In good position to deleverage from next year: Tata Steel's Chatterjee

Tata Steel is expanding capacity at Kalinganagar in Odisha, amid a challenging environment. During a conversation in Kolkata, Koushik Chatterjee, executive director and chief financial officer, Tata Steel, tells Ishita Ayan Dutt that the capex spend for next year (FY26) will be lower than the current year, and it will be a good time to deleverage. Edited excerpts:

 

India’s economic growth in the July-September quarter slipped to a seven-quarter low of 5.4 per cent. Given the correlation with steel consumption, is it worrisome?

This is more of a cyclical deceleration rather than anything structural. The credit growth has been slower than expected and the public spending is slightly delayed because the Budget cycle got pushed due to the election this year. But our estimate is that there will be a lot of catch-up in Q3 and Q4. 

Rural consumption is showing signs of improvement and private consumption is getting broad-based. A huge amount of allocation has been done on infrastructure and the entire industry expects pick-up of public spending very significantly in the second half of the remaining financial year. How quickly we can start the capital spend on the ground will be important. But a lot of central and state government contracts are on the anvil and the pipeline is looking better than Q2.

 

Prices globally have been under pressure, is steel in a down-cycle?

The steel industry is clearly in a down-cycle. On an annualised basis, China is exporting about 128 million tonnes (mt), which is almost 125 per cent higher than in 2022. This level of export represents about 65 per cent of the demand in the European Union. Therefore, the supply-side glut is very high. While many countries are currently undertaking trade investigations, it is impacting prices. At these price levels, the broader Chinese steel industry is also losing money. 

On the other hand, the European market is much weaker from a consumption point of view. So, price-wise the steel industry is in a multi-year down-cycle. Unless China pulls back from the seaborne market, this pressure will be there. From an Indian perspective, if demand growth increases due to more public spending and the government takes policy measures on imports, we may see stabilisation in prices.

 

The industry is expanding even when margins are thin, is there a risk?

Steel investment is always done with a 20-year time horizon and implementation takes multiple years. So long as the underlying long-term demand story is strong and the pathway of growth in the underlying economy is robust, it makes sense to make these investments. 

The per capita steel consumption in India is close to 100 kg. The global average is 260-270 kg and in China, it’s much higher. So, India certainly has a clear trajectory that consumption will continue to increase. It is also backed by the infrastructure lined up for growth. It is with that fundamental architecture that the industry in India is investing. 

Price sustainability and profitability are critical levers in making the investment case. Short-term fluctuations are acceptable but if there is a structural destruction in the price model for a long time, then it will become difficult for people to invest and companies will start deferring investments. Most Indian steel companies are very competitive from a global perspective. But a long-term fair pricing structure is critical for a foundational industry like steel to invest and grow.

 

In the last decade, high debt has hurt some steel companies. Is the industry on a stronger footing post-consolidation through the Insolvency and Bankruptcy Code (IBC)?

Structurally, the Indian industry is a lot more organised and mature to meet the future demand in a competitive manner. The companies are in a position to derive economies of scale and now focusing on sustainable technology, product portfolio and modernising their digital capability to be future-ready.

 

Does Tata Steel have any growth capex planned for next year?

We will be completing the tail-end of Kalinganagar Phase II. There will be completion and payments for it. There will also be payments for our mine expansion. And, there will be spending on the Ludhiana electric arc furnace (EAF), which we want to finish quickly. We will also be spending capex in the EAF decarbonisation project in Port Talbot in the UK. Beyond that, there is design and engineering spend that will happen for future growth in India, but the capex spend level for next year will be lower than the current year.

 

Are you hitting a pause button on growth capex because gross debt is nudging Rs 1 trillion?

Not really. Because in the next 12 months, we are essentially completing the Kalinganagar expansion to 8 mt and focused on ramping up the volumes. We are also ramping up the capex spend on the Ludhiana EAF and also doing the preparatory work for further growth. Even if any project is approved today, it takes 18 months to actually start making the spend. So, we will certainly use the time to deleverage.

 

When is Tata Steel going back to its deleveraging target of $1 billion a year?

In the last three years, we bought Neelachal Ispat Nigam Ltd (NINL), spent on expanding Kalinganagar and expansion of iron ore mines. Also, we had to support our European business. Therefore, from a balance sheet perspective, we have been putting capital to create competitive assets for the future and we can’t have such big spends and at the same time continue to materially deleverage, especially when the market cycle has been weak since the record high of 2022. But deleveraging remains an enterprise strategy and we will be in a good position to deleverage from next year (FY26) and hopefully strive to achieve our target net debt to Ebitda of less than 3 times.

 

We are months away from the Union Budget, what’s on your wish list?

Push towards infrastructure and its execution will have a multiplier effect on the economy. It will also drive consumption. So, the continued allocation on infrastructure will be important. Keeping the fiscal discipline that has happened so far, will also be important. 

India is clearly on a multi-decadal build path – the opportunities and levers are there and the strong long-term growth story remains intact. If more capital can be allocated for fixed asset formation, it will boost the economy in many ways.

 

Do you see potential tariffs by the Trump administration impacting trade flows?

Trade flows do get impacted because tariffs generally don’t work unilaterally. There is generally a counter-response to tariffs. Even the country that imposes tariffs faces inflationary pressure. That will have an impact on interest rates and growth. Tariff for tariff is never an economic solution in a globalised world. So, trade flows in the short term will be affected. 

A blanket tariff, if it happens, will impact supply chains across products. But given our domestic growth opportunity, we are relatively insulated from any direct large-scale impact of a tariff-induced potential trade war between the US and China.