Tata Steel shifts focus to India

Firm strengthening domestic operations to beat the slowdown in Europe, other developed markets
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First Published: Mon, Oct 08 2012. 11 34 PM IST
Chief financial officer Koushik Chatterjee says Tata Steel’s primary focus will be to continue with expansion in India. Photo: Dhiraj Singh/Bloomberg
Chief financial officer Koushik Chatterjee says Tata Steel’s primary focus will be to continue with expansion in India. Photo: Dhiraj Singh/Bloomberg
Updated: Tue, Oct 09 2012. 12 07 AM IST
Mumbai: Tata Steel Ltd, India’s largest private sector steel maker, is strengthening domestic operations to beat the slowdown in Europe and other developed markets that’s been exacerbated by the slump in Chinese demand.
It plans to double the production capacity at its existing Jamshedpur plant to 10 million tonnes (mt) and focus on the 6 million tonnes per annum (mtpa) capacity greenfield steel plant at Kalinganagar in Orissa, to be constructed in two phases. Simultaneously, it’s stepping up the efficiency of operations in Europe and Thailand.
“Right now we want to do well with what we have. Our primary focus areas of strategy are to continue with expansion in India,” said Koushik Chatterjee, Tata Steel’s chief financial officer. “We will be concentrating on our Kalinganagar and Jamshedpur projects to achieve business growth.”
Tata Steel also plans to set up a 12 mtpa project in Seraikela, Jharkhand, but the project is awaiting clearance from the state government.
While steel demand has slowed considerably in Europe, which contributes nearly 66% of Tata Steel’s total production capacity, India’s overall steel imports have risen 33.7% between April and September to 3.85 mt from 2.882 mt in the year earlier, according to the joint plant committee set up by the government to officially collect data on steel.
“Tata Steel is going the right way and it makes sense to concentrate on India as the capacity is backed by captive iron ore,” said Bhavesh Chauhan, a metals and mining analyst at Angel Broking Ltd.
Tata Steel’s net debt at the end of June increased to Rs.54,020 crore from Rs.47,657 crore at the end of March. The consolidated results for the three months ended June were disappointing.
Profit after tax (after minority interest and share of profit of associates) for the June quarter was Rs.598 crore, sharply down from Rs.5,347 crore in the year-ago quarter, which included a one-off profit of Rs.3,362 crore on the sale of investments.
The group’s steel deliveries declined 8.7% to 5.68 mt in April-June compared with 6.22 mt in the January-March quarter and 6.05 mt in the year-ago quarter.
Turnover at Tata Steel India in the first quarter of fiscal 2013 was Rs.8,908 crore, down 6% from the Rs.9,479 crore in the fourth quarter of fiscal 2012, but up 13.3% from the Rs.7,860 crore in the first quarter of fiscal 2012.
Among its overseas operations, Tata Steel Europe (earlier Tata Corus)—acquired in a £6.2 billion (Rs.52,080 crore today) deal from Anglo-Dutch company Corus in 2007—has also taken a beating in revenue. Turnover at Tata Steel Europe in the first quarter of fiscal 2013 was Rs.20,406 crore compared with Rs.19,923 crore in the fourth quarter of fiscal 2012 and Rs.20,535 crore in the first quarter of fiscal 2012.
Moody’s Investors Service cut the rating for Tata Steel’s European operations to junk in August 2012, while Standard and Poor’s lowered the outlook to negative on a BB- rating, which is also below investment grade. “Tata Steel Europe is expected to make losses at least for the next two years,” said Chauhan of Angel Broking.

Woes may continue

Analysts expect Tata Steel’s woes on volume and margin to continue in the July-September quarter.
According to Motilal Oswal Securities Ltd, global steel prices continued their downtrend with a major correction in China in the July-September quarter when average steel prices declined 8%, 4%, 14% and 4% quarter-on-quarter, respectively, in Russia, Europe, China and North America.
Domestic steel prices also mirrored global steel prices, with long and flat steel prices declining 9% and 10% quarter-on-quarter, respectively, said the report released early this month.
The Motilal Oswal analysts expect Tata Steel Europe and other subsidiaries to report negative Ebitda (earnings before interest, tax, depreciation and amortization) due to declining realization in Europe.
IDFC Securities Research analysts said muted end-use demand, seasonal factors and declining global prices have resulted in a sequential decline in domestic flat and long product prices.
The IDFC report, released recently, expects Tata Steel to figure among the steel companies that will bear the maximum negative impact in the July-September quarter. While steel volumes have been weaker in July and August on the back of higher imports (led by a sudden decline in global steel prices), the late monsoon has dampened end-use demand in September, it said.
Tata Steel’s consolidated net debt as of 30 June stood at $9.7 billion (Rs.50,634 crore today), while cash and cash equivalents stood at $2.02 billion. But Chatterjee is unperturbed.
“Steel manufacturing is a high capex (capital expenditure) business. The funds raised are being used for business growth, and the debt should be seen in the context of the entire business and not separately,” he said.
The company’s net debt to Ebidta ratio stands at around 3.25:1, while the industry average is around 2.75:1.
“We are in fairly advanced talks with lenders for money” for the Kalanginagar plant, he said, but did not commit to any timeline. “The entire project is worth Rs.35,000 crore, but we won’t need to draw so much money from our lenders.”
An analyst at Karvy Stock Broking Ltd, who did not want to be named, said, “If the production capacity in the Jamshedpur and Kalinganagar plants is scaled up, then it will provide an adequate hedge against the slowdown in Europe.”
He added that if the net debt to Ebidta ratio was to be around 4 or more, “then it is undesirable”.

Raising cost efficiency

According to Chatterjee, unlike other global steel makers that are shutting down their plants in Europe, Tata Steel is attempting to remedy the situation via “cost efficiencies and technological upgradation”.
The company said on 4 October that it would invest £400 million in its Europe business. “About £300 million will be set aside for capital expenditure and the rest £100 million will be for cost-saving initiatives,” Chatterjee said.
Tata Steel is also actively looking to stabilize its business in Thailand that has suffered considerable losses due to increased raw material costs. “We are trying to explore various options to turn around the business in Thailand and will also evaluate the option to enter into a joint venture there locally,” Chatterjee said.
Tata Steel is also firming up its raw material strategy to take care of the volatility in prices.
The company has begun coal shipments from its Benga mines project in Mozambique. It expects to ship 850,000 tonnes of coking coal and 200,000 tonnes of thermal coal in fiscal 2013 to feed its Europe operations.
Tata Steel has a 35% stake in the Benga project for which it paid $88.2 million in 2007. The rest is held by Riversdale Mining Ltd, which is now nearly 100% owned by Rio Tinto Plc, the Australian mining giant.
The Indian steel maker has an 80% stake in Tata Steel Minerals Canada Ltd, a joint venture with New Millennium Iron Corp. that was established in October 2010.
Tata Steel, through its subsidiary Tata Steel Global Minerals Holdings Pte Ltd, signed an agreement with New Millennium Capital Corp., Canada, to develop the Labmag and Kemag iron ore deposits, collectively referred to as the Taconite project.
Chatterjee declined to comment on news reports that Larsen and Toubro Ltd was planning to exit Dhamra Port, a 50:50 joint venture with Tata Steel. “First, we need to see who buys our partner’s stake if that happens. Our decision to reduce the stake will be dependent on who becomes our new partner,” he said. The port is strategically located in Orissa and should see a lot of interest from companies who are into the port business.
Tata Steel dropped 0.68% to close at Rs.407.55 on Monday on BSE. The benchmark Sensex lost 1.21% to close at 18,708.98 points, and the exchange’s metal index dropped 1.01% to 10,498.75 points.
Since January, Tata Steel has gained 21.57%, the Sensex 21.06% and the metal index 12.97%.
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First Published: Mon, Oct 08 2012. 11 34 PM IST
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