How Tata Steel's bid for ailing NINL fits in with the major's strategy

On January 31 - the eve of the Union Budget - Tata Steel Long Products, a subsidiary of Tata Steel, was declared the winning bidder for a 93.71 per cent stake in Neelachal Ispat Nigam Limited

On January 31 — the eve of the Union Budget — Tata Steel Long Products (TSLP), a subsidiary of Tata Steel, was declared the winning bidder for a 93.71 per cent stake in Neelachal Ispat Nigam Limited (NINL), an asset owned by central and state public sector undertakings (PSUs). In the running were: Sajjan Jindal’s JSW Steel and a consortium of Naveen Jindal-owned Jindal Steel & Power and Nalwa Steel and Power. But with a Rs 12,100-crore bid, Tata Steel won the race for the 1.1-million tonne (mt) asset without breaking a sweat.

Analysts dubbed it an “expensive affair”. A Motilal Oswal report said NINL was unlikely to deliver returns commensurate with the investment for several years till the new steel plant is commissioned, while ICICI Securities observed that “prima facie” the acquisition looked expensive.

Tata Steel has been there before. In 2018, when it acquired Bhushan Steel for Rs 35,200 crore under India’s insolvency law, that too, had appeared high cost. There were concerns that the balance sheet would get stretched further (Bhushan Steel was renamed Tata Steel BSL and is now merged with Tata Steel).

But that asset turned around in three years — recorded its highest EBITDA — and Tata Steel paid back much of the debt on account of its Indian acquisition, riding on a strong steel cycle that has seen prices touch record levels in the last two years.

“We knew we could unlock value at Rs 35,000 crore, which we have done. Bhushan generated a lot of EBITDA and we paid back much of the Rs 17,000-18,000 crore debt,” said Tata Steel Chief Executive Officer and Managing Director T V Narendran.

Tata Steel’s Indian acquisitions have worked well. In 2019, Tata Sponge Iron, a subsidiary of Tata Steel, acquired the steel business of Usha Martin for around Rs 4,500 crore (Tata Sponge was renamed TSLP later that year). With the asset, Tata Steel has become one of the leading speciality steel players.

Two acquisitions later, Tata Steel’s consolidated net debt came down from Rs 104,779 crore at the end of March 2020 to Rs 62,869 crore in the first nine months of FY22.

Beyond a plant, with the Bhushan Steel acquisition, Tata Steel also secured grow­th options. Not only did the steel major get a 5.6 mt plant at Meramandali in Odisha overnight, but also a site spread over 2,000 acres. 

That provides the option of taking capacity to 10 mt.

Getting a plot of that size in an area perpetually suffering land acquisition controversies takes years, as Tata Steel has learnt the hard way.

In 2004, Tata Steel signed a memorandum of understanding (MoU) with the Odisha government for an integrated steel plant, but commercial production started only in 2016 (in 2006, police firing over land acquisition claimed lives and set the project back).

Now, Kalinganagar is on its second leg of expansion, going up to 8 mt by FY25, but it’s taken a while to get there. So, when Tata Steel decided to pay top dollar for NINL, under consideration was the 2,500-acre land that comes with it.

“We wouldn’t have paid Rs 12,000 crore for a one million-tonne facility. But we got 2,500 acres. In India, it’s not easy to start a new site,” exp­lained Narendran.

Around the same time as Kalinganagar, Tata Steel had signed MoUs with governments of Chhattisgarh and Jharkhand for greenfield projects but none materialised. The list of failed MoUs on account of land is long, however, including the likes of global steel majors Posco and ArcelorMittal.

To put NINL’s 2,500 acres in perspective, Tata Steel’s 10-mt plant at Jamshedpur — one of the largest single location steel plants in the country — is on 1,800 acres. The land bank takes care of Tata Steel’s growth ambitions in the next 10 years.

Tata Steel has already announced a 4.5-mt expansion plan for NINL going up to 10 mt by around 2030.

“People look at NINL as a 1-mt plant. But we see the long-term value that we can create there and a 10-mt steel plant in the future,” said Narendran. The fact that NINL also has 100 mt of iron ore reserves is, of course, another big bonus.

Then, there are operat­ional synergies that Tata Steel can leverage. NINL’s facility is just across Tata Steel’s Kalinganagar’s facility. So, bet­ween the two, the total land available is over 6,000 acres offering scope for a 25-mt steel complex with a mix of flat and long products. Tata Steel’s operational capacity in India is 19.6 mt.

But behind Tata Steel’s best foot forward for NINL there could well be the shadow of a missed opportunity. In 2018, when five stressed steel assets were auctioned (including Bhushan Steel) from the Reserve Bank of India’s first list of non-performing assets (NPAs), Tata Steel lost out in the race for the 1.2-mt Electrosteel Steels to Vedanta.

“The learning from Electrosteel was that if you need an asset, bid at whatever you think is the price at which you can unlock value. And you should not regret if you have lost it at a bid higher than that,” said Narendran.

And what was the learning from the £6.2-billion Corus acquisition in 2007 that has mostly been a struggle for Tata Steel?

There may not be any easy answer, but Narendran said, “Every acquisition is different, the context is different. When we acquired Corus, it was much bigger than Tata Steel. So, our own approach was different.”

Tata Steel had the experience of NatSteel and Millen­nium Steel acquisitions under its belt, but they were minnows compared to the 18-mt Corus. Then the global financial crisis hit in 2008 and from 2009, it was a state of constant firefighting. Production on the European side shrunk to about 10 mt over the years.

But Europe appears to be finally turning the corner. Tata Steel Europe’s EBITDA in Q3FY22 had stood at Rs 2,942 crore compared to a loss of Rs 724 crore a year back; in the previous quarter, EBITDA was even higher at Rs 3,340 crore.

Still, Tata Steel’s acquisition can broadly be divided into the high-cost and difficult European side and the relatively newer plants in India that are easier to turn around.

ICRA Senior Vice President Jayanta Roy explained that the recent Indian acquisitions of Tata Steel benefited from a better demand environment, locational advantages as well as timing.

“These assets are close to the iron ore belts in Odisha, and ramping up their operations largely coincided with the current upturn in steel prices, which led to strong operational cash flows. These benefits were not available for the acquisition of European steel assets of the company,” he pointed out.

Plus, demand has shrunk in Europe in the past 10 years, while cost of operations is also higher. In contrast, India is a growing market. But the big question is, will NINL also reap the benefits of high steel prices? That the steel cycle will tell.