Metal worker preps steel for the base framework of a modular farming unit. (Photographer: James MacDonald/Bloomberg)

Tata Steel Looks For A New Partner In Europe

Tata Steel Ltd. is looking for a new partner for its joint venture in Europe after its deal with Thyssenkrupp AG collapsed.

“We will look at all options to understand whether strategically there could be another player with whom we could do this and with whom we will not face a similar outcome,” Executive Director and Chief Financial Officer Koushik Chatterjee told BloombergQuint in an interview.

The future of Tata Steel’s units in Europe has been thrown into doubt after its planned joint venture with the German steelmaker collapsed over the European Commission’s concerns. The deal was important for Tata Steel as it seeks to lower its European exposure and focus more on the domestic market. The joint venture with the German steelmaker was expected to alleviate more than Rs 20,000 crore in debt from Tata Steel’s books and generate synergy benefits worth over 400-500 million euros.

“There could be some other option which we could work around in terms of portfolio and we will have to evaluate each of them, weigh the pros and cons,” Chatterjee said.

The company’s group debt of $13.15 billion as of March is the highest among Indian steelmakers. Tata Steel, however, said it will focus on deleveraging to improve and create more “appetite” in the balance sheet. The company peaked in its debt requirements last year after the Rs 35,200-crore acquisition of Bhushan Steel, Chatterjee said. But its debt-to-Ebitda level now is three times and the company is confident of reducing the debt, he said.

“We should not be more worried than we need to as far as the debt levels are concerned,” he said. “We will reduce the debt level. There are no liquidity issues in the company.”

Chatterjee said, “Between synergies from erstwhile Bhushan Steel, Usha Martin, and our current business of 18 million tonnes when implemented in Kalinganagar (Odisha) and Jamshedpur, we would have formidable cash flow which will then take the deleveraging process further.”

Besides, Tata Steel’s strong cash flows in India will aid its deleveraging process, he said. And with the company directing most of its internal cash flow to its Kalinganagar phase-II, there won’t be any need to depend on borrowings, according to Chatterjee.

Also read: $13 Billion Debt Now in Focus After Collapse of Tata Steel-Thyssenkrupp Deal

Mid-Cycle Play For Steel

Fresh tariffs imposed by the U.S. and China led to a disarray in various industries, including steel.

“One has to be careful and ensure that one’s exposure is focused on domestic markets,” Chatterjee said.

Steel, according to Chatterjee, is a late-cycle play—stocks that react later in the business cycle. “If there are no black swan events, we are in the mid-cycle play,” he said. It’s where the spreads will be range-bound, the demand in certain sectors will have an impact based on how credit moves in the country, and how the underlying sentiment is, he said.

This comes at a time India entered its final phase of Lok Sabha polling—a politically uncertain environment.

“There will be a clear view post the outcome,” Chatterjee said.

Here’s the edited transcript:

With Thyssenkrupp opting for ‘Plan B’ and not opting for joint venture, what are the options on the table for Tata Steel? What kind of clarity can investors get from you at current point of time?

It’s both the potential shareholders taking a view from the feedback coming from the European Commission. It is not just Thyssenkrupp doing it or us doing it. Given the fact that remedies that are asked are much more than the fundamental merger logic that we have worked on. In terms of our focus area which has been in the works for some time, we have been working on Tata Steel’s Europe portfolio to make it more profitable and more cash-flow positive in terms of its earnings. We have been working on the asset quality. We have been investing in critical assets in Tata Steel Europe. We have been focusing on its operations including working capital for some time. We didn’t have a very good year, last year, because of major repairs in the furnace at Port Talbot. Also, there were some operational challenges in Netherlands.

Having said that, it is behind us. We look forward for much more stable operations in Europe and pursue the objectives in this year to ensure that it meets all its requirements and cash obligations within its own cash flows. That’s been the primary management target that all of us has been working very hard with the employees of the company. We would like to believe that this is our first target. Once that is achieved that, we are on a much more sustainable level. The cash flows from Netherlands continue to be very strong. It is the U.K. operations that has had these challenges. Going forward, this will be the key performance areas as we sharpen our focus on performance. Thereafter, on a parallel basis, we will look at what should be fit for purpose strategy for the portfolio and how do we achieve similar outcomes as we had planned in joint venture.

When businesses planned for a particular event to happen and it always comes to the brink of happening, but it didn’t happen. It creates a near-term void from the intended stated results that it was supposed to achieve. Most people anticipated deleveraging. You stated objective that it will help in big way. How do you salvage the situation then?

It was intended to happen and almost on the brink of happening. It is not that it did not happen because Tata Steel and Thyssenkrupp didn’t do it, but because of the way the regulatory approvals create this kind of scenario.

Having said that, we need to see the size of deleveraging. It is effectively a de-consolidation of roughly about Rs 18,000-19,000 crores on a base of about Rs 1 lakh crore. Last year, we peaked our debt requirements in Tata Steel post the Bhushan Steel acquisition which was Rs 1.18 lakh crore. In the second half of the year, we have reduced our gross debt by about Rs 17,500 crores and we closed the year with roughly about Rs 1 lakh crore. Subsequent to it, we have announced that we will reduce debt by $1 billion which is about Rs 6,500 crores in this current year by the end of the year. As far as the overall debt profile is concerned, we will continue to deleverage. Our India cash flows are very strong, and it is a significant part of the overall cash flows of the consolidated Tata Steel. We are also organically implementing our Kalinganagar phase-2 where we will be putting most of our internal cash flows and not depend on any further borrowing.

Therefore, if you look at the next 18-24 months horizon, then two things will happen. One is surety that we will implement our Kalinganagar phase 2 expansion of 5 million tonnes. We don’t intend to do any net borrowing for that particular project. Secondly, over the next few weeks and months, we will develop alternate strategy to joint venture and hopefully reach the same goal as we had intended for the joint venture. If the level of Ebitda continues where we finished last year which is closely around rs Rs 30,000 crore. I think we will be calibrating our cost capex and working capital to ensure that we can deleverage further. Thankfully, the schedule repayments are not hugely large at this point of time and therefore we have opportunities to do lot more pre-payments.

There are a couple of rumours doing the rounds. It is best if you put rumours to rest. Post this development, the conversation is that you may be looking to exit some international market or you may offload some of the assets including Tata Consultancy Services shares that you have, and which is something they have done before as well. Are this even for consideration for somebody to report on this, or you have not thought of it as yet?

Before I address that, I would like to say that at a Rs 30,000-crore Ebitda level, Rs 90,000 debt is 3X Ebitda. So, I don’t think we should be more worried than we need to as far as the debt levels are concerned. Of course we want to and will be reducing the debt level. But it is not that there are any liquidity issues or a liquidity crisis in the company. We have just reported the best-ever underlying performance during any financial year, last year.

We are not in any major international markets other than South East Asia where we are already in the process of divestment. This is something which will happen during this quarter, it is what we are focusing on as our buyers are looking at approvals. We have sold South Africa. There is not much left elsewhere, and we don’t own TCS shares to sell. We had done that many years back. We will look at the portfolio but not merely from a deleveraging perspective or for servicing debt perspective. We will look at the portfolio more to drive simplicity within the Tata Steel group and also to drive synergies between the retained part of organisation. We have just announced the merger of Bhushan Steel with Tata Steel or Tata Steel BSL with Tata Steel and that is going to go forward to drive more synergies. So, internal cash flows are the focus areas. Lean management and lean working capital are the focus areas. Calibrating capex to the requirement is a focus area. Even in India our sustenance capex may be around Rs 1,500 crores and the rest of it is discretionary capex. And this discretionary capex has huge value potential when implemented through the expansion in Kalinganagar for example.

I don’t know the purpose of the rumours which you mentioned. But fundamentally we are in a very, very robust position as far as Tata Steel is concerned.

If indeed the debt reduction level is not going ahead as planned then does it impact the capex plan of Tata Steel in any way? Also, when the domestic business is looking so robust, then will the cash flows from the domestic business have to go out and support Tata Steel Europe’s operations in a slightly larger way than it would have if this particular event had not happened?

The near-term focus is very clear that Europe does not required any cash support. It should be self sufficient as far as cash flows are concerned to cover its capex and external interests. At £350 million of capex which it incurred last year and about £100 million of external interest. It is £450 million cash-neutral position. That’s been achieved almost all years. In some years, they have fallen behind. But there are times when it has achieved £500 million also. We would stick to the focus that Europe should be self sufficient in meeting all its obligations and cash-flow needs. India would have the ability to then invest and deleverage. Invest in growth capex which is announced. Our portfolio for the current moment is pretty clear. We would be about 24 million tonnes in two years’ time once the Kalinganagar gets implemented. Therefore, we should be in a good position from the cash flow perspective because that is a very competitive business with world-class assets.

From an overall perspective, we will drive deleveraging as a target to improve and create more appetite in the balance sheet and that’s what we should focus. I mentioned that Rs 30,000 crores of Ebitda and Rs 90,000 crores debt is about 3X. We certainly want it to be lower, but we will do the implementation of the accommodated growth that we have in India. Between the synergies with erstwhile Bhushan Steel, Usha Martin, our own business of 18 million tonnes when implemented in Kalinganagar and Jamshedpur, we will have formidable cash-flow levels which will then take the de-leveraging process further forward.

Where are we in the cycle of what is happening on world growth as a result of Donald Trump and China. Back home too, growth seems to be faltering. We can argue that a headline number shows a particular number. CMIE, IIP data has pointed to the numbers which are arguably a lot weaker than what the headline number seems to suggest.

There is certainly global volatility emanating out of geopolitical moves and the economy gets impacted first. Whether it is U.S.-China or a Brexit or any other trade agreements that opens up for renegotiation, trade has become a very important element. It is coming out of a political protectionism that the global polity is following. Therefore, one has to be careful and ensure that one’s exposure is focused on the domestic market, which is what we do.

Steel is normally a late-cycle play. It rises late and kind of falls late. We have seen volatility in other commodity and commodity products. If there are no black swan events, then we are in mid-cycle play. That is something where the spreads will be range bound.

The demand in certain sectors will have impact based on how the credit moves in the country, how the underlying sentiment is.

Currently, we are in an uncertain political environment due to the election. Hopefully, there would be a clear view after a month or so depending on the outcome. Everyone who operates in a particular geography bets for the long term. As a company where assets have a life cycle of 25-50 years, we also take long-term bets. India is a geography, irrespective of political dispensation which has long-term attractive fundamentals.

The ability to ride out any rough phase whether it is one to two quarters or a couple of years is important element of any organisation’s strength in terms of riding and managing risk. We look at it from that perspective. In certain circumstances, we look inwards in terms of cost takeouts and remaining lean and mean and ensure that we focus on the right levers. Overall, there are externalities where none of us can individually influence but collectively face. That is what is happening all across the world. This is not going to go away soon and this needs to be adjusted into business decisions and evaluation on new investments and so on. It all depends on the risk appetite of the company whether it can ride out this kind of volatility or play a safe bet by not doing anything.

At this point of time, for us we have taken a call for investments in Kalinganagar. We are going ahead, and it is scheduled as we believe that it is fundamentally important. Even at 5-6 percent growth rate, India will require about 5-6 million tonnes of incremental steel every year and that’s the play we want to participate and that’s why we are investing in world-class assets as far as Kalinganagar is concerned. One has to take a view on it. It certainly is a risk prone and volatile world and has its own uncertainty. As good management across companies and sectors, we have to recognise the fact that we have to manage our risks well enough.

You mentioned that the alternate strategy for JV which is not happening now will be pursued and something to that effect in next 12 months. Can you elaborate on it? What is it that you will possibly do to get the desired result of this proposed JV with Thyssenkrupp had it gone ahead?

We will review all the options and evaluate. It is very hard to talk specifics within three days of decision. We will look at all the options to understand whether strategically there could be another player with whom we can do this, and which will not be faced with a similar kind of outcome. There can be some other options which can work around in terms of portfolio. We have to evaluate each of them, weigh the pros and cons. Our institution view is that we should move towards the similar outcomes which are two—one is towards more sustainable business; second is to have the capital to deleverage or a structural solution to deconsolidate.