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Structurally the steel industry is in a better position than two years ago: Tata Steel MD

Thomas K Thomas / Suresh P Iyengar | Updated on October 15, 2019 Published on October 15, 2019

T V Narendran, MD, Tata Steel

T V Narendran, CEO and Managing Director, Tata Steel is on a mission mode to transform the 112-year old company. He is not only deleveraging the existing core businesses to make it financially stronger, but Narendran is also planting seeds for new businesses to ensure future growth. But with challenges like declining steel prices, struggling units in Europe, climbing debt levels and cheaper imports, the Tata Steel chief has his task cut out. In a conversation with BusinessLine, Narendran explains how he plans to navigate through these hurdles to achieve his target.

How do you compare the ongoing stress in the steel sector compared to the down cycle in 2016-17

I am less negative or more optimistic because structurally we were in a better place than we were in 2016-17. At that time the big problem was China doubling its exports from 5 million tonnes to 10 million tonnes. Today that is not happening. China is still exporting 5 million tonnes-- steel consumption in China's domestic market has grown 10 per cent over the last six months. China has taken many things in the previous 3-4 years to cut down inefficient capacity and cut down polluting capacity. The more prominent companies have got bigger, which is suitable for the global steel industry because the bigger guys are more disciplined than a large number of small players. Structurally the steel industry is in a better place to what it was in 2016-17. There you had China disrupting global markets today you don’t have China disrupting global markets, today the problem is more about macroeconomic sentiment across geographies which are having its impact on steel. Secondly, look at India itself and South -East Asia. Who sets the price in South East Asia? It's not China its India, because Indian exporters, including Tata Steel, are selling into Vietnam and other areas. We are in some sense setting the prices because the Indian companies are structurally in a stronger position than most other companies. We have the scale, raw material, we have the latest plants here, so efficiencies are good. Companies like JSW, Tata Steel --can be competitive in the international market.

How do you see this playing out in India?

In India, the industry has consolidated quite a bit’. There won't be many people queuing up to invest much money in this industry other than some foreign investors like---Arcelor Mittal. The demand for steel will grow faster than supply. If you look at big steel consumers, yes, the auto sector is facing some headwinds now, but Indian cannot be a country consuming just 3 million cars. As the infrastructure gets built, more and more parts of the country gets included, how do you travel around in places where there no public transport. On the construction side, the government is realising that infrastructure is the best way to kick start the economy. Private equity is coming into commercial construction. In the residential segment, there is a lot of action around the affordable housing category.

Are you on track to hit 30 million tonne capacity by 2025?

We are pretty much on track. The acquisition of Bhushan Steel with a capacity of 5 million tonne and expansion at Kalinganagar by 5 million tonnes is anyway happening so we will hit 24 million by 2022. Then it is a question of the steel market; if it continues like this, later we will revisit, but I don’t believe it will stay like this for that long. It will pick up soon. We have two options one is to expand our existing sites or through inorganic growth. We can go to 35-40 million in existing three sites--we don’t need to acquire any flat products facility. We could look at smaller assets to beef up long products at a later stage. Right now, we will focus on integration and -turning around. Bhushan steel is already turned around quite a bit and Usha Martin also by the next year will start seeing positive results. Our focus is now to deleverage.

Asset sale in Europe and South East Asia were part of your deleverage plans which did not go through. How does that impact your target to reduce debt?

We put in a lot of effort in Europe for the last few years, but we were quite disappointed that the commission did not see our point of view. The focus for us in Europe is how can we make cash positive. We are also looking at how to optimise capex. So the challenge to our team there is if you are cash positive, then you are no longer dependent on India for any support --you are sustainable on your own. We are closer to it happening than ever before. If the market were not so bad we would have achieved, it but now it may take more time. India has to generate extra cash flows to deleverage, and Europe has to ensure that it doesn't ask India for any money. In South-East Asia, we want to exit. So we should close the transaction to sell our unit in Thailand. We have already signed an MoU, and hopefully, in the next month or two, that transaction will close. Then we still have the Singapore unit for which we have received interest from buyers.

Will you look at bidding for iron ore mines that are coming out for re-auction?

Yes, we would be. We are also considering getting into merchant mining at some point of time because we have 100 years of mining experience.

How has your experience been with IBC?

Now with the recent amendment has brought a lot of clarity. The only part which we have been representing is that if there is any action against the old promoters, then the new owners should be insulated. The govt is trying to address that. But some of the cases are taking too long. The steel business is cyclical, so the value two years ago may not be the same today.

Will you continue to acquire through IBC?

We don’t have any major plans. From a flat product point of view, we are comfortable now. In the long products, we will see as and when we require we will acquire.

The debt to EBITDA ratio is now over 4. Is there a worry?

We have been on the investment mode, and ours is a cyclical business. But still, Tata Steel reported Rs 30,000 crore EBITDA and Rs 10,000 profit after tax. But we understand the concerns, but sometimes panic is more than required. The enterprise value of Tata steel today is around Rs 1,35,000 crores. We want to bring down the debt to EBITDA to under 3. If the steel prices had been stable, we would have gone below 3 by the end of this year. But steel prices are Rs 10,000 lower than what it was last year. Cycles have become shorter. Earlier if the price went up, it remained up for three years. Now within the year, it goes up and down multiple years. Our job is to make sure we are the last man standing from a cost position. Tata Steel in India business is in a solid place. Europe is where the challenge is.

How are your retail and other non-core businesses shaping up?

The retail business is living up to its expectations. Currently, we are selling 8,000 steel doors a month, and we would like to sell 30,000 entries. The journey has taken us slightly longer than we thought simply because it a very customer-centric business and the supply chain was not stable. Now when the supply chain is stable, the orders need to be chased. There is a vast potential in this business. We have also developed windows and furniture. The business now is in a few hundred crores, and it will grow rapidly. We are planting seeds for the future. One seed is the service and solution, the other is our new materials business where we are working with graphene. For example, we are working with Railways to coat inside of coaches with graphene. We have set a target to get 10% of our revenues from new materials. Third, we are expanding into the steel recycling business. We are setting up our next centre in North that will come up next year--near Delhi. We are setting up scrapyards in all regions. Another new area is using technology, R&D in different areas. For example, we are looking at how can we use the poor quality raw material to make good quality steel. We are also betting on online commerce for our products. We have an online site called Aashiyana which sold products worth Rs 100 crore this year, and we are targeting Rs 300 crore. We are hoping that these businesses will account for 30 per cent of our turnover in the next 5 years up from 10 per cent now.

Read also: Tata Steel eyes new businesses to tackle future challenges

How do you see the regional free trade agreement -RCEP - conversations impacting the steel industry?

The steel industry should be kept out of RCEP. Today the most significant imports into India are not from China. Seventy per cent of imports are coming from Japan and Korea. Our fundamental point is India is a growing market for steel, and if anyone wants to participate in this market they should come and invest in India, create jobs in India, build steel plants in India. Why do you want somebody to borrow money at low cost and build some plant somewhere and just shift stuff into India? We feel that we should not blindly follow these theories because East Asian countries didn't have a domestic market; they have no choice but to export. For example, in the auto industry, if India had a zero input duty on the car, I don’t think there would have an auto industry in India. We should build a similar story for steel - we have the raw materials, steel industry creates jobs, we create economic activity. The argument that countries which have no raw material should make steel and export, while India, with all these raw material and domestic market is not trying to create an industry, is flawed. We are the second-largest producer of steel in the world; we can’t be the second largest if we were not good at making steel.

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Published on October 15, 2019
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