Tata Steel: Value Creation

The year 2018 has been a strong one for Tata Steel with two acquisitions: Bhushan Steel and Usha Martin and a JV with 200-year-old German conglomerate Thyssenkrup to create the second-largest European steel company that will control a fourth of the continent’s market for flat steel. Under the leadership of  T.V. Narendran, Tata Steel has gained structural strength and emerged as a stronger enterprise.

In an investors meet in November 2018, Tata Steel said that it is working on a strategy to raise the share of value-added steels to 30 per cent of its total production, as part of an initiative to insulate itself from the cyclicality of steel business. The company is planning to add new materials such as graphene, carbon fibre reinforced polymer and advanced ceramics that would constitute over 10 per cent of its revenue by 2025. Tata Steel’s generated 69 per cent of revenues through enriched and value added product mix in H1FY19. The company is targeting a total capacity of 30 MT (million tonnes) by 2025.

The company’s acquisition of Bhushan Steel and Usha Marin was a step towards adding more value-added steels in its portfolio,” said CFO Koushk Chatterjee. The company said it has raised Rs 19,400 crore in last seven years through divestments that will be used to deleverage its balance sheet. It is also looking at other portfolio restructuring options that includes Tata-Thyssen venture in Europe, the Sedibeng iron ore property in South Africa, Cogent, its electrical steels plant at Newport in the UK, TRL Krosaki, a refractory unit in Belpahar, Odisha and the South East Asia cluster.

Tata Steel has emerged the most integrated steel producer with a current steel-making capacity of 18.6 MT in FY19. While it has 100 per cent iron ore security till 2030, the company said it can rely on captive sources for over 25 per cent of its coal requirement.

Bhushan Steel has been a “value accretive” acquisition according to Tata Steel, which will give additional capacity to retain marketshare in a growing market, higher downstream integration and value addition with a complementary product mix, closer access to key markets in North and West and the option to scale up capacity through brownfield expansion.
Describing acquisition of Usha Martin as a first step in building a sustainable long products portfolio, Tata Steel said it would help retain its long product market share while marking an entry into a special steels segment and enhance its product basket for automotive customers.

Increased sales to the automotive and industrial products segments led Tata Steel, the country’s second-largest private sector steel producer, to report consolidated net profit of Rs 3,116 crore in the September 2018 quarter (Q2), up 206 per cent from Rs 1,018 crore in the year-ago period. Consolidated revenue increased to Rs 43,544 crore in the quarter against Rs 32,464 crore a year ago. Over the same period, consolidated ebitda increased from Rs 4,664 crore to Rs 9,000 crore. The ebitda margin was 21 per cent while ebitda/tonne, a key metric of a steel producer’s profitability, was Rs 12,131. The company spent Rs 2,177 crore in capital expenditure in Q2. Consolidated steel production in the quarter was 7.26 MT while deliveries stood at 7.42 MT.

One of the company’s key priorities is to reduce leverage by around a billion dollars in the next 12 months, primarily from internal cash flow and sale of non-core assets, Chatterjee said in the report. Net debt was a little more than Rs 1 trillion at the end of Q2. The company had already repaid about Rs 1,000 crore of the debt undertaken to buy Bhushan Steel since the transaction closed earlier this year, he added.