MANAGEMENT SPEAK

Q: How has Tata Steel group performed in Financial Year 2018-19?

Financial Year 2018-19 was a strategically important year for us. Even though the macro environment remained mixed, we progressed significantly on our strategic goals, focussing on operating performance to register the highest ever EBITDA, enhancing our footprint in India through the acquisition of Bhushan Steel and Usha Martin Steel businesses, and strengthening our balance sheet through significant deleveraging from the peak debt post the acquisition of Bhushan Steel.

Q: The second half of 2018 saw a slowdown in growth owing to trade tensions and the geo-political environment and the same is expected to continue in the first half of 2019. How do you expect this to affect the steel industry?

2018 witnessed a slowdown in global growth, primarily due to the decline in trade and manufacturing activity across most industrial sectors, increased trade tensions among major economies, tightening of financial conditions and policy uncertainty in many economies. Despite this slowdown, global steel demand showed resilience and grew at 2.1%, supported by some recovery, in investment activities and improved performance of emerging markets and developing economies. In the coming year, global steel demand is expected to witness a gradual recovery, though at a lower pace, owing to risk of uncertainty over the trade environment. Though the economic fundamentals of the European Union economy remain relatively stable, steel demand in 2020 will show some deceleration over the growth seen in 2018 and 2019, partly due to uncertainties resulting from global trade tensions and the uncertainties about Brexit. In 2019, US growth is also expected to slow down with the effect of fiscal stimulus tapering off and the normalisation of monetary policy.

In India, steel demand in the first half of the financial year was more stable than in the second half and there has been a distinct decline in the automotive sector and other sectors in the second half of the year. One of the key issues has been the credit flow in the system and we hope that structural policy actions will be undertaken to ensure that increased credit flow is restored and private investment is encouraged to revive the economy.

Q: Steel demand in India is expected to increase in the medium term. What is your preparedness to capitalise on these opportunities?

We recognise that there is a significant potential for increase in steel demand in India in the long term given that per capita steel consumption in 2018 was less than one-third of the world average. Various government initiatives, including ‘Make in India’ projects, increased spending on infrastructure and increased focus on rural development are likely to support increase in domestic demand for steel, providing opportunities for domestic steel players. At Tata Steel, we have always focussed on sustained growth in India and we believe that the steps taken during the year will place us in a good position to capitalize on the opportunities in the future.

During the year, we successfully completed the acquisition of Bhushan Steel (renamed Tata Steel BSL) to add to our downstream capability and complement our product mix. We have had a very encouraging start to the integration journey and are well on our way to ramp up the capacity of Tata Steel BSL to the rated level. This acquisition has provided us the opportunity to scale-up our operations and strengthen our market position in various market segments.

An important area of focus in the coming year will be to continue our efforts to further integrate the business of Tata Steel BSL with the existing business operations in Tata Steel Limited through the process of amalgamation. This integration, we believe, will realise synergies, including better facility utilisation, efficient and assured availability of raw materials, reduced logistics and procurement costs, efficiencies arising out of a single value chain, reduced working capital, simplification of the operating structure and improving customer satisfaction levels.

We also envisage that the demand for long products will grow significantly in the future. Tata Steel is already present in the long products business and is recognised for its high-quality products such as rebars, wire rods and wires. However, to augment its long products capacity and be prepared to cater to the increasing demand, we acquired the 1 MnTPA steel business (including captive power plants) of Usha Martin Limited through our subsidiary company, Tata Sponge Iron Limited. The acquisition will help the Company retain its long product market share while marking an entry into the special steels segment as well as to enhance its product basket for automotive customers.

During the year, we also commenced the Tata Steel Kalinganagar Phase II expansion project to augment the cumulative capacity of the Kalinganagar plant from 3 MnTPA to 8 MnTPA. As part of the expansion in Kalinganagar, we are building a 5800 cubic metre blast furnace, which will enhance the asset productivity significantly, along with a state-of-the-art cold rolling mill complex to produce value-added products. We will be expanding the existing steel melting shop and hot strip mill and will also be adding a coke oven battery and a pellet plant. The project involves a capital expenditure of `23,500 crore. The project scope and costs include investments in raw material capacity expansion, upstream and midstream facilities, infrastructure and downstream facilities. The expansion work is in progress and the facilities will be commissioned in phases, with the first commissioning of the cold rolling mill facilities in Financial Year 2020-21 followed by the balance commissioning. The expanded capacity will help us produce value-added products, including cold rolled galvanised and annealed products, and will enable us to meet the requirements of the automotive, general engineering and other high-end quality product market segments.

We are positive that through our existing operations in India, coupled with these organic and inorganic growth initiatives, we are on the right path towards strengthening our business in India and are well poised to take advantage of the potential opportunities in India.

Q: There is a considerable amount of debt on the books of the Company. What steps are you taking to deleverage the balance sheet?

During the first half of Financial Year 2018-19, the gross debt level at `1,18,680 crore was at its peak owing to the acquisition of Bhushan Steel (Tata Steel BSL). Through conscious and rigorous efforts, we reduced our gross debt by `17,864 crore to end the year with a debt of `1,00,816 crore. We will continue to focus on deleveraging as a primary strategic initiative to rebuild the balance sheet strength.

Despite some stress in the domestic debt markets, we extended the Company’s debt maturity profile by successfully raising `4,315 crore through non-convertible debentures with a maturity of 15 years. We also put in place a 12-year long-term take-out financing for `15,500 crore at Tata Steel BSL Limited. The changes in the financial risk profile of the Company are reflected in the upgrade of our credit rating by Moody’s from ‘Ba3’ to ‘Ba2’ with positive outlook in February 2019 as well as in the revision in outlook by S&P in April 2019.

Our aim will be to further deleverage the balance sheet of the Company, in Financial Year 2019-20 and beyond, through a combination of internal cashflow generation and continuing efforts to rationalise the portfolio to focus on our core businesses and markets, while continuing to facilitate our key growth initiatives.

Q: What are your future plans regarding the European business?

During the year, the revenues from Tata Steel Europe stood at `64,777 crore while the EBITDA was `5,414 crore, reflecting an increase of 46% over the previous year.

In June 2018, we had signed definitive agreements with thyssenkrupp to combine our steel businesses in Europe to create a 50:50 pan-European joint venture company focussing on customer centricity, technology and sustainability. This merger transaction, like any other, was subject to merger control clearance in several jurisdictions, including most importantly, by the European Commission. As part of the application made to the European Commission, a comprehensive package of remedies (sale of production assets to unrelated competitors) was offered covering all the areas of concern highlighted by the Commission. The remedies offered were developed considering the overall industrial strategy for the proposed joint venture, the integrated and complex nature of the supply chain to service customers and the need to build a sustainable business that would be able to endure the structural challenges faced by the European steel industry. However based on the adverse feedback received from the European Commission, both parties decided not to pursue the transaction as any further commitments or improvements to the remedy package would have adversely affected the basic foundation of the proposed joint venture and the intended synergies arising from the merger to such an extent that the economic logic of the joint venture would no longer be valid and its fundamental sustainability would be severely impacted.

We remain committed to these strategic goals and will continue to focus on improving the operational performance to enhance earnings and cash flows to ensure that the European business is self-sustaining.

Q: One of the strategic objectives for Tata Steel is to consolidate its position as a global cost leader. What is your plan to meet this objective?

At Tata Steel, we are focussed not just on growth, but on sustainable growth, to make a better tomorrow for our business and for all our stakeholders. While we are keenly focussed on our long-term strategy to be the industry leader in steel globally and are channelising our efforts towards growth, we have set for ourselves other strategic objectives that will help sustain our business in the future.

Alongside growth, we are also focussed on consolidating our position as a global cost leader and are taking several initiatives in this direction, including driving digitalisation across several processes and functions, structural cost take-out programmes through our improvement programmes, enhancing employee productivity and investing in logistics and supply chain efficiencies. We are also investing in our mining operations both from capacity enhancement and cost efficiency perspectives.

Q: Tata Steel has also ventured into the new materials business. What benefits do you see from this business?

We are harnessing the power of emerging technologies and processes in material sciences to create sustainable solutions for end product use in the coming decades. We recognise that investment in technology and innovation is a prerequisite for a sustainable future.

At Tata Steel, we are keen to find innovative solutions to the way we conduct business and have embarked on a journey to become a technology leader not only in the steel but also in the materials business. Moving beyond steel, we have set up a new business vertical that will explore the possibilities of entering the non-steel materials segment. We are focussing on composite materials such as Fibre Reinforced Polymer (FRP), a light and corrosion-resistant, structural material similar to steel. Our focus in the new materials business will be to cater to four sectors i.e., the railway, industrial goods, infrastructure and automotive sectors. We believe our product offering will be of high quality, cost effective and bring superior value to our customers in these sectors, consequently giving us a differentiated and leadership position in the market in the coming years.

Q: Tata Steel has recently entered into the steel recycling business. How would you align this with your strategic objectives and what change do you expect this business to bring in the way you conduct your business?

As one of the leading and pioneering steelmakers, it is our responsibility to protect and preserve the planet for future generations. Globally, we are moving from a linear business model towards a circular economy. Reduce, reuse and recycle is the new way to drive optimal resource efficiency. The steel industry is an integral part of the circular economy and we have a vision to be an active participant in the circular economy. Steel is 100% recyclable material and can be used repeatedly to create new steel products, without losing the inherent properties of steel. This helps reduce the use of natural resources as well as leads to low CO₂ emissions.

Tata Steel has always been committed to sustainable growth, which includes our responsibility towards its customers as well as towards the environment. In preparing for the future, Tata Steel has set up a steel recycling business to meet the growing demand for steel in a sustainable manner in the long run. The steel recycling business will help formalise the scrap market in India and help the country transition to a scrapbased steelmaking route in the long term.

Q: What steps are you taking to meet your strategic objective of being an industry leader in Safety, Health and Environment (SHE) and Corporate Social Responsibility (CSR)?

Acting with responsibility towards planet Earth, ensuring the health and safety of people at all our workplaces, balancing economic prosperity, and generating social benefits for the community are the rules by which Tata Steel operates.

We understand that health and welfare of our people, the community and society, as a whole, is intrinsic to our approach to business and hence, we persevere to create a safe and healthy environment for all employees and stakeholders and to be an industry leader in SHE and CSR. We aspire to achieve this objective through enhanced focus on reducing unsafe incidents at the workplace and reducing carbon emissions and consumption of depleting natural resources.

To contribute towards the socio-economic development of the areas where we operate, we undertake various CSR initiatives in the areas of health, education, livelihood, sports and infrastructure development with indigenous communities. We have partnered with various organisations to work for the upliftment of our communities and will continue to deepen our engagement with communities, with an aim to touch more than 2 million lives by 2025 through our CSR initiatives.