Our team is trying to get maximum value from Bhushan Steel's facilities, said TV Narendran, Chief Executive Officer and Managing Director, Tata Steel
"The team is focused on trying to see how can we get maximum value from the facilities. One of the good things about the Bhushan Steel facilities are it is ready to go and amongst all the facilities that we saw. Bhushan Steel is the best and that is why we went for it quite aggressively," he said.
Bhushan Steel would remain a listed subsidiary post deal, says Tata Steel Edited Excerpts: What are your plans as far as Bhushan Steel is concerned?
We want the deal to go through. I think today it has gone to National Company Law Appellate Tribunal (NCLAT), so let us see what they say. We are ready to go. If we get the clearance, we are ready to move in tomorrow. So, it is as close as that. We are very keen on this, as you know it supplements our existing facilities very well and we see a lot of benefits that we can derive from the footprint that they have.
Bhushan Steel will continue to be a listed subsidiary of Bamnipal Steel, which is a special purpose vehicle (SPV) that we have set up. Bamnipal Steel will be 100% owned subsidiary of Tata Steel and Bamnipal Steel will invest in Bhushan Steel. So eventually, we will take a call and in a year or two, we will see how things go.
No immediate plans to look at a de-listing or a merger at least for the next one or two years?
The first focus essentially is going to be to – as and when the deal is done of course to ensure that you are able to bring or increase the capacity utilisation, so take me through that? I know you spoke about it yesterday but 5.1-5.5 million tonne is the overall capacity that it has. It is functioning on 3.1 roughly, so what is the increase that you can look at and by how much can you scale this in the near term?
The problem is more in the iron making and steel making side rather than in the rolling. We can easily take it to 4-4.5 with the existing upstream facilities that they have.
In one year’s time?
Yes, in one years’ time, that is our ambition. The sooner we get there, the better that is one part of it. We need to debottleneck and see what we can do to get the upstream facilities to 5-5.5.
We have an option over the next three years as Kalinganagar ramps up, that we will have more slabs in Kalinganagar than we can use in Kalinganagar. So, that allows us an opportunity to send slabs to Bhushan to make better use of their rolling facilities.
So, between Kalinganagar and Bhushan, we believe we can go to 5-5.5 million tonne with increasing the existing upstream in Bhushan and supplementing with some of the slabs that we can get out of Kalinganagar.
Beyond 5 million, we will call for investments. But there is potential in that site to take it to 8 million or even higher. That will come after maybe three years or so once we exploit the facilities that there are today.
Have you decided on how much more additional investments you would want to put in?
For Bhushan Steel, the approach is more to say how can we get maximum value for the money we are already putting in. At this point, there would be some investments required from what we have seen in terms of improving the environment and emissions.
How much is that?
A few 100 crore, maybe. But nothing very significant. The team is focused on trying to see how can we get maximum value from the facilities. One of the good things about the Bhushan Steel facilities are it is ready to go and amongst all the facilities that we saw. Bhushan Steel is the best and that is why we went for it quite aggressively.
Can you give us the quick breakup as well? Rs 35,200 crore is the overall amount that was offered. What is the exact breakup over there?
Breakup as in.
In terms of how much would be debt, how much is going to be done through cash?
Basically, the thinking just now is about to Rs 17,000 to 18,000 crore is the money that we put in from the reserves that we have as Tata Steel. As you saw yesterday in the numbers, we are sitting on a cash of about Rs 27,000 crore odd.
We have the ability to put in cash to that. The balance will come from debts, which will lie on the balance sheet of Bhushan Steel because that will be fresh lending to the company. So, that is the Rs 35,000 crore. Roughly 50% will be put in by Tata Steel from the cash it has and 50% will be borrowed and put on the balance sheet of Bhushan Steel.
Once the deal is done, what is the debt going to be for Bhushan Steel, is it going to be Rs 16,000 roughly?
Yes, about Rs 16,000-17,000 crore will be the debt on the Bhushan Steeel balance sheet, but we must also keep in mind and we explained that in the analyst call yesterday.
If you look at the Rs 55,000 crore debt that was on the Bhushan Steel balance sheet, Rs 35,200 is what we are paying the banks and the balance debt which is still lying on the Bhushan Steel balance sheet is being sold to us for Rs 100 crore.
So, from a technical point of view, that Rs 20,000 crore which is on the Bhushan Steel balance sheet will be owed to Tata Steel and that is why we say, we may have a 72% stake in the company, economic interest is 100% because Bhushan Steel will owe Tata Steel Rs 20,000 crore in addition to everything else. So, that is why the cash flows of the company will first go to the Tata Steel before it goes to the other shareholders in some sense who are there.
So Tata Steel 72% how much do lenders get?
Lenders is about 12% and then there are some retail investors. I think the promoter share at the end of it will come down to less than 2%.
I also wanted to understand the rate of return that is estimated given the current valuation that you reached at what is the rate of return that you are looking at?
We are looking at it from a point of view that it should have taken us at least four-five years to build this kind of a facility. If you look at Tata Steel today, between now and Kalinganagar phase II, we don’t have any additional volumes.
At this point, when the market is good, the demand is growing and this is the great opportunity for us to encash that. Even if I take Rs 10,000 per tonne earnings before interest, taxes, depreciation, and amortization (EBITDA) and 4 or 5 million tonne and you are looking at 4 or 5 years, you are looking at Rs 15,000-20,000 crore of money there, which we couldn’t have capitalised on, if we didn’t get this asset.
So, we are looking at it from that point of view. We look at the opportunity to expand this facility from 5 million to 8 million. So if you look at it overall long term basis, we have seen that it is a value accretive acquisition for us.
By when will Bhushan Steel then turn EBITDA positive? Is the end of three years a realistic timeline?
No, it is EBITDA positive today. I mean today, if you look at the Bhushan Steel numbers over the last years, it always had positive EBITDA. It had EBITDA’s in the region of maybe Rs 6,000-7,000 something like that per tonne.
Our challenge is to take it to Rs 10,000 and more, because we will benchmark with other companies, who are buying raw materials in the market and that is EBITDA we should aim for.
So, Rs 10,000 per tonne by when?
I would say in the next few months, that is what I would like. I think that is possible. I know it is challenging for the team, but that is what we should aim for.
Bhushan Power, of course, that is in the course right now so we can’t go too much in to the details. But now that Liberty House bid has been allowed Tata Steel is no longer the highest bidder which it was at one point what is the plan over there? What is the development or what is the update that you have heard so far?
We haven’t been informed anything formally by the Committee of Creditors (CoC). We will wait to hear that. We have appealed around a matter of principle. There was a process which is defined. If that process said, you could bid anytime and any price later, maybe we would have given a different bid. We would have waited to see what everyone has bid and then decided what to bid.
This seems a bit unfair to JSW and us, who bid on time and put in a certain number.
Is Tata Steel committed to Europe even now. In the long-term is there a possibility of you looking at exiting and exiting the joint venture. I understand it’s still in the process.
As of now, the whole intent is to create a company there, which can stand on its own and with the joint venture, we are creating a company, which can stand on its own.
The European market is a good sophisticated mature market. It doesn’t grow obviously as India grows, but there is a lot to learn from the European market because of the nature of business.
Things are recovering right now in Europe as well?
Absolutely. Europe is recovering. Europe, to be fair, the last ten years has been really bad for Europe from the steel industry point of view.
And this is a first sign of recovery?
Absolutely. The consumption of steel in Europe is, even today, less than what it was ten years back and the business has gone through a very difficult time through that.
I think some great work has been done in trying to make it lean and efficient and the challenge for us – Europe was more that we cannot support Europe.
We are happy to be there as long as it can take care of its own needs and by creating this joint venture, we are creating a company which can take care of its own needs. It will have a balance sheet, which is pretty strong, pretty good and it will have cash flow which can take care of its own needs and we will continue to be invested in it.
Tell us more about coke rates?
We have driven great efficiencies over the last few, if you look at our coke rates today, as to what it was five years back, it’s very different. So if the steel prices are what it was five years back, we should make more money.
By how much do you think you will be able to expand EBITDA per tonne in the near term from an India perspective?
If you look at Rs 16,000, you can go a bit above that, go a bit below that but…
You should be able to sustain thereabout?
That is what we want to aim for unless something very dramatic happens, but when I look at the steel prices today in dollar terms, it has been closer to long-term normal.
It’s not something which is unusual. In rupee terms, it looks high because the rupee has moved from $45 to $65 in the last four-five years but $600 for hot rolled coil is not an unusual price. So I believe the prices are sustainable internationally, so we should be aiming for this.
What about South East Asia. By when are you expecting a turnout because as you said the demand recovery is witnessed in India, is witnessed in Europe but South East Asia is likely to take some more time?
South East Asia, structurally, the business operates on the scrap rebar gap and what has happened over the last year or so is local economies have struggled a bit.
I am a bit watchful of South East Asia because it will be more impacted by trade issues because South East Asia as a region is far more dependent on other countries for markets, so I am watchful from that point of view.The scrap prices typically reflect what happens in the US because US is the biggest exporter of scrap in the world and US prices today are at record levels because of Donald Trump’s (Section) 232 actions. When steel prices in the US are high, scrap prices are high and that puts pressure on South East Asian operations because rebar prices sometimes do not move as much.