Upsides of price increase in steel to reflect in subsequent quarters: Koushik Chatterjee, CFO, Tata Steel

Koushik Chatterjee, executive director & CFO, Tata Steel

Tata Steel’s European business performance disappointed the Street in the first quarter. However, executive director and CFO Koushik Chatterjee tells Shubhra Tandon in an email interview that the upsides of the price increase in steel will reflect in the subsequent quarters. He also says the company has put away the sale plans of European business for now. Excerpts.

The company’s European business performance disappointed as the Street had pencilled in a much higher Ebitda/ tonne, especially after the performance of some of the industry peers. What is ailing the business there?
In reality, the performance of Tata Steel Europe this quarter has been sequentially better with a positive profit after tax and has been at the trend levels across the peer group in Europe in terms of Ebitda margin. The nature of the business in Europe is more contract oriented and not on spot prices, which means there will be a lag between the increase in spot price spreads and the “felt spreads” as there is a lag impact on the profitability. Hence the spot increase in the first quarter will flow into second and third quarters as the existing contracts are renewed, and we expect the spreads to expand materially. The prices in Europe continue to be strong through the summer and hence will have positive impact on future quarters.

Tata Steel has maintained that the company will continue to focus on the business in Europe and improve performance. When do we start to see the results of those efforts?
In many ways it is already visible through the transformation programme and will get more accelerated once the separation of Tata Steel Netherlands and Tata Steel UK happens in the third quarter of this financial year. The focus is on operational stability, productivity enhancement, take out of fixed costs and commercial efficiencies. The entire focus of the transformation programme is to make the business sustainable and cash flow positive.

Is the sale of European business off the table now, or are you still in discussions for it?
No, we are not working on anything currently.

India Ebitda/ tonne remained strong in Q1 and has been above Street expectations. Are these levels sustainable?
The fundamentals of our India business are on a very strong foundation, which enables us to leverage opportunities from increased market spreads better. As things stand, we see the current trends of profitability [sustaining] in the coming quarters of this financial year. Irrespective of the external environment, we have a structured approach that works at improving the efficiency metrics across functions in all our operating locations. The robustness of this programme has been demonstrated even in newly acquired units like Tata Steel BSL and Tata Steel Long Products.

What is the outlook on sustainability of this global rally in steel prices?
There are certainly a few key structural themes that are playing out globally which are important to articulate. The first is the demand increase led by heavy investments in infrastructure spend globally to revive economies affected by the pandemic. Secondly, in many countries including China, there is a significant supply side recalibration. There is also a rise in carbon costs as is evident in the prices of the EU emissions trading scheme. Thirdly, the pace of new capacity build across the world has slowed down, which is also creating supply pressures. Hence, in our view, the average trend level of global steel prices in the near future will be higher than what we have seen in the past.

What is the domestic demand outlook for FY22 given that the fear of a third Covid wave is looming?
The underlying demand in many sectors is strong and we expect it to continue during the current year. While there was some order deferral during the peak of the second wave, there has also been revival since June-end in many segments, including automotive. With the policy initiatives undertaken by the government … we hope public investments, private capex and consumer demand will help in the revival of the economy.

What is the target for debt reduction in FY22 and what is the overall debt level the company will be comfortable with in the next 2-3 years?
We have repaid Rs 5,800 crore of debt, and in spite of the increase in the working capital due to significant increase in finished goods prices, we continue to generate healthy cash flows. With the current underlying trading conditions, our focus is to de-leverage in the same range as previous year.

The government recently announced the PLI scheme for the specialty steel sector. What are Tata Steel’s plans under this scheme?
We certainly have plans for investments in this area and will look forward to participating.