Tata Steel and JSW Steel are rapidly losing their COVID-era cash pile. Here’s why

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The rapidly depleting cash reserves of India’s top steelmakers over the past three years could, going forward, raise concerns about their ability to service existing debt or raise fresh debt to fulfil capex commitments, analysts said.

According to data from Bloomberg, cash and cash equivalents of Tata Steel and JSW Steel have fallen by 45 percent to 28 percent between FY22 and FY24, respectively, after reaching historical peaks from windfall gains, driven by higher steel prices during the pandemic years.

Analysts maintain that the current sharp decline in cash reserves comes amidst heightened competition from Chinese steelmakers, which has put pressure on margins and reduced profitability. As of September 30, the cash reserves of Tata  Steel and JSW Steel covered less than 15 percent of their respective gross debt.

Tata Steel, JSW Steel and JSPL did not immediately respond to queries sent by Moneycontrol.

Cash reserves help companies manage day-to-day operations, repay debts, handle unexpected expenses, and invest in growth opportunities without financial strain. Companies build cash reserves through profits from their operations, borrowings, asset sales, or equity funding.

Healthy cash reserves also help companies leverage their balance sheet to raise more debt, vital for the steel industry, in which most major players have announced large capital expenditure outlays, at least till the end of the decade. According to an analyst with a large brokerage, all of the major steel firms will be required to raise fresh debt to fund part, if not most, of their capital expenditure commitments- which will further put pressure on margins due to higher finance costs.

Shrinking cash pile sounds alarm

The reserves at Tata Steel stood at Rs 8,677.7 crore in FY24, down 45 percent from FY22 levels. The decline comes as a post-COVID property crisis in China caused the world's largest crude steel producer to heavily export, in a bid to navigate overcapacity. The dumping of low-priced steel on India reached an eight-year high in December, according to a Reuters report, eating into the profits of domestic steelmakers which couldn't match the prices of Chinese steel. Chinese steel is highly subsidised by the government at different stages.

Between 2022 and 2024, finished steel imports from China increased 2.4-fold and import of HRC ( hot-rolled coil and strips) jumped 28-fold, according to market research firm Crisil. HRC is used as feed material to produce various value-added downstream products, and these imports are often at a discount to domestic HRC prices, creating price pressure on domestic steel.

JSW Steel and JSPL both reported a double-digit fall in Q2FY25 net profit, while Tata Steel swung into profit in the same period, though, sequentially, profits declined 13 percent. Analysts remain cautious on the outlook of the domestic steel industry due to weaker-than-expected demand recovery, post the festival season, subdued steel prices, limited export opportunities, and a lukewarm response to China's stimulus.

In FY24, JSW Steel saw its cash reserves plunge 28 percent to Rs 12,348 crore.  JSPL's reserves inched up 10 percent from the 2022 levels but declined 14 percent against the 2023 levels of Rs 4,024.13 crore, according to Bloomberg data. However, free cash flow, another important metric, remained negative for all three companies in FY24, data shows.

Capex struggles

Steelmakers are grappling with a double-edged sword: limited cash reserves and weakening profits, which are curtailing their ability to pursue ambitious capital expenditure plans, including brownfield expansions. For instance, in November, Tata Steel managing director TV Narendran said that the steelmaker is re-thinking its fresh capex plans, given the relentless cheap imports and subsequent pricing pressure in the domestic markets, as reported by the Hindu Businessline.

In his remarks, Narendran said that the current levels of earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne from steel in India do not justify large investments for expansion. The company has capital expenditure commitments not just in India, but also in its UK and Netherlands operations.

In the UK, the company is spending 700 million pounds on its Port Talbot steelworks to replace blast furnaces with electric arc furnaces (EAFs). The UK government is subsidising the company to the tune of an additional 500 million pounds.  In the Netherlands, where the company has a profit at the EBITDA level, it is negotiating with the country's government to assist with the expected $5 billion expense to transform the IJmuiden steelworks to produce EAF and direct reduced iron (DRI)-based steel, and use hydrogen fuel in the steelmaking process.

For India, Tata Steel plans to invest around Rs 10,000 crore per year to expand its capacity to 40 million tonnes per annum (MTPA), including expansions at its Kalinganagar, Jamshedpur, and Neelachal Ispat Nigam facilities, as well at its greenfield EAF-based steel facility in Ludhiana.

Eager to increase its market share in downstream products, the company has restructured its corporate set-up to amalgamate a few subsidiaries, and Tata Steel has also planned investments to boost its downstream capacity.

As for JSW Steel, the company has already cut its capital expenditure target of Rs 20,000 crore for FY25 by around Rs 4,000 crore, by deferring the overhaul on one of the blast furnaces at its Vijayanagar works. In its target to develop a steel-producing capacity of around 50 MTPA, the company's joint MD and CEO Jayant Acharya has estimated a capital expenditure of around Rs 1 lakh crore till around 2030.

While smaller than JSW Steel and Tata Steel, Jindal Steel and Power has also announced major capital expenditure plans,  of around Rs 31,000 crore, around three-fourths of which is being spent in doubling the steel capacity at its Angul works in Odisha to 12 MTPA. Investors have been largely positive on the stock, despite its large capital expenditure commitments, due to its slightly better cash position, and its longs-heavy product mix (more than 50 percent), compared to its peers.