Deleveraging is an enterprise priority for Tata Steel: Koushik Chatterjee

Bhushan Steel fundamentally is a good asset. Our integration process is on course, says Tata Steel CFO Koushik Chatterjee

Steel prices have come off their highs since Tata Steel acquired Bhushan Steel through the Insolvency and Bankruptcy Code (IBC). But Koushik Chatterjee, executive director and chief financial officer, Tata Steel, tells Ishita Ayan Dutt that the firm will reduce debt by $1 billion in the next 12 months and is focused on the target. Edited excerpts:

Steel prices were at a high when Bhushan Steel was acquired. Will the payback period get stretched?

The fundamental strategy and the long-term economics of any acquisition are not influenced by near-term prices. That the industry is cyclical in nature is always factored in the decision-making framework for any capital allocation. Our assessment for Bhushan has not changed — it is fundamentally a good asset. Our integration process is on course. What we are seeing today in terms of steel prices is not a structural demand contraction but a normalisation from the peak cycle, more due to the slowdown in China. Raw material prices, which continue to be at an elevated level, give a clear indication that the cycle will be rangebound in the near term.

Will falling steel prices impact your brownfield expansion?

The current situation cannot be compared to black swan events like the global financial crisis post-2008. Moreover, India is expected to continue its journey of development. Our growth plans are well-calibrated to market growth. Our brownfield growth in Kalinganagar is also focused towards the premium end of the market, especially with the planned investment in the cold rolling and galvanising facilities. 

Has the market bottomed out?

The cyclical movements in the steel industry depend on several factors, including seasons. For example, there has been an increase in production in China ahead of the winter shutdown and Chinese New Year, which has caused an inventory situation that is leading to this price softening in domestic prices of flat products in China. 

In recent times, regulatory and tariff play has had an influence on domestic steel prices of many countries. Steel prices in the US are clearly at a premium to the rest of the world as it has put tariff on imported steel and US is a net importer of steel. Similarly, we are now in the season of floods and weather disturbances in Australia, which has the potential to cause supply disruptions in coking coal and hence, keep the prices at an elevated level. On the other hand, long-steel supply demand is more influenced by local and regional factors. Similarly, currency movement has an important factor in the domestic steel prices.

As of September, net debt was more than Rs 1 trillion. What is the plan to bring it down?

Deleveraging is an enterprise priority and the entire organisation in Tata Steel is alive and aligned to the task. In the past seven years, we have raised Rs 19,000 crore from divestments. We are pursuing a couple of levers for deleveraging: a) divestment of assets or investments that are not core to the future, b) combining businesses with partners to create more value in the future. For example, the JV with ThyssenKrupp and deconsolidate the debt responsibility to the new enterprise, c) enhance internal generation through effective cost and efficiency management as also have a sharp focus on capital allocation for aggressive reduction of absolute debt. 

We have said we will reduce our debt by $1 billion in the next 12 months and are focused on the target. Once Kalinganagar expansion is completed in the next couple of years, irrespective of the stage of the cycle, we will have a lower capex outlay and higher internal generation that would give significant cash flow headroom to redesign the balance sheet further.

When will the Usha Martin deal be closed?

The transaction is structured as a slump sale and, hence, involves a number of steps. We are working with the Usha Martin team to complete the process. 

Is Tata Steel going to acquire a part of Prashant Jhawar’s stake?

I can’t comment on such speculation but would only reaffirm that we have been working collaboratively with all stakeholders to complete the transaction. 

The National Company Law Tribunal order on Binani has gone in favour of value maximisation. How do you see that affecting the IBC process?

The IBC process is a very important legislation in the history of Independent India. It is obvious the legislation will mature as we move forward. The committee of creditors and the resolution professionals have an important role to ensure the objective of the process is not compromised.

If value maximisation for creditors is the primary principle of the resolution process, unlike what is stated in the Code that the resolution has to be in the best interests of all stakeholders, it should be clearly stated upfront and the entire process should be conducted on the same premise. Should that be the criteria, it would be worthwhile then to conduct an online auction only on one parameter of value maximisation.