was not high-cost coal. It was also the quarter when the export duty was brought in by India. There were abnormal circumstances in Q1 of last year, so it may not be a good base for comparison. This is the third consecutive quarter of losses in Europe operations. There are macro factors affecting the demand there and you have undertaken relining of blast furnaces in the Netherlands, which is affecting production.

How is this looking for the rest of the year?

We give European numbers on a consolidated basis. But if you look at our performance for the last 8-10 years, typically, the Netherlands business is positive in cash, EBITDA and PAT (profit after tax). It is a pretty strong business. The UK is where we have struggled because structurally there are some challenges. The assets are old and coming to the end of life. Often, the Netherlands business offset the losses in the UK business. On a consolidated basis, you tend to see a positive EBITDA more often than not. But last year, because of the Ukraine-Russia conflict, gas prices and electricity prices in Europe shot up significantly in a short period. Secondly, the demand recovery was taking time because of the overhang of the Russia-Ukraine conflict. It was a pretty tough year in Europe. On top of that, we had the blast furnace relining so the Netherlands business has not been able to contribute on a consolidated basis and in fact has negative EBITDA in Q1, which is very unusual. That’s why you see three quarters in a row, Europe operations had negative EBITDA.

The challenge will continue for Q2 as well because the blast furnace is still being relined; it is a five- to six-month process. We will see a positive recovery in the performance of the Netherlands only from Q3; by Q4 it will be back to normal.

The UK business tends to make money when steel prices are good, if not, it tends to have a negative EBITDA. That’s always been the challenge with the UK business. Over the years, we have shrunk the UK business from 10 million tonnes to 3 million tonnes and the India business has grown to 20 million tonnes. So, while UK business was 40 percent of our business at one time, it is now 10 percent of our business. That’s why Tata Steel, on a consolidated basis, is in a much stronger place. Going forward, the Netherlands business will come back to normal and will hopefully be able to offset the UK, which will swing between positive and negative EBITDA.

What’s the outlook for demand?

India demand continues to be okay, driven by a strong auto industry. Construction demand in Q2 tends to be a bit soft as construction activities slow down in the monsoon season. Overall, in India, the demand is quite strong, which is reflected in the fact that we are running at 100 percent capacity utilisation and selling 95 percent of that in India. Globally, demand is going to be driven a lot by what happens in China. The recovery in China has not been as great as expected. The stimulus that has been given so far, which is going to the real estate sector, is more to spend on completing projects than starting new projects. Though I see that in the last couple of days, there has been a little bit more excitement about another stimulus coming to the real estate sector in China.

Europe will slowly recover. Next year will be better than this year from a macroeconomic point of view. In Europe and in the US, inflation is still on the higher side. The Fed, the European Central Bank, the UK Central Bank — there are talks of more rate hikes. I think it will be next year before you really see economic activity come back strongly in Europe. But we are positive about India. That’s where most of our growth is going to come from.

What’s the outlook for price and realisation in the second quarter and for the rest of the fiscal year?

We have guided that Q2 realisations in both Europe and India will be lower than Q1. In India, it will be about ₹3,100 per tonne lower in Q2 than Q1. In Europe, we are expecting it to be about €38 pounds per tonne lower in Q2 than Q1.

At the same time, we expect the costs of coking coal consumption to come down by at least $50-55 in both Europe and India. To some extent the drop in prices will be offset by the drop in coking coal costs. We are looking at some other costs to try and protect margins.

So to that extent, what kind of EBITDA per tonne are you expecting for your consolidated operations and your India operations, if you can give some colour on that for the second quarter?

We don’t give specific guidance on EBITDA; there are many other moving parts. We expect H2 to be much stronger than H1 for multiple reasons. We expect that China exports will reduce in H2, which will bring more stability to international steel prices. The India demand post monsoons should be strong, leading up to the elections. Europe will progressively start getting better. Inflation is slowly coming under control. Globally, interest rate hikes will stop. So, overall, we expect a better H2 than H1 for sure.

You have been talking to the UK government for support for your plant there. Now there are some reports suggesting you are internally looking at an exit plan. Where do you stand vis-à-vis the conversations with the UK government? Because they are happening at the very top level... Is there an exit plan or are there other options?

The conversations have been going on for some time as you said, but we must also consider the fact that we have had three governments in the UK in the last two years and there was a lack of the political stability needed to take these calls. But now, we are seeing clear progress. Dedicated teams are working on it with us. We want to take it to its logical conclusion, which we hope will be acceptable to all stakeholders. All other speculation is very hypothetical.

Have you set a hard stop for the timeline because the process has been going on for a long time?

We have already said publicly that many of the assets in the UK are coming to the end of life; this is going to start happening within a year. This means we have no option but to close them — you can’t run them if they are not safe. We have a year to take a call on that. We are hoping that in the next few months, we will come to some sort of conclusion. But the outside timeline is what you said, the end-of-life of the assets,

Your capex is driven by India demand. What makes you so bullish about India?

Traditionally India had consumption-led growth. Over the last few years, we are seeing more investment-led growth. That’s good for steel; in this industry, the intensity of growth is higher when it is investment-led growth. Most developing countries have a steel consumption growth rate that is higher than the GDP (gross domestic product) growth rate. Even when China was growing at a GDP growth rate of 10 percent, steel consumption was growing at 15 percent. In India, it has been the other way around; steel consumption has grown slower than the GDP growth rate.

That’s changing. Now, we are seeing steel consumption growing at a faster rate than the GDP growth rate, as it should. And that gives us the confidence that demand in India will continue to be strong. Prices will vary with international prices. But we are one of the lowest cost producers of steel in the world. Even if you see last quarter, the EBITDA margin in the India business is over 20 percent. And this is when steel prices are quite low and overall, most steel companies are not doing so great. So, I think we have the confidence that we are in a good cost position, we have the confidence that demand in India will grow. And we have a very strong franchise in the marketplace with our retail business, our brands, our relationship with OEMs (original equipment manufacturers), our dominant or strong position in auto and other high-end sectors. That’s why we want to keep growing in India and that helps the overall Tata Steel balance sheet and the overall Tata Steel portfolio.

Earlier in the year, Tata Steel had said that it plans a capex of Rs 16,000 crore for 2023-24. Is it on track? How are you financing it?
We are on track; we spent Rs 4,000 crore in the first quarter alone. Most of it will go towards completing the Kalinganagar project and the associated work. We have the internal cash flows to support that. We are also focused on our debt.

So, last fiscal you slashed your debt reduction target. Then the company indicated that it will resume its deleveraging exercise and reduce debt by $1 billion in FY24. Where do we stand on that plan right now?

Ever since we said that we will reduce debt by $1 billion every year, we have done it every year apart from last year. This year, of course, the first two quarters have been more challenging than we thought. But still, we have not given up on that target. I think we can manage a good balance between deleveraging and growth because of the strong cash flows out of India. It’s too early to give up on the debt reduction target.

Tata Steel’s focus has been on brownfield expansion but there are some opportunities in the secondary market, like NMDC and some assets of Vedanta. Are you keen to look at that space?

At the moment, we are focused on our organic growth because in the last few years we did more inorganic growth. This has given us sites on which to work on. So, between the Neelachal Ispat Nigam’s Kalinganagar site and the Bhushan Steel site — both of which we acquired — and Jamshedpur, we can actually build about 40 to 50 million tonnes on these sites. We have said we want to build 40-million-tonne capacity by 2030. Now, it’s more about execution than anything else. We don’t really need to look at any inorganic growth opportunities, we will stay focused on what we have.

Decarbonisation is a big theme globally, especially in energy-intensive sectors like steel manufacturing. Carbon taxes will kick in soon. This is happening at a time when there are challenges in the macroeconomic situation and commodity cycle. How hard is it to be on track with your decarbonisation plan?

The transition needs three stakeholders to play their role. One is the industry — we need to plan capex for the transition. Second, the transition needs the regulatory environment to support that. If I take Europe as an example, which is in some sense ahead of the rest of the world on the regulatory environment, there is a policy framework that includes the carbon border adjustment mechanism, which is aimed at encouraging local steel companies to transition into a greener future. The carbon border adjustment mechanism says that anybody who is selling steel in Europe has to pay the carbon tax. Then, third, you need to have customers who are willing to pay a premium, because green steel comes with a premium. Any geography which wants to transition, needs the industry to commit and do what it has to do, the government to create that framework and the environment, and customers (to be) willing to pay more. The plans are being made for both the Netherlands and in the UK, using all these elements or ingredients.

In India, I think we are moving in that direction. A lot more needs to be done on a policy basis. We need to also have customers willing to pay more for green steel; I can hear some customers talking about it. As an industry, we need to invest in it, which we are already doing. There is no silver bullet. There will be multiple solutions that we need to develop and scale up. It is going to be a very exciting phase which will create a lot of opportunities. It is also going to create a lot of demand for steel, because all new energy sources also have steel in some form or the other involved in generating or transmission or storage of energy.

You are juggling many balls right now. The Tata Steel board has reappointed you for another five years. As you start a new term, what is your biggest goal for the next term?

Execution, both in execution of transformation in Europe and execution of growth in India.