On May 10, Tata Steel had said that the European Commission would not clear its proposed joint venture with Germany's Thyssenkrupp. The two companies had agreed last year to combine their steel operations in Europe to form the region's second-biggest steelmaker.
Talking to CNBC-TV18, Tata Steel Executive Director and Chief Financial Officer Koushik Chatterjee said the company had already started talks with other potential partners and expected its European business to generate positive cash flows in the coming days.
Excerpts from the interview: Let me look at the math for Tata Steel Europe itself. Putting various brokerage reports together, it appears that the earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne over there is about $42 as of now and at $50 you are cash flow positive. Can you bridge that, can it stop being a bleed?
Since you have started off clearly on the numbers, I would like to explain that last year we had a significantly challenging operating year. We had our blast furnace down in Port Talbot for about 3-4 months and we had some issues in the Netherlands. Actually, if you look at it from an EBITDA per tonne perspective, $50 is not our target, it is much beyond that. Our more sustainable target for Europe is around $70-75. For that we have been making investments in the Netherlands.
The Netherlands is going through a Strategic Asset Roadmap (STAR programme), which is precisely to make the assets much more capable, to meet the highest requirements of the market. Similarly, in Port Talbot, we now have two stable blast furnaces, we have also invested in the mid-stream and downstream. So fundamentally, we would. And I want to talk about the part that you started with, the joint venture issue. It was constructed assuming all three hubs will be significantly cash positive. When I say three hubs, it includes the Thyssenkrupp hub. It is very clear for us that Europe would be a cash-neutral entity.
There are lot of plans and actions to calibrate capex and manage working capital. Last year, we did fairly good work in working capital. I think capex as I said that the blast furnace required an unplanned capex injection, the capex out of the STAR Programme in the Netherlands is going to wean out and therefore I don’t see any anxiety that Europe will be bleeding.
Even otherwise, from the math that many people have done it is only $8 per tonne, but you are saying that by end of FY20 that may not be?
We should be over that. We have been working irrespective of the JV because, end of the day we would have owned 50 percent of the JV too. So it will always be an element that you have to address and therefore we had started that work. It is part of the work and it will get done.
I am just sticking to the math because the market is trading and they want to know these numbers, there is a capex you have done of about 350 million pounds, what is the capex this time? I will tell you why the market broadly has taken around Rs 50 from your share for the JV not coming through. Now you are telling us first that the losses itself are going to be reduced and the free cash flow could turn positive or at least break even this year, so they may probably put back a few rupees on that. Now I am asking you about capex and interest outgo. How does that work out in the current year?
If you look at sustainable capex, it is in the region of say 200-225 million pounds. We have been doing a programme to make the capex more targeted and focused in terms of meeting the market requirements for the future specifically for automotive grid. In fact one of the reasons why the European Commission has been taking us more seriously because they are saying that we are strong automotive guys. So, that capex programme was taken on board and we have spent substantial part of the capex. Last year we spent about 330-odd (million pounds) and I think this year also we will be somewhere around the similar number. The capex in Europe is not like capex in India. India is a growth capex, there it is more value capex. So that is what the focus is.
Now let me come to the debt burden. Out of this Rs 95,000 crore, Rs 18,000 crore was expected to be or $3 billion was supposed to go to the JV. Now that is not happening. Therefore, how does that change the math for your debt itself? Is there any other plan you have for debt reduction other than the $1 billion you have already promised?
The point is that this Rs 18,000 crore would have got deconsolidated as the JV would have happened. Now, there are two things, before I answer that question, the point is that JV is not happening and life as usual is not the answer. That also needs to be understood.
So two things I would say if I may just jump forward. The JV had targets from a Tata Steel point of view -- to build a more sustainable business portfolio which in our view would have served the competition well, would have served the sector well, customers well and climate well. These are the four things. So, that is not happening, the strategy does not change. There are other alternatives strategically. We will be open to those alternatives and we have already started working on those. I think there will be a time not too long from now when we will articulate that in the market.
Meanwhile, the point that you mentioned is relevant, which is that how do you move to cash neutrality. There is no additional support required from anyone else and it is kind of a self-sustained ring-fence business and that is what we have been working on and it has largely been there. In the last quarter we saw that, and we will continue that effort in the next few quarters. If I may say, this is the interim step before we have the newer scenario.
What is your plan B? It looks like you cannot have buyers in Europe because everywhere there will be an issue – even with Ilva and ArcelorMittal, the EC was creating the same issue or asking the same questions. So I do not know, will you really have other buyers in Europe or are you talking to a Chinese buyer or buyers outside?
Without getting into specifics at this point of time, what was our starting point? We said that European steel industry is different compared to India. It is more matured and it focuses on value rather than volume and we had a potential partner with whom the synergies would be very high. I think there are options to look at partners, both within Europe and outside Europe and there are options to look at other players who would share the same industrial logic as we would be, and those conversations have started. So, I think we would continue to have these conversations.
It takes a long time to sometimes seed depending on how the structure is, but I think we are open to ensuring that our endgame strategic outlook remains the same and the deleveraging or deconsolidation was more as an outcome or as a consequence than the only driver.
The deconsolidation also would have been cash positive is what you are saying?
Absolutely, and then you look at where does the overall Tata Steel look like. If you are talking about an EBITDA number between Rs 25,000-30,000 crore, and if you have a debt of roughly Rs 90,000 crore, that is three times, and three times debt in a steel industry or a commodities industry is not crossing the line so to speak.
Mind you, we have just bought Bhushan Steel and the integration is well underway. We are getting a lot of synergistic value in the market as well as in the cost. We have just got Usha Martin, it has just started, and we believe that while it may be small, 1 million tonne, we will drive the same. Then you are talking about Kalinganagar expansion starting to get commissioned in the next 18-24 months and so on. Then you have another 5 million tonne of great asset coming on board. So the de-risking plan has actually been worked on an underlying basis where this Rs 18,000 crore was not the primary driver.
If you can put it in numbers, when you first took over Corus that was the one that was wagging the company as a percentage. Now it is a much smaller part of the whole. Can you give us the percentage? What was it when you took over, what is Europe as part of your total now in terms of EBITDA and where do you see it 2 years and 3 years down the line? What I mean is when Kalinganagar is done.
Around 2006-2007, first from a physicality point of view, we were 4 million tonne, Corus was 18 million tonne. Cut to today, we are 18 million tonne, Corus is 10 million tonne. We would be 24 million tonne in 2 years from now and Tata Steel Europe would be about 10-10.5 million tonne. So the physicality is different. Now if you look at from profitability perspective, last year we had about Rs 15,000 ballpark average EBITDA per tonne and at a peak of about 18,000 in Q2-Q3. So if you look at it, all-weather EBITDA at Rs 15000; take the ups and downs and do it on that basis and even if I take $50 that you talked about for 10 million, the proportionalities are 2/3rd -1/3rd and this 2/3rd is going to be bigger 2/3rds because it will move and then if you have ring-fenced business in terms of operating cash flows, working capital, capex etc. Then this becomes a very small part of the portfolio. So if I look at the main hubs of Tata Steel consolidated; Jamshedpur, Kalinganagar, Angul are three in India. The Netherlands, Ijmuiden and Port Talbot. You have at least 4 of the 5 hubs as world class.
Growth is an ultimate palliative; What is the kind of sales growth or demand growth that you are seeing in Europe and even India? Look at the state of the auto industry?
For example, in Europe last year even if we had the ability to produce, we would have been at 10-10.5 million level. So this year we should be around that level. The average capacity utilisation in Europe is not at 100 percent. It is lower depending on the market conditions unlike in India where normally the good players cross 100 percent and that is what the important part is. Average in India, we have been looking at a million tonne of growth, average over a period because it comes lumpy when you do organic. So in the growth perspective, India growth is very solid even if some of the underlying sectors face challenges.
We have seen contraction in autos.
Yes. Tata Steel today has about Rs 18,000 crore of branded products as a turnover. It has a very significant B2C business and it has got very significant business which has premium over peers. In auto, you may not grow but the auto volumes are still there; it is an important part of the portfolio. Of course it will have its own impact if the auto slows down significantly. But there are some competing products which we can move towards especially the buildings and solutions products that we do. I think we need to look at it from a portfolio point of view and in that portfolio it is not one vertical that one plays in.
What about imports? Besides the fact that demand in one of your large buyers like auto is stagnant, you also have a challenge of imports. Is it not casting pressure on realisation in this quarter?
The benchmark gets referred on the basis of how imports play but that is where the strength of the network comes in and that’s why I said that the B2C is an important part. The branded products are a very important part and the customer relationships are very important. Imports, if it is coming as a switch volume, in and out, what it does is it sometimes is based on the desperation of the exporter from the other country that creates disturbances or volatility in the market, but that eases out over a period of time.
It is there now?
It is happening but it is not like 2015-16. It was very different and destabilising. More importantly it was, in our view, unfair. It was unfairly priced.
So now it is unfair to ask for minimum import price (MIP)?
That is in place, so that will continue.
A higher MIP?
I do not want to talk about that.
Will there be pressure on realisations this quarter?
In a commodity market or commodity-referenced market, there are two important things. One is that the pressure on realisation is always there and the pressure on some of the costs is always there. So cost takeout becomes a very important element of the maneuvered plan and product mix enrichment is the other side. So, you basically tend to expand the spread through these two reasons.
I want to finish that part of the Europe issue. Will your cost takeout in Europe include possibly more layoffs as well, as you want to get towards $50 at least?
We look at cost takeout from both efficiency point of view as well as stranded cost that you don’t want to incur, and so both the selling, general and administrative expenses to improve competitiveness of a business whether it is in India or Europe or anywhere else in the world. As a consequence, if there are ways to rework on the man power, reskill them and make them more productive, that is an on-going journey. We keep doing that in India too, so if you look at it, in India also we have been reducing our people but we have been re-skilling the right kind of people.
So layoffs is not a prime part of your plan - because it is the new situation?
There is also another challenge in Europe which is essentially in terms of talent and demographics. There is an attrition that is happening naturally. Now the question is what do you do with that attrition. Do you net recruit, do you automate or do you make it more technology friendly. So it is not necessarily a layoff issue at this point of time.
Will you even think of de-merging operations in the Netherlands and the United Kingdom and selling off or JV separately?
I would only say what we have articulated in our release on Friday, all options are open. It has to serve our purpose. It has to serve an objective and it has to be meaningful. We have worked very hard to make it into one company since the time of our acquisition. At this point of time nothing is on the table, but also everything is on the table.
In terms of seller, if there is a buyer who wants one part of the unit?
Our point is, in the JV that we had proposed with Thyssenkrupp, it was the integrated Tata Steel Europe getting in there because there was a logic. Now there are certain uncertainties also, like the Brexit.
How does Brexit impact you?
It would have impact on imports, exports and the currency. We yet don’t know how it is going to play out. So, we keep watching the situation, we keep tracking the situation and we keep preparing for that situation and eventuality.
Meanwhile our focus is more on making UK operations more efficient. We have shrunk the capacity from say 8-9 million tonne or 10 million tonne to 3.5-4 million tonnes. I think it has got a sweet spot to service the UK business. We had asset reliability as an issue in the past, we have already invested in them.
Then you look from a portfolio point of view, is it one portfolio or two portfolio, depending on what the end straight strategy is. If there is a partner who says one or two or both, we will have to play that out. We don’t know yet.
We got to know about the EC’s extreme positions only recently, but you may have seen it coming. So are there already a shortlist of buyers who have been approached or will be approached?
The partners couldn’t get into it because we have an exclusivity with ourselves so you have to respect that. We have been looking at strategies, alternatives and scenarios and we have got a fair view of the direction.
The direction does include another JV partner?
We should hear about it in the calendar 2019 you think?
Calendar 2019 is still a long time away. As I said, there is an interim part which we have already started focusing on how we can manage for the interim. Clear priority is on profitability and cash flows; the governance, oversight and the focus are very different and that is what we are focusing on. It will be much more clinical and sharp and hopefully we will get that outcome to demonstrate.
Similarly, the longer term issue. And to us, longer term is like calendar 2019, to get the building blocks of the new plan in place. And it is necessary to do that for sustainability of the business, the company and the shareholders.Watch the interview