Tata Steel's atmanirbhar: Reducing global presence, boosting local capacity

The quest for globalisation appears to have been replaced with a focus on India — from where it all started — with an eye on strengthening the balance sheet.
Before the acquisition (of Corus), B Muthuraman, then managing director of Tata Steel, wasn’t all that interested in the company’s centenary celebrations. “There was something missing… one has to earn a celebration,” he said in a stirring speech to a gathering of employees and guests assembled at Jamshedpur for the celebration in August 2007.

The £6.2 billion acquisition of the Anglo-Dutch steelmaker earlier that year had filled the gap.

But 13 years later, on November 13, the wheel came full circle when Tata Steel announced that it had started discussions with Sweden-based SSAB for a potential acquisition of Tatas’ Netherlands business, including the Ijmuiden steelworks.

The deal would leave the steelmaker with a reduced global manufacturing footprint that would include a three million tonne presence in the UK; its acquisitions in Southeast Asia (made before Corus) — Singapore-based NatSteel (2004) and Thailand-based Millennium Steel (now, Tata Steel Thailand, 2005) — have been classified as “asset held for sale” since last year (the company decided not to pursue a transaction with HBIS Group Co for want of regulatory approvals).

The quest for globalisation appears to have been replaced with a focus on India — from where it all started — with an eye on strengthening the balance sheet.

“Fundamentally, Tata Steel is going through a transformation, where we are making ourselves structurally stronger, culturally stronger and future-ready,” said T V Narendran, managing director and chief executive officer, Tata Steel. “Hopefully, it will make the company financially much stronger and ensure better returns to shareholders,” he added.

Proceeds from the SSAB transaction are geared to this end and would be deployed for additional deleveraging of the balance sheet. “We had said a few years back that we are focusing on bringing down debt to EBITDA close to 3x. We were at 3.3x-3.4x before the Bhushan Steel acquisition in 2018. Now, this transaction would bring us close to 3x while performance in India continues to be strong,” Narendran explained.

Annualised debt to EBITDA for Tata Steel consolidated stood at around 3.9x in Q2 (see chart).

*Exceptional items in 4QFY20 primarily includes:
*Rs 3,029 crore — Impairment of PPE including CWIP in Tata Steel Europe, Tata Steel
Tata Steel Special Economic Zone Limited  
1. Production Numbers: Tata Steel Standalone, Tata Steel BSL & Tata Steel
Long Products — Crude Steel Production, Europe — Liquid Steel Production;

2 Adjusted for fair value changes on account of exchange rate movement on investments in 
at TS Global Holdings

Though news of potential divestment of the Netherlands business has brought much cheer to the markets (the stock has appreciated by about 19 per cent since), Tata Steel would continue with UK operations, which has been the problem child almost since it was acquired from Corus. In fact, selling Ijmuiden — one of Europe’s lowest cost producers — wasn’t exactly Tata Steel’s preference.

“The first choice would have been to create a strong pan-European company of the kind we were planning with the thyssenkrupp transaction, but we need to be conscious of challenges on the Competition Commission front,” said Narendran.

In 2018, Tata Steel had agreed to a 50:50 joint venture with Germany’s thyssenkrupp, but the European Commission did not approve it.

The high-cost UK market — which has been on the decline for a while — made it difficult to find potential buyers for the plant based in Port Talbot, Wales; the focus there would be to make it self-sustaining and engage in dialogue with the government for support.

“The Netherlands business is a good business in the European context with a strong plant. So we will get value for it, which will help in additional deleveraging,” said Narendan.

An Emkay Global report said Ijmuiden could fetch an enterprise value of $2-2.5 billion. The transaction is expected to bring Tata Steel closer to its target debt to EBITDA ratio of 3x.

Deleveraging has been in focus for a while, though; the company has a target of reducing net debt by a $1 billion every year for the next few years. Last year, it hit a bump as steel prices started dropping. But Tata Steel managed to reduce net debt by Rs 8,285 crore in H1FY21 by focusing on cost; the SSAB transaction would accelerate those efforts.

The Indian operations has become the more substantive part of Tata Steel’s operations. “When we acquired Corus, 65 per cent of revenues came from outside of India. Now, over 60 per cent of revenues come from India, which accounts for 90 per cent of profits,” Narendran pointed out.

In the last four years, Tata Steel has spent Rs 75,000 crore in organic growth in Kalinganagar and the acquisitions of Bhushan Steel, steel business of Usha Martin and other facilities.

The capacity in India is about 20 million tonnes now, four times of what it was at the time of Corus acquisition. Europe, during the same time, has shrunk from 18 million tonnes to 10 million tonnes capacity.

Tata Steel’s September quarter results show that its focus on India is the right way forward.

The company delivered one of its best quarterly results for India operations, beating most peers with operations generating an EBITDA of Rs 6,025 crore and Tata Steel standalone EBIDTA margin crossing 29 per cent with an EBIDTA/tonne of Rs 13,127. Key subsidiaries also delivered — Tata Steel BSL (formerly Bhushan Steel) recorded an EBITDA/tonne of Rs 8,735 and Tata Steel Long Products Rs 10,512.

Not just Tata Steel, steelmakers globally believe that India is a good market to invest in, which was manifest in the intense competition for the larger stressed assets auctioned under the insolvency law.

Though steel demand growth in India fell sharply in FY20 to around 1.5 per cent from 8.8 per cent in FY19 because of the headwinds faced by the broader economy, the long-term demand prospects remain favourable, explained Jayanta Roy, senior vice-president, ICRA.

Tata Steel would want to grow at least at the rate of steel consumption growth here; it has the added advantage of captive mines.

There are opportunities just through brownfield option. Kalinganagar can be scaled up to 16 million tonnes from 3 million tonnes (the 3,500-acre plot is twice that of the legacy Jamshedpur plant), and so can Tata Steel BSL’s 5.6 million tonne capacity.

But as of now, the plan on the drawing board is to scale up Kalinganagar by another five million tonnes, which would take it to eight million tonnes and Tata Steel’s overall capacity to 25 million tonnes.

To drive scale and synergies, Tata Steel is also reorganising its India footprint and folding listed and unlisted subsidiaries into four clusters: long products, downstream, mining and utilities and infrastructure. It will also simplify the web of subsidiaries and joint ventures.

As the India footprint expands, the global footprint will shrink further. At some point, the acquisitions in Southeast Asia — Natsteel and Tata Steel Thailand — may be divested. Multiple companies have shown interest in the units, but Tata Steel can afford to wait and ride out the down market. “We are not under the same kind of pressure that we sometimes were for the European business. We can wait for the right buyer and the right value,” Narendran explained.

Would that restrict Tata Steel’s footprint to India? Narendran said the global manufacturing footprint has shrunk, but Tata Steel will always be a global company in terms of customers and suppliers. It’s just the nature of the manufacturing footprint that is changing in favour of a growing market.

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