Higher interest rates won't hurt us now as they did in past: Tata Steel MD

In Q&A, T V Narendran explains why growing in India will not add to leverage

In the last two years, Tata Steel has reduced net debt by around Rs 53,000 crore. In an interview, Tata Steel managing director & chief executive officer, T V Narendran, explains to Ishita Ayan Dutt why growing in India will not add to leverage. Edited excerpts:

Tata Steel Europe recorded one of its best financial performances in FY22 with an EBITDA of 1.2 billion pounds. Has Europe peaked or is the best yet to come?

I wouldn’t say it has peaked. For most of last year, we were honouring our long-term contracts. They were priced at January 2021 prices. We have a larger share of long-term contracts particularly in the Netherlands. Those were renegotiated in November-December and the new prices reflected in the last quarter. Also, spot prices in Europe went up because of the Ukraine crisis and continue to stay at a high level. So you can expect a similar or slightly better performance in this quarter than the last quarter.

You have stopped sourcing raw material from Russia. Is there a cost impact to it?

The cost impact is at an overall level because coking coal prices have gone up as Russia is out of the market for most countries. Of the 15 million tonnes we buy, we used to source 3 million tonnes from Russia. That isn’t such a big volume.

For Europe, we are sourcing from Canada and the US. For India, it’s from Australia. There is some price impact, but not material.

While year-on-year profits in the March quarter have seen a jump, quarter-on-quarter, it’s just marginally higher. Is demand slowing down and what is the outlook for Q1FY23?

We don’t see demand materially slowing down. There is a little bit of impact from some of our customers on account of working capital and power. But it’s nothing material and I don’t see any issue from a demand point. Also, we exported 15 per cent and can always export more if there is a problem with demand. But we expect demand pick-up to continue to be strong in India. As far as guidance is concerned, we expect margins in Q1 to be similar to Q4.

Do you see prices going up further?

It depends on coal (coking) prices. If it stays at $500 a tonne, then steel prices need not go up. But if it suddenly shoots to $600, then steel prices will be under pressure.

In the last few years, Tata Steel has balanced between growth options and deleveraging. What is prompting you to accelerate growth projects now?

We have been able to deleverage because we have grown aggressively in India. The India business has always been cash positive even at the lowest point of the cycle. But the India business, at one point in time, was only 30 per cent of the business. Today, it is at 60-70 per cent and we will keep growing that.

The cash flows that we generate in India, allows us to grow without adding leverage. As the size of the India business grows, Tata Steel as a company can continue to grow and deleverage. Structurally, Tata Steel is in a much stronger position today than it was before and the industry is also in a much stronger position structurally because China is not exporting much, not much capacities are being added apart from in India and steel prices are high. As an industry and as a company, we are structurally better placed.

Are acquisitions going to be a part of the growth strategy and have you taken a call on RINL?

We don’t need to pursue any other acquisition to realise our growth ambitions. At the existing sites, we can grow to 40-50 million tonnes and we have the optionality to grow through the electric arc furnace route. So we are in a comfortable position. We can always look at all those assets but we don’t need to and organic growth is easier to control.

If the market slows down, you can always slow down the capex in organic growth. When it’s inorganic, you are committed to it. We have taken the inorganic calls at the right time, now’s the right time to take the call for organic growth.

You are expecting to close the Neelachal Ispat Nigam Ltd acquisition in Q1, but is it behind schedule?

There was a 45-day timeframe, but the government wanted some more time because there were issues that they needed to sort out between the owners.

After Kalinganar second phase expansion, are you going to take up NINL?

We have already developed plans to take NINL from 1 million tonne (mt) to 5 mt. We can move beyond phase 2 in Kaliganagar – if we choose to move from 8 to 13 mt, we can immediately start. We will take that call.

We are also looking at how we can take Angul from 5 to 10 mt. If the market is very strong and the cash flows are very strong and demand is very good, we can do all three at the same time. That’s the advantage that we have today, that we didn’t have earlier.

Tata Steel profits in FY22 surpassed TCS in the group. Is it a clear flagship in the group?

I don’t think we are competing with TCS. They are in a different industry and we are in a different industry and we are all part of the same group. I will be the happiest person if TCS continues to grow and do well and Tata Steel should also continue to grow and do well.

I think our flagship reference comes from the fact that we have been around for 115 years and survived many cycles and been very resilient and come back after being written off many times.

Do you see demand being impacted by the RBI rate hike?

Steel demand is dependent on construction. And a lot of the construction is dependent on government spend on infrastructure. I don’t think there is any change in government focus on infrastructure and revenues have been strong for the government.

The second part of steel demand growth is the auto industry. If the government continues to spend on infrastructure, the auto industry, particularly commercial vehicles, will continue to be strong because largely it’s been driven by construction and mining – mining is strong because of commodity prices and construction is strong because of government spending.

The third area where commercial vehicles is doing well is because of supply chains and e-commerce delivery systems, which is also strong in India. So I am not seeing this as a very big derailer.

Also, balance-sheets are in a much better place. If you look at Tata Steel or many of our peers, we have deleveraged a lot. We are not looking at borrowing money today. To that extent, higher interest rates are not going to impact us directly as much as it did in the past.

But what about overall demand and the economy?

I don’t see it as a derailer yet. You cannot expect the RBI to keep an accommodative stand forever. I think it has been as accommodative as it could be when the industry required it to be so. Today, when the industry is doing better than it was earlier and inflation is high, and globally central banks have raised interest rates, I think, it was inevitable.

The industry was expecting it to happen anyways and has to adjust to it as it has with other events – whether it’s the pandemic or the Ukraine war. The industry has to respond to these events and adapt.