A failed global bet. Loss of market leadership. And a pile of debt. That’s what changed for Tata Steel Ltd. in a little over a decade. There is only one way to recoup the lost ground and win back the crown: join a bidding war.
The nation’s oldest steelmaker plans to focus on the domestic market and double its capacity to 26 million tonnes a year by 2023. Quite a task given that the company’s existing plan to improve capacity by 5 MTPA at Kalinganagar, Odisha will only take it to 18 MTPA. Still shy of where market leader JSW Steel Ltd. plans to be by then.
Commissioning a large greenfield project in five years would be a huge challenge as Tata Steel’s ongoing expansion would be completed only by March 2022, said Jayanta Roy, group head, corporate sector rating at ICRA Ltd. Stressed steel companies facing insolvency proceedings— Bhushan Steel Ltd., Electrosteel Steel Ltd. and Monnet Ispat Ltd.—offer an opportunity, he said.
That would pit it against rivals like JSW Steel, global steel giant ArcelorMittal and Anil Agarwal who aims to add steel to his mining-to-oil Vedanta Group, BloombergQuint reported earlier.
Tata Steel didn't respond to BloombergQuint's emailed queries.
Tata Steel was last No. 1 in India nearly 11 years ago. The $13.5-billion Corus buyout of 2007, just before the global economy unravelled, changed everything. Demand declined, leaving it saddled with excess capacity and losses. By March last year, exchange filings showed, its debt had ballooned to Rs 83,000 crore. Tata Steel sold assets and took multiple write-offs in the U.K. in the last three years to ease the stress. The steelmaker also agreed to merge its European business with Germany's ThyssenKrupp AG.
Rival JSW Steel, in the meantime, expanded capacity aggressively from 11 MTPA to 18 MTPA betting on improved demand as the global economy revived after the 2008-09 crisis. The Sajjan Jindal-led steelmaker acquired Ispat Industries Ltd. and invested in its Vijayanagar (Karnataka), Dolvi (Maharashtra) and Salem (Tamil Nadu) plants to boost output. It now targets to increase its overall capacity to 23 MTPA by March 2020.
Steel demand in Asia’s third-largest economy, according to Indian Steel Association, is expected to double to 240 million tonnes by 2030 driven by the government’s infrastructure and housing push. Tata Steel too aims to tap this increasing consumption.
Shifting focus back to the domestic business by adding capacities will definitely place Tata Steel on a high-growth trajectory, Tarang Bhanushali, assistant vice president and analyst at IIFL Holdings Ltd., said. But the timely execution of planned asset sales in Europe remains the key, he said.
The steelmaker has already announced investments worth Rs 23,000 crore to expand capacity at Kalinganagar. It also raised $2 billion to pare debt and buy stressed assets. But winning an aggressive bidding war won’t be easy.
The impact of losses and debt on the books of Tata Steel will not wear off soon. Given its balance sheet, the company is not expected to bid aggressively for stressed assets, Rakesh Arora, a market expert who tracks the steel sector, told BloombergQuint.
The steelmaker, in a statement while announcing its fund-raise in December, said it's looking to add capacity for automotive, engineering and other value-added industries—which contribute 18 percent to its revenue. A potential acquisition of Bhushan Steel (5.6 MTPA) would help it increase market share in high-end customised automotive products and improve realisations, said Goutam Chakraborthy, an analyst at brokerage Emkay Global Research.
Yet, clinching that bid would be difficult, Arora said. Both JSW Steel and Vedanta have submitted resolution plans for the stressed account under the Insolvency and Bankruptcy Code, people familiar with the development told BloombergQuint.
Arora said Electrosteel’s 2.5 MTPA assets could be easier to acquire and help the Tata company expand in the east. It makes long products like TMT bars, DI pipes and billets, among other things. Tata Steel gets 21 percent of its revenue from long products, 74 percent from flat products and 5 percent from other segments. Electrosteel would give the company capacity to meet construction demand fuelled by the government’s plan to build roads, bridges and ports.
For Monnet Ispat too, Arora said, Tata Steel would run up against an aggressive JSW Steel. The Jindal-led company would be looking to foray into central India given that it already has enough capacity in the west and the south. Monnet Ispat makes long steel products and ferro alloys, besides mining coal and iron ore.
Shares of Tata Steel have gained 71 percent in the last five years compared to the more than 230 percent rise for JSW Steel. Goldman Sachs rates JSW Steel a ‘Buy’ compared to ‘Neutral’ for Tata Steel because of the Jindal-led steelmaker’s higher efficiencies and a stricter focus on cost control.
JSW Steel will spend Rs 15,000 crore on the 5 MTPA expansion at Dolvi, implying a cost of $460 a tonne, the bank said. That compares with $720 a tonne for Tata Steel’s expansion plan for Kalinganagar.
The brokerage expressed doubts on Tata Steel's ability to meet the expansion timeline. “It plans to double its India capacity in the next five years but has not yet announced the next phase of expansion.”
One alternative is open: that of buying its way back to the top.