Back on the growth path
N Chandrasekaran has adopted a two-pronged strategy for Tata Steel: Make European operations sustainable and grow the Indian business aggressively. With Tata Steel Europe transferred to a 50:50 joint venture (JV) with Thyssenkrupp, Tata Steel will put its energy behind growth in the domestic market.
In the next five years, Tata Steel has a target of doubling capacity in India through a mix of organic and inorganic options. Its Kalinganagar (Odisha) plant would take up the second phase of expansion and Jamshedpur will increase capacity by de-bottlenecking.
For Europe, acquired in 2007 for $12 billion, the way forward is to plug cash leakage and make the operations sustainable. The UK business was losing £1 million a day till March 2016, which had prompted former chairman Cyrus Mistry, to look at exiting it in part or whole but the decision was later put aside.
In the past month, Tata Steel has managed to close the British Steel Pension Scheme (BSPS) and move from a defined benefit scheme to a defined contribution scheme, de-risking cash flow. The Tata Steel Europe-Thyssenkrupp JV would be a strong number two flat steel maker in Europe, after ArcelorMittal, with annual revenue of ^15 billion (~1.15 lakh crore).
Though industry sources caution that approvals for the deal, including from the European Commission, were only expected by March 2019, consolidation as a move in Europe was largely being viewed as the way to go.
A report from Prabhudas Lilladher says the JV was structurally positive for Tata Steel, as its debt in Europe would come down by 30 per cent to ^3.25 billion from the current ^4.7 billion. And, would help the company to strengthen focus on India.
As Chandra said while announcing the deal, a deleveraged Tata Steel would be better positioned to grow faster and double capacity over the next five years. Adding: “Tata Sons would continue to financially support Tata Steel strategy for capacity expansion through organic and inorganic growth opportunities in India.”
Motilal Oswal said in a report that Tata Steel was likely to expand by 3-5 million tonnes at Kalinganagar and increase production by one million tonnes over three years through de-bottlenecking at Jamshedpur. At present, Jamshedpur has capacity of 9.7 million tonnes and the total capacity in India is 12.7 million tonnes.
That apart, Tata Steel (India & South East Asia) Managing Director T V Narendran recently said the company was looking at all inorganic assets. Among the Reserve Bank of India-mandated insolvency process for 12 stressed assets under the Insolvency and Bankruptcy Code, five were from the steel sector, with annual capacity ranging from 1.5 million tonnes to 10 million tonnes.
The industry expects Tata Steel to bid aggressively for some of these assets. The demand projections for India are robust compared to the rest of the world. No wonder the stock has gone up 68 per cent over the past year.