Tata Steel bulks up for growth without compromising its deleveraging target

The upturn in the steel cycle has allowed it to reconsider overseas asset sales and plan domestic expansion and acquisitions

At the end of January, Sweden’s integrated steel maker SSAB withdrew its “initial interest” offer in Tata Steel’s Netherlands business for “technical reas­o­ns”. The transaction — announced last Nov­e­mber — was meant to accelerate Tata St­e­el’s deleveraging efforts, bringing it closer to its target net debt-EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio of 3x from 3.9x (annualised) in Q2.

Yet, SSAB’s withdrawal did not dismay Tata Steel. The country’s second largest private steelmaker’s results earlier this month showed that net debt fell by Rs 29,390 crore to Rs 75,389 crore in FY21 and net debt-EBITDA improved to 2.44x, a long-term target. Consolidated EBITDA grew 71 per cent to Rs 30,892 crore.

This performance has been the result of a 54 per cent surge in domestic steel prices over the past six months. When SSAB’s interest in the Netherlands operations was announced, analysts had suggested an enterprise value of $2-$2.5 billion alone for IJmuiden, the primary steelmaking site in the Netherlands. Sans the deal, Tata Steel deleveraged close to $4 billion.

Soaring steel prices may have helped, but the management is confident of weathering a downturn. “Even at low steel prices, we will be the last man standing,” Tata Steel Managing Director and Chief Executive Officer T V Narendran said.

His confidence stems from the fact that when prices were as low as $300-$400 a to­nne, the India business had an EBITDA margin of 20 per cent (prices of hot rolled coil, used in vehicles and consumer goods, are now at around $917 a tonne in the domestic market). That strength stems from the legacy ownership of captive iron ore mines, which insulated the company from a runaway price rise (iron ore prices are at their highest since 2008) coupled with operat­ional efficiencies. As a Motilal Oswal report said, with captive iron ore availability, Tata Steel’s Indian operations are a play on steel prices. “Given the prevailing higher prices, we expect margins to be strong,” it said.

The EBITDA margin for Tata Steel’s India business in the fourth quarter was an unprecedented 41 per cent, which ensured a higher debt reduction than what it would have achieved by selling its Dutch operat­ions and much more than its typical deleveraging target of $1 billion a year.

Others such as Steel Authority of India Ltd (SAIL) and Jindal Steel & Power also used the current cycle to deleverage. JSPL, one of the top six steel producers, saw consolidated net debt reduced by Rs 13,773 crore in FY21 (it reported its highest consolidated EBITDA of Rs 14,444 crore). Government-owned SAIL reduced gross debt by around Rs 16,150 crore to Rs 35,330 crore (provisional) as on March 2021.

The steel rally means that Tata Steel is also no longer under pressure to consider di­vestment options for its European or Sout­heast Asian operations. “Right now, the steel cycle is working in our favour, so our assets in South East Asia and Europe continue to be a part of the family,” said Narendran.

In 4QFY21, Tata Steel Europe recorded an EBITDA of Rs 1,194 crore against a loss in the preceding quarter and full year. Tata Ste­el’s primary steelmaking operations in Eu­rope are IJmuiden, Netherlands and Port Ta­l­bot, UK. The UK, on account of a high cost structure, has been a problem for Tata Steel.

“The Netherlands site has more often than not been cash positive except for the last couple of years when we had some operational challenges,” said Narendran. “The UK is where we had a problem. But for the last two or three years, EBITDA has been in the minus-100 million pound to plus-100 million pound range,” he added. At peak lev­el, it was losing £300-400 million a year.

This year, however, the UK business will be EBITDA and cash-positive. “The challenge is to sustain it and that is our focus. We are not under pressure to pursue any option than when we were losing money or cash,” added Narendran.

Unlike Europe, Southeast Asia — Tata Steel has operations in Singapore, Thailand, Vietnam — has mostly been cash-positive, but was put up for sale to meet the deleveraging target. It has now been reclassified as continuing operations from an “asset held for sale”.

But Tata Steel is clear that it will be focused on India. With a strong steel cycle at play, Tata Steel has restarted its capex with the second phase of Kalinganagar’s 5 million tonne expansion (expected to be completed in FY24) without compromising its deleveraging goal. “If demand and prices are strong, we can grow all the sites (Jam­s­hedpur, Kalinganagar and Angul) simultaneously,” said Narendran. Between the three sites in India, Tata Steel has the opportunity to scale up its annual capacity to 40 million tonnes from 20.6 million tonnes currently.

Scale is what Tata Steel was eyeing during the last steel boom from 2003 till early 2008. Size was becoming important for the industry then (the giant ArcelorMittal had been formed in 2006). With few expansion opportunities in India, Tata Steel acquired Corus in a £6.2-billion deal in 2007, then India’s biggest cross-border acquisition. But between that cycle and this, the major difference is the structural change that Tata Steel has undergone. The capacity in India is now four times of what it was when Corus was acquired. Europe, on the other hand, has shrunk from 18 million tonnes to 10 million tonnes.

Tata Steel is pursuing inorganic growth options, too. In 2018, it acquired Bhushan Steel (now Tata Steel BSL) under the Ins­olvency and Bankruptcy Code and in 2019, it acquired Usha Martin’s steel business.

The company recently submitted an exp­ression of interest for the strategic sale of government stake in Neelachal Ispat Nigam Ltd. It will also participate in the disinvestment of Rashtriya Ispat Nigam Ltd once the process starts. As Narendran said, Tata Steel’s long-term target is to keep net debt to EBITDA below 2.5x. “There is no point chasing a net debt to EBITDA lower than that and missing out on growth opportunities,” he added.