Tata Steel to keep Europe, SE Asia operations in the 'family' for now

Even at low steel prices, we will be the last man standing, says Tata Steel MD & CEO

An unprecedented rally in steel prices has taken the pressure off Tata Steel to explore divestment options for its global manufacturing operations in Europe and Southeast Asia.

"Right now, the steel cycle is working in our favour, so our assets in SE Asia and Europe continue to be a part of the family," said T V Narendran, managing director and chief executive officer, Tata Steel.

On November 13, last year, Tata Steel announced that it had started discussions with Sweden’s SSAB for potential acquisition of its Netherlands business, including Ijmuiden steelworks. However, end-January, SSAB withdrew its interest.

But since then, Europe has seen a strong rally in prices and hot rolled coil-–used in vehicles and consumer products-–is selling at around $1,200 a tonne. Higher prices led to a sharp improvement in Tata Steel Europe EBITDA to Rs 1,194 crore in Q4FY21. Not all of the higher price is reflected in the bottomline as yet, though.

Moreover, the unprecedented EBITDA margin generated by the domestic business at 41 per cent ensured a higher debt reduction than what it could have achieved by selling its Dutch operations.

The SSAB deal was expected to bring Tata Steel closer to its target net debt-EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio of 3x. But net debt decreased by Rs 29,390 crore to Rs 75,389 crore year-end (FY21) and net debt to EBITDA improved to 2.44x, which is a long-term target. Consolidated EBITDA grew 71 per cent to Rs 30,892 crore.

At the time of the announcement of SSAB’s interest in the Netherlands, analysts had suggested an enterprise value of $2-$2.5 billion for Ijmuiden. But sans the deal, Tata Steel reduced debt by close to $4 billion, making good of a strong cycle that saw domestic prices increase by about 54 per cent in the last six months.

Narendran, however, said, “Even at low steel prices, we will be the last man standing.”

Tata Steel’s primary steelmaking operations in Europe are Ijmuiden, Netherlands and Port Talbot, UK. Britain, on account of a high cost structure, has been Tata Steel’s primary problem.

“The Netherlands site has more often than not stood on its own feet and has been cash positive except for the last couple of years when we had some operational challenges,” explained Narendran.

“The UK is where we had a problem standing on our feet. But for the last 2-3 years, EBITDA has been in the range -100 to +100 million pounds,” he added. At peak level, it was losing 300-400 million pounds a year.

This year, however, the UK business will be EBITDA-positive and cash-positive.“The challenge is to sustain it and that is what we are focussed on. We are not under pressure to pursue any option than when we were losing money or cash,” said Narendran.

For long-term solutions, however, Tata Steel is in discussion with the UK government. “While the spreads are supportive right now, it will not be the same forever,” pointed out Narendran.

As far SE Asia operations are concerned, from an “asset held for sale”, it has been reclassified as continuing operations in the fourth quarter. Tata Steel decided to explore sale of SE Asia operations when it set a deleveraging target of $1 billion a year about three years back.

“Deleveraging is our goal and like we demonstrated last year, if things turn bad, we will prioritise deleveraging over growth. We paused Kalinganagar expansion last year because we felt we could not afford to impede our deleveraging goal,” he pointed out. “Hopefully, the next two quarters will help us deleverage a lot more,” he further said.

Tata Steel has also restarted its growth capex with the second phase of 5 million tonne expansion at Kalinganagar, which is expected to be completed in FY24. And if demand remains the way it is, then other expansion projects could be taken up.

“If demand and prices are strong, we can look at Kalinganagar second phase and grow all the sites (Jamshedpur, Kalinganagar and Angul) simultaneously,” said Narendran. Between the three sites in India, Tata Steel has the opportunity to scale up annual capacity to 40 million tonnes.

“There is a big advantage in growing the India business. When we were hit by a bad cycle 10 years back, India –the cash generating business – was only 5 million tonnes out of 28 million tonnes,” explained Narendran.

But the capacity in India is about 20 million tonnes now, four times of what it was at the time of Corus acquisition. Europe, on the other hand, has shrunk from 18 million tonnes to 10 million tonnes.

With a growth ambition clearly focused on India, Tata Steel also plans to pursue inorganic growth options in the long products space.

It has submitted an expression of interest for Neelachal Ispat Nigam Ltd (NINL) and is likely to participate in the disinvestment of Rashtriya Ispat Nigam Ltd (RINL), once the process starts.  

Narendran pointed out Tata Steel’s long-term target is to keep net debt to EBITDA below 2.5x. “There is no point chasing a net debt to EBITDA lower than that and miss out on growth opportunities,” he said.