Will consider balance sheet as first priority, says Tata Steel's Chatterjee

As a principle, we are determined to ensure all businesses, including Indian and overseas subsidiaries, are free cash flow positive, says Chatterjee

Tata Steel is on the cusp of a change; it has initiated discussions with Sweden-based SSAB for acquisition of its Netherland business including Ijmuiden steelworks, and in India, it is reorganising its subsidiaries and joint ventures into four business verticals. In an interview, Koushik Chatterjee, executive director and chief financial officer, Tata Steel, tells Ishita Ayan Dutt about the key themes of the strategy. Edited excerpts:

What is the time-frame for completion of the due diligence and consultation for the sale of Tata Steel Netherlands, including Ijmuiden to SSAB?

We have initiated discussions with SSAB and stakeholders in the Netherlands, including the Netherlands Board of Management and the Supervisory Board. Over the next couple of months, we expect multiple work streams, including SSAB, to conduct its due diligence, proposed separation of Tata Steel Netherlands and Tata Steel UK as well as engagement with the relevant stakeholders. We will also be having detailed discussions on commercial terms and conditions with SSAB. Once these work streams are completed to mutual satisfaction of both parties, the European Commission will be approached for competition approvals.

What is the rationale behind exiting the Netherlands and continuing with the UK, that has been largely loss-making?

We have articulated three key themes of our strategy. Firstly, to find a long-term structural solution to our European portfolio, second to deleverage the balance sheet to the target levels and thirdly, focus and deploy capital for the profitable growth in the Indian market. All our actions that you will see will be oriented around these themes.

Is the sale of Port Talbot ruled out? What is the status of discussions with the UK government?

It is important to find the path for a long-term solution of the European portfolio. As a principle, we are determined to ensure all businesses, including Indian and overseas subsidiaries, are free cash flow positive and do not depend on corporate funding and support. Our capital allocation framework is driven by the above principles. At this point we are looking at all credible options to turn around the UK business and make it self-sustaining for the future without depending on funding support from India. We are in regular contact and dialogue with the UK government and are looking for constructive support from the UK government for the Port Talbot value chain.

The proceeds from the sale of Ijmuiden Steelworks would be used to deleverage. What kind of deleveraging strategy do you have?

We have re-iterated the aim to deleverage around $1 billion every year over the next few years till we reach our target debt levels. Any proceeds of potential portfolio restructuring will be additional to the above. We are also a company that has growth projects. So, we will calibrate the same to define the most optimum debt level in the long term.

Tata Steel's EBIDTA from India operations has surged 49 per cent YoY. What are the drivers and is this maintainable?

There were clearly four key drivers for the stand-out performance in India. Firstly, our operating philosophy of maintaining an optimum level of production during the lockdown gave us the ability to drive volumes during the quarter. We had our best ever volume performance during the quarter. Secondly, our focus on operating costs helped take out around 14 per cent costs from the baseline. This has been part of our structured cost take out and network optimisation programme. Thirdly, a lot of work has happened and is ongoing on product mix enrichment and hence, despite the challenges of the Coronavirus (Covid-19) pandemic, we have achieved better realisations. Lastly, the market realisations have been robust globally, which helped, especially with higher volumes. The current quarter outlook is quite strong and we hope to continue with our internal efforts to sustain the overall level of performance.  

Indian operations have recovered. When do you plan to take up the second phase of the Kaliganagar expansion?

Our capital allocation framework has a clear strategic hierarchy and we will consider the balance sheet as the first priority. Having said that, we have two very important projects that are in progress in Kalinganagar. The first one is the pellet plant which has significant cost synergies and will help the entire system to reduce costs from purchased pellets. The second project is the cold rolling mill project that will enhance our product mix significantly. Both these projects are margin expansionary projects and our highest priority. Apart from that we have raw material expansion projects which are again margin expansionary. These are for immediate priority and a work in progress. Once these are done we will calibrate the priority for the upstream volume expansion in Kalinganagar. Our focus on capital allocation will be on India business and hence we continue to deploy our capital for the growth in India.

What kind of synergies are expected from the merger of Tata Metaliks, Indian Steel and Wire Products into Tata Steel Long Products?

The cluster approach towards consolidation is important to drive synergies on multiple fronts including functional synergies in upstream operations, procurement, finance HR etc. Tata Steel Long Products will be the engine of growth in the long products space and we expect growth in the ductile iron pipe business too as it is currently in the process of doubling capacity in the value added segment – so we are excited about creating an entity with multiple growth drivers.