Explained: How Tata Steel put its soul into debt-laden Bhushan Steel

For Tata Steel, communicating its credo formed the cornerstone of its strategy.
The Insolvency and Bankruptcy Code, a reform undertaken by the Narendra Modi government, came as a beacon of hope for banks and investors three years ago. While the law still evolves and litigations pile up, many companies have got a fresh lease of life through IBC. The first of a four-part series takes a look at how erstwhile Bhushan Steel is faring as Tata Steel BSL under a new command.

 

When Tata Steel was done with the takeover of the ailing Bhushan Steel (BSL) in Odisha, ramping up Key Performance Indicators (KPIs) was the least of its concerns. BSL was debt-laden and stressed. But as an asset, it was of immense value given its facilities, competent workforce, and the range of customers it served. Tata Steel decided to focus on the nuts and bolts before worrying about KPIs.

The first step was to start planning what had to be done with the re-christened — Tata Steel BSL — asset. Rajiv Singhal, managing director at Tata Steel BSL recalls how the first 10 days post-acquisition were marked by endless meetings to get to know everyone. “Our effort was to communicate, sit with the people and understand the challenges they are facing. We had constant and ample communication. Slowly, we started introducing the methodologies with which we had to run this business”, said Singhal.

 

You would think that, with a century of operations and the brand label, Tata Steel could easily have swayed customers and vendors of all stripes. But Tata Steel BSL had a lot of baggage — the bizarre management structure of the previous promoters, lack of uniformity in policies and recurring accidents had punched a hole in the confidence of stakeholders.

 

“No suppliers were ready to supply on credit which otherwise they would have. Customers were not keen to take long-term positions. For instance, once the automotive customers approve a supplier, they continue with it. They don’t want to switch on or off because they do a lot of quality checks. Obviously, there was a fair amount of apprehension in the minds of suppliers as well as customers and that was a challenge,” Singhal said.

 

For Tata Steel, communicating its credo formed the cornerstone of its strategy. This helped instil confidence in the workforce that the insolvent steel plant had a future. “Both customers and vendors accepted us quite well. And we never belied their expectations”, said Singhal.

 

Aside from the mood and morale, Singhal did not face many hassles on the operational side. When it took over BSL, most of the units were operative. The situation demanded maintenance of assets and their balancing. The next step was to help the plant reach the rated capacity of 5.4 million tonnes per annum (mtpa). Till then, the plant had been running at a ramped down capacity due to lack of raw material and mounting debt.

 

By the next financial year, Singhal expects Tata Steel BSL to achieve the rated capacity and this in turn will give the company a fair amount of leverage in cost structuring. Quarter-on-quarter and year-on-year, Tata Steel BSL is inching closer to the nameplate capacity.

 

On May 18, 2018, Bamnipal Steel Limited (BNPL), a wholly-owned subsidiary of Tata Steel, acquired a controlling stake of 72.65 per cent in BSL. The acquisition was in accordance with the approved Resolution Plan under the Corporate Insolvency Resolution Process of the Insolvency and Bankruptcy Code (IBC).

 

The admitted CIRP cost and employees were paid, as required under IBC. Further, settlement of the amounts equivalent to Rs 35,200 crore towards BSL's financial creditors is being undertaken. BNPL's investment in BSL was achieved through a combination of equity of Rs 158.89 crore and a inter-corporate loan of Rs 34,973.69 crore. The acquisition was financed through an external bridge loan of Rs 16,500 crore taken by BNPL and investment by Tata Steel in BNPL.

 

The bridge loan is expected to be replaced by debt raised at BSL over time.

    

Following the insolvency resolution, Tata Steel BSL has brought about a significant improvement in the plant’s operational parameters. In FY19, Tata Steel BSL logged a crude steel output of 4.14 million tonne per annum (mtpa), higher by 10 per cent year-on-year,  propelled by higher mill availability, better maintenance practices, and regular supplies of raw material.

 

Driven by higher production, sales too grew 6.5 per cent year on year. In Q4 of FY19, sales went up by a robust 23 per cent year on year and 25 per cent quarter-on-quarter.

 

Other challenges were harder to overcome, namely safety and the environment. “These were the two areas where we did a lot of work, made investments and brought in processes and systems. We had a non-negotiable agenda on items like ethics, safety and environment. It helped us in building a very robust plant”, said Singhal.

 

This focus on safety and the environment will continue. “We have to make sure that the machines are healthier to operate. This is what we call Sustenance Capex (capital expenditure).

 

Other than Growth Capex, Sustenance Capex will ensure that we get consistent performance”, added Singhal.

 

Only when the groundwork had been done did the management turn its attention to improving the KPIs in areas such as improving blast furnace productivity, improving the coke rate, or achieving the desired parameters.

 

Acquisitions are always tricky affairs but one reason for the successful integration of BSL was Tata Steel’s team — an eclectic mix of experienced and younger professionals, drawn from both companies, who worked on cultural integration.

 

“We had something like 100 people chosen from different functional backgrounds. The MD and CFO were selected from Tata Steel while the operational bosses of blast furnace and steel melting shop came from BSL. Their functional competence determined the selection and they were responsible for instilling Tata Steel’s values and aligning with the company’s policies”, said Singhal.

 

While there was no juggling or redeployment of personnel at BSL after the acquisition, certain ad-hoc practices of the previous management were replaced by Tata Steel’s transparent and uniform policies.

 

“Tata’s culture is built around value systems that are non-negotiable. Our concern was how we institutionalise these values into BSL. That’s where we spent a lot of time”, said Singhal.

 

 



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