Followed due process to get fair valuation for amalgamation: Tata Steel CFO

In a Q&A, Koushik Chatterjee, says the decision to merge seven group firms is a priority for Tata Steel and the entities involved. He adds that rupee depreciation will influence steel prices

In a bid to consolidate its metals and mining business, Tata Steel has decided to merge seven group firms. In an interview, Tata Steel executive director and chief financial officer, Koushik Chatterjee, tells Ishita Ayan Dutt that the amalgamation is a priority for Tata Steel and the entities involved. He added that rupee depreciation will influence steel prices. Edited excerpts:

What are the immediate and long-term benefits of this mega merger?

The proposed amalgamation will help us drive strategy in a sharper and (more) focused manner. Tata Steel will provide the financial strength to these businesses to grow in the future and align them with Tata Steel's enterprise strategy. There will be synergies through cost take-outs in several areas. The management structure also becomes simpler.

Since 2019, Tata Steel has reduced 116 associated entities. Was that mostly in Europe?

Yes, it was mostly in Europe and South East Asia.

It appears from the way the stocks of group companies reacted after the merger announcement that shareholders are not enthused. Your comment on the valuation...

Firstly, don’t go by one day’s market reaction, as the broader market on Friday was deeply affected by global factors. The valuation process followed for this exercise was robustly done by independent external experts and validated with fairness opinion by another set of external experts. Further, the entire valuation proposition was considered by the independent directors, audit committee and the boards of all the involved companies.

Therefore, we followed the due process laid down by the regulators and the governance oversight has been fully complied with to ensure a fair valuation is arrived at for the amalgamation.

Given that the process involves seven firms including four listed ones, how long do you think the merger process will take?

There is a clear sequence of process laid down by Sebi, NCLT and other regulators and we will follow it diligently. This amalgamation programme is a priority for Tata Steel and all the amalgamating entities.

Globally, steel prices have corrected sharply since peak levels in April. What is the outlook?

The market is now becoming more stable than a few months back and prices would reflect the underlying demand supply conditions. There was a mismatch that was happening earlier on account of the raw materials cost versus the steel prices in India. The underlying demand conditions are looking up with the festive season coming up. The system inventory with the customers are also currently low, so restocking should also happen.

How will rupee depreciation impact Tata Steel?

Historically, there is a high correlation between steel prices and movement of the rupee. Steel is a dollar-denominated global product with large seaborne volumes. We have seen it in the past and are also witnessing now, that externalities including global geoeconomics have a significant impact on steel-making raw material and steel prices.

In recent months, there has been a lot of volatility due to multiple factors, currency being one. Currency affects both imported raw material prices like hard coking coal and steel prices. Our risk management process takes these multi-factor variables into account.

But the input cost will increase on account of rupee depreciation...

Coking coal will be costlier if the rupee continues to slide but that will also influence steel prices.

Given the correction in global prices, is the export duty on Indian steel a major factor?

The Indian steel industry is globally competitive and has the potential to not only serve the growing needs of the country but also compete globally in the seaborne market and earn crucial foreign exchange for the country. Therefore, it is important that the Indian steel industry continues to grow in the future and steel players invest in capacity growth. But this industry is capital-, technology- and employment-intensive and requires companies to look at capacity planning carefully.

New capacity growth has to be bankable, sustainable and value creating. At times, there will be a mismatch between demand growth and capacity to produce because the market grows more linearly than capacity. That’s when exports become even more relevant to enable the industry to balance the needs and be more sustainable.  

Will the slowing down of economic activities world over impact demand for steel?

Steel is a foundation sector for any country and a fundamental material for sustenance and growth of the economy. Post-Covid, governments across the world have stepped up public spending on infrastructure and as the world prepares for an alternate energy future to decarbonise, steel will be a big input towards transition to a low-carbon economy. The relevance of steel as a primary and sustainable material with a high degree of circularity will continue. While there may be short-term cyclical effects, the demand for steel will continue to grow.

How will the price drop and Europe’s plan to ration gas in winter impact Tata Steel Europe?

The question is at what price the gas will be available during the winters. But the good thing is that we keep hedging our energy exposure.