Tata Steel managing director B Muthuraman feels this year is going to be one of the toughest years for the company compared with the entire last decade, and also the toughest year in the next five years.
He says he's very happy to be taking over in a tough situation like this. "In fact, it makes it all the more tough for me considering our outstanding performance last year," he says.
Excerpts from an interview:
What are the challenges ahead?
In recent years, 1997-98 was a tough year when the international prices had gone down and new capacities came up in India which pulled down demand. 2001-02 is going to be even tougher because of two added reasons: the capacity built-up is even more than in 1997-98, and our exports are going to be affected much more because of the actions taken by the US and our inability to export to the US.
Last year our exports to the US was around 9 lakh tonne which is going to be zero this year. Besides, the economy is down and so is the demand for steel. Therefore this year is going to be the toughest.
Do you mean to say that it will not be possible for you to make inroads in the new international markets?
It is not very easy to switch on and switch off in the international markets. It takes a long time to build your presence in any international market. This year the surprise element was the US action and everything else was predictable and that the Indian economy will not look up was predictable.
Internationally it has been a trend that to counter this sort of a downcycle in the industry, steel companies are getting into unrelated diversification's.
Do you portend such structural changes at Tata Steel?
Indeed, telecom business is on your cards...
We have to look at it on a long-term basis. It is not because this year it is tough so we want to enter non-steel businesses. Or it is not because next year it is going to tough so we want to go for a diversification.
There are fundamental reasons for diversification. Only very few international players who have a low cost of production, or whose geographical location is favourable, can manage to get a return on their investment which is higher than the weighted average cost of capital.
Even Posco has not recovered the cost of capital last year. In our record profits of last year we have not recovered the cost of capital. It is less by around 4 per cent. So even the most efficient players are finding it difficult.
Despite a record profit last year and efficient cost reduction drive, our return on capital was lower than the weighted average cost of capital. This is fundamentally because of the structure of the steel industry.
It will take around 5- 10 years for the structure of the steel industry to change. It is changing; in 10 years the industry will be absolutely different from what it is today and will turn profitable. But in India it will take longer than what it takes globally.
There are two reasons: internationally, the only thing which will make steel industry to get a return on capital higher than the weighted average cost of capital is the restructuring of the industry because the growth is not taking place. In India, steel growth is taking place but the capacities are in excess of demand.
So what do you do?
Increase efficiency, reduce costs and improve product mix. Secondly, look at opportunities where shareholders value can be enhanced .. better than in the steel business. That is why we are looking at titanium, ferro-chrome and telecom.
In telecom, we are yet to take a formal decision. We have to put our money where we earn better than what we earn today and where the potential rate of return is higher.
Are strategic alliances are a possibility?
They will happen, but the conditions are not yet ripe. We are open to acquisitions provided it adds value to our businesses.
