CFO Leaders: Steel Is ‘Toys For Big Boys’ – Koushik Chatterjee
Koushik Chatterjee led Tata Steel Ltd.’s first overseas acquisition — the purchase of NatSteel Asia in 2004. Then came the Thailand one. Then the big one in Europe, evangelised by Ratan Tata himself. A $12-billion takeover of Corus, corporate India’s largest overseas acquisition to date. Soon enough Tata Steel had 4-million-tonnes-per-annum capacity in India and 18 outside.
But, while India’s premier steel company was out shopping the commodity cycle was turning. Then the global financial crisis struck. Followed by 10 years of low steel demand weighed down by crippling debt. And so the company decided to sell its overseas businesses.
After years of failed efforts at divesting these assets, and the pandemic, the steel cycle has turned once again — with Goldman Sachs forecasting a commodity supercycle.
What’s it like living on the edge...of a cycle, I asked Chatterjee, group CFO of Tata Steel. The volatility teaches you to be calm at all times, he said.
“So, in the best of times you're still the same, you don't have to be super excited about a commodity cycle upswing, in the same manner, you shouldn't be in distress when there is a downswing. There was one banker who said that steel is like toys for big boys. So you have to be a big boy in a manner of speaking and be able to take a lot of the ups and downs in the same manner and be calm about it. I think that's part of the game.”
Is Tata Steel now tempted to hold on to some of these overseas assets?
“I think first of all the global financial crisis was not predicted by anybody which we could have taken on board. Secondly, at that point in time growth in India was very difficult from a greenfield perspective and we found that it took a long period of time. So those were the right strategic reasons at that point in time. I think at this point in time we see India to be a focus of future growth and therefore, we will be focusing on incremental capital allocation certainly in our India business. There are many other areas of growth in India, I am not saying only with steel, because we are seeding new businesses in India within Tata Steel, with new materials businesses in India. So, I think we see a lot more materials play going forward and we will be looking at those carefully over the next few years and seeing how we allocate the right capital and the right way of growing the company.”
Short answer - no. The sale of global assets remains on the cards. Meanwhile, during the pandemic the focus has been on three strategies — digital, risk management and capital structure.
For industries like steel, lockdowns and unlocks, were twice as challenging. It’s not easy to shut down continuous process plants. Supplies such as coal are ordered at least three months in advance, making their way from Australia over sea, rail and road. Then there’s the responsibility of running a town like Jamshedpur.
If Tata Steel scored a four on 10 on digital infrastructure, data and analytics in 2016, by 2020 it had achieved 7.5 on 10, according to Chatterjee. That investment came in handy through the pandemic and will remain in focus.
“A 7.5 on 10 as on March 2020 will not be the same as on March 2021 or 2025 because you have to keep spending as technology is changing and the various platforms are changing etc.”
It also enabled risk management to become the centre point for decision-making.
“Now, imagine yourself sitting in the month of April not knowing when this lockdown was going to ease, when customers are going to start or when you will be able to sell your products. So, at that point of time, when you have to make decisions on operating levels, you will have to bring in and factor in all the risks associated by remaining at that level, bringing down your production, shutting down your furnace, going ahead with the procurement orders, asking for the suppliers to deliver and how they will deliver—nobody knows because nothing is moving and inter-state movements have been very slow etc. When you look at that, it is my colleague who is running that blast furnace, who is then pairing it up cross-functionally, then we discuss what are the pros and cons of how to run that process and how does the decision-making play out in the next few days and weeks and months. So, these are the kind of embedded risk management processes that are important. Because a production guy can continue to just produce. He will say how do I care what the commercial person will do, but that's not how risks will play out. So, I think it is an important aspect that the risk management as a theme, risk management as a function and risk management as an attribute has come in the front and centre and I think that is what the leadership team became very conscious about and compared to a normal risk assessment.”
The most critical, and lasting, lessons though have been learnt in managing capital structure. Three things Chatterjee said stood out.
- The renewed focus on generating internal capital.
- Balancing de-leveraging with growth.
- Making cost containment a culture.
“If you look at any company and especially in our case, if you're collecting say 5,000 crore of revenue in a month and spending about 4,500 crore. Suddenly, that 5,000 becomes zero and your cost structure, typically in a steel industry or in a process industry cost structures have a significant amount of fixed costs and a significant amount of costs which are sticky and not just switch on, switch off. So in those kind of a circumstances, how do you manage these costs when your collections have suddenly fallen off the cliff.”
The first focus was on raising revenue, say via exports to countries that were still open. The next in line was paring costs, renegotiating payments, slowing capital projects worth Rs 23,000 crore. Chatterjee and his team started daily cash calls, which they continue to this day.
“Capital structure is actually the muscles on which you will grow in the future. So reset that capital structure very quickly and carefully, which means that you have to start at—how do you generate more internal capital? The starting point is looking at spend reviews, questioning each and every spend that you have, classifying into the ‘must-have spends’ to ‘good to have spends’ to ‘discretionary spends’ and you get back into the basics and try to actually do cost takeouts of a very different nature. So, that's one starting point.
Then is the capital allocation towards growth. When do you actually restart your existing projects, etc. How do you do it more smartly than before? What do you need to do yourself and what do you need to put onto say a rental model? What are those assets that you can play arbitrage with? The third thing is, all of this will lead to the kind of capital structure that is to be designed basis where you want to go and how you need to achieve that goal.”
At the same time Tata Steel had committed it would deleverage its balance sheet by half a billion dollars each year.
“At a point in time we had the option of managing the debt or reducing the debt versus calibrating growth. So, either you grow or you de-lever. But post the pandemic, there is a balance of both. That's why I went back to the spend review — that you start by focusing on what kind of internal capital one would like to generate or one would focus to generate and ensure that we can achieve both growth as well as deleveraging the balance sheet. That's a transformation programme that is not just the finance manager’s job. We have a team of cross-functional guys who are doing these reviews 24x7, actually working with the business guys and saying, we need more, do it differently, is there a different way of working or a different way of looking at these costs? How do you categorise these costs in ensuring that we don't remain hostage to the past? We need to look at cost differently. So, there is a very different cost structure that can come out after this pandemic.”
And, a cost culture that can reshape enterprise in India, Chatterjee said.
“It has a lasting impact when you actually change the culture, people focusing on cash, people focusing on productivity and people focusing on ensuring that every spend has a value behind it which is more than the spend. When you bring this culture right down the line and onto the shop floor and into your larger ecosystem, it has a very different multiplier effect which lasts for a long period of time. So, one cannot leave that as a one-off exercise, one has to continue that exercise. If you say that, look, we have recovered from the pandemic now we are back to our own ways, then we would have lost all the benefits and not taking care of the opportunities that we have created in the last pandemic.”
Opportunities that might prepare the company better for the next turn in cycle — up or down. Because, as champion cyclist Greg LeMond once said — “It never gets easier, you just go faster.”
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