Tata Steel is in a much better place; we can grow and deleverage at the same time: TV Narendran

How much of the uptick which the steel industry has experienced in FY22 will get challenged by energy shock, demand and high inflation?
We are in a volatile space. Our input costs are fluctuating. Inflation is an issue globally. Interest rates are going up. We are a capital intensive industry. But having said that, structurally the industry is in a much better place than in the past. From a discipline point of view, there is very little excess capacity going around. It is becoming more regional and a local trade issue.

Exports out of China are no longer a threat. Ukraine and Russia were big exporters and they are no longer in the market. So for multiple reasons, the demand-supply is far better balanced. The governments’ focus on infrastructure spending across the world is good for steel demand. Even if this war gets sorted out, there will be reconstruction. Europe is going to spend a lot more on defence and it did in the past and there is a lot of investment happening in Europe and elsewhere around transforming into a greener future.

Overall I expect the steel industry to have a few good years ahead and nowhere in the steel industry apart from India is capacity being added significantly, unlike in the past when steel prices were high and a lot of capacity was added in China. So overall, we are in a much better place and that will reflect in the numbers for the industry. Tata Steel is in a much better place as a company and that will get reflected in the Tata Steel numbers as well.

What is the plan in place to manage the volatility in coal prices? Tata Steel is still dependent on imported coal and given that A) there is a coal shortage for the power sector, there could be a challenge in terms of importing more coal for steel plants now.
The steel sector uses metallurgical coal which has always been imported because India does not have good quality metallurgical coal. Only 10% of the coal available in India is metallurgical coal and only a fraction of that is really coming to the steel plants. We are not dependent on domestic coal as much for our steel making and imported coal has been volatile but now it has stabilised quite a bit. What is, of course, of concern to us is if the power outages impact our customers because steel plants typically have captive power plants and we are not impacted by the grid power as much, but many of our customers are and we are watchful of that from that perspective.

Given that you are generating more free cash flow, you have also increased your dividend payout. Market would compare your dividend payout ratio with what other companies are doing globally and what other Indian metal companies are doing. Do you see a change happening there because even though the dividend payout is significantly higher than what you have given in the past, it is significantly lower than what other metal companies are giving?
We have been a bit prudent because we have a lot of ambitions on growth in India. We want to double our capacity over the next 10 years. Globally metals and mining companies do not have the growth ambition that we have. We need to make sure that we keep aside money for growth because the growth in India is very value accretive. Our dividend payout has factored that in. We are trying to be as generous as possible with our shareholders while at the same time focussing on creating long-term value for them by investing in growth in India. That is why you see a balance there.

By the time your expansion of this leg – whether it is Neelachal or other capacities – start adding up, what would be the total planned capacity for Tata Steel in FY25?
The FTA with Australia is helpful because that removes a 2.5% duty that was there on the imports of metallurgical coal. When the FTA in some sense comes into play later this year, we will have that benefit. As far as Russian coal is concerned, we used to buy about 3 million tonnes of coal out of Russia, largely PCI which is pulverized coal that is injected into the blast furnace. It is a different type of coal but it is good quality PCI we used to import from there. We are no longer importing from Russia because of the various issues and difficulties in transacting so we will source those coals out of Indonesia and Australia.

Eventually, if things are back to normal with Russia, then of course we can look at continuing to import coal from Russia as well.

Last time you did indicate that you expect steel prices to remain volatile with the positive bias. Any change in that view? What is your view on the steel cycle per se?
We believe the spreads in Europe will continue to stay strong simply because Russian and Ukrainian steel is no longer available there, input costs have gone up in Europe because gas prices are high and also there are transition costs which European steel makers are incurring to transition into a greener future. So there is no motivation or incentive for European steel companies to operate at lower price levels and imports are no longer as big a threat as they were sometime back.

As far as India is concerned, we are quite bullish about demand in India and you know that is why we believe that the bias is still positive and strong. It will fluctuate but with the positive bias, we are optimistic and confident about the margins for the industry and for Tata Steel.

On the demand front, we are getting into some kind of resistance with your customers. You briefly alluded to the fact that there is a power shortage in a lot of manufacturing plants. Auto sector per se continues to suffer because of what is happening on the semiconductor front. There is an uptick in the cycle. The second sign could be a drop in demand because of compulsions. Are you experiencing that?
The strongest part of the auto sector today is commercial vehicles which is less dependent on semiconductors and passenger vehicles and they are very steel intensive. From that point of view, the demand for steel in the auto sector has been stronger than it has been for the last three years. In auto, the commercial volumes are back to where they were about four years back and that is driven by the activity in construction and mining. So with high commodity prices, mining activity continues and with the government focus on infrastructure, construction activity continues.

I am quite positive about the prospects of commercial vehicles in the auto sector and as the semiconductor issue sorts out, passengers vehicles will continue to be strong. On most popular models, there is a few months’ waiting list. Overall demand has been strong. Some factories are obviously impacted by the power cuts. It hurts both supply and demand because a lot of small scale producers of steel also suffer because of power.

A lot of the secondary sectors suffer because of that and that is something we are watchful about. The other concern was when the steel prices were on the higher side, many or the smaller customers used up all their working capital limits. It is not that they were not profitable but they did not have the working capital lines. That is also another area which is of concern but overall, we expect demand to be quite strong this year.

India is already producing about 120 million tonnes of steel and consuming about 105 million of steel so that is pretty strong.

The net debt has declined to just about Rs 50,000 crore. That takes your net debt to EBITDA below one which is a very comfortable zone. Are you happy with where it is right now or do you want to bring it down more?
We are very happy where we are but certainly we want to bring it down a bit further. We will continue to deleverage a little bit more certainly this year at least a billion dollars after allowing for the Neelachal acquisition. We are comfortable and we should be able to do that. Beyond that we will take a call because we need to optimise the need to reduce debt further but we also feel we can grow and deleverage at the same time because the India business is now of a certain scale and size and we generate enough cash flows to take care of our capital expenditure as well as deleveraging goal.

Your European business has now generally become atmanirbhar (self sufficient). If I may use that word, the challenge is that when Europe is going through such an energy shock, could that have an impact in terms of the energy availability for the European steel business?
What we are watching is what is the plan in Europe to transition away from Russian gas because some of the European countries particularly Germany, Netherlands etc. are dependent on Russian Gas quite a bit while some others are not. France has got enough nuclear capacity. So while Europe has announced that they will transition away from Russian gas, we are waiting for the details of that plan because that has an impact on our own transition plans. When one looks at the transition plans for the industry in Europe, it is about moving away from coal to gas and then to hydrogen. That transition plan will be impacted by the plans the European government makes.

Gas prices have peaked, they stabilised and we are quite comfortably hedged. So we do not see an adverse impact of gas prices going forward and whatever is the impact, has already been absorbed in the current levels.

Like you said, do not expect the European business to run into rough weather. You pretty much expect the EBITDA numbers which you have shared in terms of profitability. Will the outlook for the next two quarters irrespective of what is happening in gas prices continue?
At least for Q1 yes. For Q2, we will give guidance when we talk about the Q1 results.

If I look at Tata Steel, you have expanded at the downturn of the cycle whether it is Neelachal or the acquisition of Bhushan Steel. You have made some exits in the last 6-12 months and that too when we are at the peak of the cycle. Can I say that the international operations which you wanted to exit – with the exception of Europe – most of that have been done?
Yes, pretty much and even in Europe, in the last year, we have taken out a lot of corporate overheads, split the business and we have run Netherlands and UK separately and that brings a sharper focus because the challenges and the opportunities in UK and Netherlands are very very different.

The Netherlands is a very strong business; one of the best positioned steel plants in Europe from a cost point of view and we have been investing over the years and upgrading the product mix. We actually have probably one of the best steel plants in Europe and the Netherlands plant is one of the most profitable steel plants in Europe. The UK one is a different challenge which we are dealing with but in the UK also, you can see a possible EBITDA business and we need to see how to make it sustainable over the longer term.

Are you having a last laugh and feeling happy that the Thyssenkrupp deal did not go through?
Yes, sometimes you create an opportunity out of a problem.