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Tata Group Chairman Cyrus Mistry is pinning hope on the upcoming factory at Kalinganagar in Odisha to turn around the fortunes of the 106-year-old Tata Steel, which reported a Rs 764 crore loss for the quarter ending December 31.
The company is building a six-million tonne unit at a cost of about $7 billion (Rs 38,500 crore), to primarily cater to increasing demand for its flat products from the automobile industry and tap new customers from other sectors.
Tata Steel's December quarter loss was the biggest in three years. The company has two-thirds of its production in Europe, where there's an economic crisis. In the quarter, Tata Steel Europe reported an operating loss of Rs 429 crore, with a production of 3.3 million tonnes. In the same period, Tata Steel India (TSI) recorded an operating profit of Rs 2,524 crore, with production of 2.1 mt.
The company does not provide net profit or loss for its different units on a quarterly basis. The consolidated net loss for the company after paying interest and taxes and accounting for depreciation and amortisation was reported to be $139 million (Rs 764 crore).
Debt
The higher loss is also because of high interest and depreciation costs. The burden of the former has increased substantially, as the consolidated debt on the books at the end 2011-12 was Rs 59,796 crore, up from Rs 3,377 crore prior to the acquisition of Corus (in Europe) in March 2006. The high debt also reflects the company's effort to raise capacity at the over 100-year-old plant at Jamshedpur. The capacity here has reached 10 mt, from four mt at the time of acquiring Corus.
Besides, debt for the Kalinganagar unit has started coming on the books. The first phase of this plant, with a three mt capacity, is expected to be operational by the end of 2014.
This clearly reflects the importance of the Indian operation in the scheme of things. Delivery from the European unit came down to 14 mt in 2011-12 from 23 mt in 2007-08. With the second unit of Kalinganagar coming into operation in 2016, the company will have a 16 mt production capacity in India, of which 13 mt will be flat steel, for which demand for the automobile industry is seeing a rise.
"We believe the faster it comes to operation, the more it will be beneficial from a structural point as far as Tata Steel Group is concerned," said Koushik Chatterjee, chief financial officer (CFO) of the company, in an analyst call in February, on Kalinganagar.
Work on the plant had got inordinately delayed since at least 12 protesters (there were huge protests at land acquisition for the project) were killed in police firing in 2006, leading to overshooting from the original budget.
The market
TSI is currently unable to meet the demand of its customers who use the company's flat products in the automobile industry. Besides, the plant will help the company produce steel that is wider and thicker, with higher tensile strength. This would help the company get into new sectors such as oil and gas, while supplying more to the auto industry.
"Our marketing team succeeded in procuring approval for the GS skin panels from major auto manufacturers, signifying a lot of strides being made to move up the value chain," said the CFO.
The company is also aggressively targeting small and medium enterprises. It has launched Tata Astrum under a branding initiative for hot rolled (HR) sheets and coils. It is confident of reaching the higher sales target in successive quarters by leveraging its retail network.The company has also found new export markets for HR sheet and coils in neighbouring countries.
The World Steel Association, the global industry body, in its short-range outlook report issued on Tuesday, expects Indian demand to pick up much faster. It expects the demand in India to improve sharply by 5.9 per cent in 2013 and then 7.5 per cent in 2014, from a tepid 2.5 per cent in 2012. The outlook is based on a benefit to steel demand from monetary easing measures taken to lower the fiscal deficit and a better foreign direct investment climate. So, a lot will depend on the successful implementation of these measures, if the demand for steel is to come up to the expected level. Its expectation for global demand is to increase by 2.9 per cent in 2013 and 3.2 per cent in 2014, up from the 1.2 per cent growth in 2012.
Others
However, a concern analysts have is that even the other steel majors are expanding capacity. India currently consumes about 70 mt of steel a year and even at an eight per cent annual growth in demand, India will require maximum of about 88 mt in 2015-16. "One will have to keep in mind that by that time, not just Tata Steel's capacity but that of others will also come on stream," says Jatin Damania, analyst at SBI Capital Securities.
By the end of 2015-16, public sector Steel Authority of India could add another eight mt to its current capacity of about 12 mt. Jindal Steel & Power, which has three mt capacity, would have expanded this by about five mt. However, if the marketing strategy of the company goes as planned, then the Kalinganagar plant has the potential to help Tata Steel once again become the largest company in the $100-billion (Rs 550,000 crore) turnover Tata Group, a coveted position that it lost to Tata Motors a couple of years earlier, despite garnering 25 per cent of group turnover.
