TV Narendran, MD, Tata Steel, spoke about growth drivers in the September quarter, outlook on steel prices, BREXIT impact on his European business and acquisitions among others. Edited Excerpts: 

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Q: What were the important growth drivers and changes that helped Tata Steel to post good results in the quarter ended on 30 September 2018? 
A: We have been working a lot since last 3-4 years with a special focus on coke rates as coal/coke rates play an important role in the steel business. Our efforts since 2015 have helped us in lowering coke rates by 15-20% from the actual levels and this reduction is having an impact on our performance. If you look at the coke rates than I think that we have the best coke rates in the country today and it has played a big role in our cost efficiency. Secondly, the stability at Kalinganagar unit, which was commissioned two years back, has added on the volumes and is contributing as the cost is getting distributed over large volumes. Bhushan Steel acquisition that contributed in the quarter is the third factor that is adding to our growth. 

Besides, the improvement in market conditions in past 2 years, operational efficiency at our place, improved product mix and new initiatives undertaken at Jamshedpur and Kalinganagar plants has paid off and helped in improving our results. 

Q: You were talking about the prices that have helped you in your performance. But I would like to know about your outlook in terms of the price range on steel amid ongoing volatility in the global and domestic market? 

A: An improvement in macroeconomic conditions of the global market in past 2-3 years, for instance, the US and China have grown by 3% and 6.5-7% respectively, and it is good for an economy which is 10-11 trillion dollar. India is also going great as it is growing by almost 7%, which is strong. Similarly, conditions in Middle-East, Europe and South East Asia are positive. In fact, we never saw such stable macroeconomic conditions in the past 4-5 years. 

However, trade issues are disturbing things a bit like trade flows and talks are there on the way they will have an impact on the Chinese market. But, if you step back and look at it then export market accounts for only 4% in China's GDP and it doesn't mean that an action on the export market will derail the Chinese economy. I think that the Chinese government is also taking some actions locally to stimulate the demand but some of the products like appliances etc which are export depended will have slow growth. We have seen its impact and the steel prices have been fluctuating between $500-600 and my own view will be in the range of $550-650. I see, this movement quite range bound and from the Tata Steel point of view, I think we are okay. 

Q: Chances of price hike in recent future?
A: Not at present but we will have to look at the situations that will exist in the month of January because January to June is the best season for the steel industry in India. 

Q: Let's talk about global impacts, like BREXIT which has led to the restructuring of the European operations, what is a turnaround in the region? Update us on the non-core assets which were being sold in countries like Thailand among others? 
A: We had a production of 18 million tonnes in Europe in 2008, the year when we acquired Corus, of which 10 million tonnes were produced in the United Kingdom and remaining 8 million tonnes was being produced in the Netherlands. Interestingly, maximum restructuring activities were undertaken in the UK in past one decade and in the process, we have reduced our production to 10 million tonnes in Europe of which 7 million is being produced in the Netherlands and remaining 3 million in the UK. This is a reason that our European Business is structurally stronger and it is an EBITDA positive business for us. But cash positives are available in the Netherlands not in the UK. 

Definitely, the BREXIT will have an impact on our business and we are waiting to see the kind of impact that it will have on our customers like the Auto Industry. But it will not have a great impact on Tata Steel especially in the UK because 70% of our products of the country is being sold within the country and when it comes to exports than maximum produce is sent to countries like the US. Secondly, we are eyeing on valuations of Pound as weaker Pound is better for our business. However, we will have to look at the final terms of BREXIT. Something truly impacting our business in the UK is the oil prices, which is affecting the energy prices and moved it up in a significant way. 

In other geographies like South East Asia, we are working on our strategy. If you see the overall Tata Steel portfolio in terms of EBITDA margin than you will find that Jamshedpur and Kalinganagar business has a contribution of 30-32% while Bhushan steel is at 10%, Europe is around 8% and South East Asia is at 5%. We are looking at the plan that should be followed in South East Asia and there are people who are interested as there is a growth in demand and we are present there with a good team, people and facilities. We are looking at the interested people and have started interacting with them. The decision will be taken on the basis of the talks. 

Q: But you don't want to retain it even if you can see an opportunity over there? 
A: It is like this that if somebody else has a greater plan for South East Asia and is willing to invest and grow the business than it is better for the South East Business to have another kind of owner. But that is a call that we will take based on the talks. 

Q: What is the deadline for the call?
A: The call will be taken in the next 3-6 months. In addition, we want to be sensitive to our employees, we have 3000-4000 employees over there and have done a good job in the last 10 years, and we want to make sure about the takeover. 

Q: Do you think the recent and ongoing acquisitions, like Bhushan Steel and Usha Martin among others,  will give a fillip to your growth plans? Provide a timeline when they will start impacting your books? 
A: Transaction of Bhushan Steel has been completed and it is a listed subsidiary of Tata Steel and we will take a call on it in recent future but it is already a functioning subsidiary of Tata Steel. Bhushan Steel is the number one asset for us and that is something that we said when we went to NCLT and we are happy with it. We are aware of the difficulties one faces while establishing a new steel plant in India and we have gone through the experience. This is a reason that we were very keen on Bhushan steel. 

Acquisition of Usha Martin will help us increase our capacity for producing long products, which stands at just 3 million tonnes of our overall production of 18 million tonnes.

Q: What is your take on Bhushan Power?
A: We will have to wait for the court's decision. Our stand is clear on it as we have said that the process has been compromised but we put our best when we bid.

Q: You talked about the European operation and I just go back to ThyssenKrupp AG and know about the kind of synergies being created over there? What is your outlook on product mix on high margin products? 
A: We are waiting for the JV with ThyssenKrupp 
Our JV with ThyssenKrupp has not been finalised yet as we are waiting for a clearance from the competition commission. The first stage of clearance has been completed and the second phase will be completed by March 2019. But they have a timeline of completing the process within 90 working days and in the process, they will keep asking questions and we will have to go with our submissions. In fact, the process is on and the JV will be created as soon as everything is completed. We expect that a synergy of about 400 million will be created with the signing of the JV and it comes from multiple areas like procurement, network optimisation and other things. Definitely, we will have an important focus on the automobile sector as it is a big target segment in Europe. I think the JV was created with a logic that the presence of a strong company will allow us to invest more in R&D. 

Q: What if you fail in meeting the timeline and close the process by March 2019? Are you prepared with a contingency plan?
A: No. The contingency plan is what that is happening today and we are running the business as it is today. Secondly, I don't think about a reason that the JV can't happen. I feel that the European Commission is also conscious that you need a strong local company or you will always be challenged by the trade flow and other issues. There are some specific areas where the commission will have concerns like automotive, packaging and electrical steels. Thus we are supposed to address their concerns in these areas and then there is a question of getting clearance. So, I don't think that the JV not happening is a possibility. 

Q: The ongoing bids on big assets and projects will need a good CapEx or around Rs 60,000-70,000 crores. How you are funding it or are you well capitalised for it? 
A: I think the big one was the Bhushan Steel, where we were supposed to invest Rs35,000 crore and we had 50% money and rest 50% was borrowed for the purpose. If you see on the Bhushan Steel than we have reduced it by almost Rs1000 crore in the last quarter. Thus it is cash positive and is generating cash. So I think from that point of view Bhushan Steel has been taken care of and it is reflected in the net debt of Tata Steel, which stands around Rs13000 crore. 

On looking on our net debt to EBITDA on an annualised basis is less than 3.5 and we aim to bring it down to 3. 

If you look at Usha Martin than what we have done is that we are doing it along with Tata Sponge that has cash of almost Rs700-800 crores of cash and has capabilities. We are supporting, they will have the right issues and we will support that. So Tata Steels exposure to it will be limited and with the existing cash that is available in Usha Martin with some support of Tata Steel, I think we will be able to do the transaction as it is not such a big tension. 

When it comes to Rs 23,000 crore associated with the Kalinganagar is also going to be spread over the next few years. Something good with the project is that you are not supposed to pay everything within the time by when the project is completed. Still, we are paying for phase I expansion thus normally it drags on, .i.e. there is a structure in engineering projects. Most parts of REs 25,000 crore of phase I expansion of Kalinganagar was funded from our existing cash flows through the market conditions were quite bad. So we are hopeful that we will be able to fund Kalinganagar phase II of our own even though we have access to funds. But I feel in this kind of projects in brownfield and greenfield projects, which extends over a period of time when the market is strong we can take care of the cash flows without adding too much to the borrowings. So, I think that we are pretty much over there but we will have to see that we had a strong quarter and cash flows. India has always been a cash positive business. In addition, the European JV will also seek Rs20,000-25,000 crores, which will lead to a reduction to our net debt. 

Q: What is your split in context of demand in India vs Global?
A: India demand is around 6-7%. Our point is if India is to grow at 7% than steel consumption has to grow by 7%. There is a need for infrastructure in India. Have a look at the developing countries and you will find that steel demand growth is 1.2-1.3 times more than the GDP growth. It used to be low in India, which very unusual but recently, it has caught with the GDP growth. I feel, the question to be asked is that will believe that India will grow at 7% and the answer is yes then the steel consumption should grow by 7%. 

There is a demand of 100 million tonnes of steel in India and 7% means the demand will grow by 7 million tonnes per year. This means that somebody like Tata Steel will have to add 1-2million tonnes to stand on the spot. 

Q: Any update on the capacity addition?
A: We are the third largest mining company in the country, it is not a known fact,  we are doing 25million tonnes of mining and stand just after Coal India and NMDC. Our plan is to increase our mining from 25 million tonnes to 45 million tonnes mainly for Iron ore to support our expansion in steel production. Our mines' are captive mines, which means that the iron ore can be used just for iron and that is a reason that we are investing and I think it is fine. we have mines and we have been mining for more than 100 years. 

Q: What is the CapEx that has been lined up?
A: The immediate plan is to grow enough to take care of both Bhushan and Kalinganagar expansion. Interestingly, Kanban project has cleared been cleared by the board and it is a Rs2,300 crore project. That expansion is going on and we will accelerate that expansion as that takes Kanban from 3 million to 8 million. Besides, we will keep debottlenecking at our existing mines. I think, we have environmental clearance to the capacity of 38 million tonnes, so we can keep expanding as per our needs. But we will have to plan to mine in a manner that it is congruent to the growth of the steel capacity.