Fortune Scrip     

Published: Jan 15, 2023
Updated: Jan 15, 2023

Tata Steel

Global steel maker non pareil Cutting debt and dead wood

Tata Steel, a prestigious company from the illustrious industrial group of the Tatas, is an Indian multinational steel manufacturing entity. It is one of the world’s most geographically diversified steel producers with operations and a commercial presence across the world. The company operates in 26 countries, with key operations in India, the Netherlands and the United Kingdom, and employs over 81,000 persons. The company is based at Jamshedpur (Jharkhand) where its largest plant is located. In 2007, it acquired UK-based giant steel maker Corus and was ranked 486th in the 2014 Fortune Global 500 list of the world’s biggest companies. It was the seventh most valuable Indian brand of 2013, according to Brand Finance.

The company has been recognized amongst India’s best workplaces in manufacturing, 2022, by Great Place To Work. Interestingly, this recognition has been received for the fifth time, highlighting the company’s sustained focus on fostering a culture of high trust, integrity, growth and care for its employees.

Tata Steel in India, with an installed capacity of 34 million tonnes per annum, is one of the few steel operations in the world that are fully integrated from mining iron ore to the manufacturing of finished products and marketing them. The company is today spread across five continents and the group recorded a consolidated turnover of Rs 243,959 crore in the last year ended March 2022.

GROWTH BECKONS

Of course, the company’s financial performance has remained irregular, with mounting debt affecting the vitality of its balance sheet. However, with great determination and sustained efforts, the management has strived to take out the company out of the woods. The efforts are yielding results and Tata Steel is on the path of steady improvement and growth, and within the next five years will be in robust health. That is why we have selected this grand old lady of the Indian corporate sector (founded in 1907) as the Fortune Scrip for this fortnight. Consider:

• The 115-year old Tata Steel is today the world’s second most geographically diversified steel producer, having operations that are fully integrated – from mining to manufacturing to marketing finished products. Its operations are spread across 26 countries and it has a commercial presence in over 50 countries. As it strives to give of its best with the help of innovation, the product quality is superior and its channel partners and digital platform are enabling efficient distribution and enhancing customer experience through better collaboration along the distribution network.

DIVERSE PRODUCTS

• The company’s other plus point is a well-diversified product segment with a focus on innovative products. Tata Steel’s product portfolio spans flat and long products categories and is characterized by a high share of value-added and branded products which attract higher margins and strengthen its operating profile. The company has four segments to cater to: (1) automotive and special products, (2) branded products and retail, (3) industrial products and projects, and (4) downstream products. It has a well-established position in the domestic automotive flat product segment and, with the acquisition of Bhushan Steel and the alloy steel business of Usha Martin, is expected to further consolidate its leadership position in the domestic automotive market.
• Tata Steel’s Indian (standalone) operations are unique in the sense of its being a fully integrated project. It can boast of captive iron ore and coal mining which ensures remarkable cost efficiency. Little wonder, Tata Steel’s Indian business is among the lowest cost steel producers globally as it procures 100 per cent of its iron ore requirement and over 30 per cent of its coking coal requirement from its captive mines, thus sharpening its competitive edge and providing a distinct competitive advantage over its peers. Due to this captive consumption, the company’s domestic profitability has remained partly insulated from the volatility in raw material prices. Further, this backward integration benefits the company in getting a significant operating leverage and aids in reporting healthy earnings through the steel upcycle.

DEBT DECLINES

Tata Steel follows a praiseworthy and effective deleveraging policy. In order to reduce its debt burden regularly and systematically, the company has made a deleveraging commitment of $ 1 billion every year. The company’s consolidated net debt declined from Rs 75,389 crore as on March 2021 to Rs 51,049 crore as on March 2022. In other words, the company’s net debt to EBITDA stood at 0.8x (2.44x at the end of fiscal 2021) and net debt to equity was 0.52x (0.98x in fiscal 2021). This systematic debt reduction will lead to a leaner and stronger balance sheet.

CHANGING FOCUS

• The company has started the process of winding up non-performing subsidiaries and has proposed a new structure for rationalizing subsidiaries. This is a positive step as this would drive synergies across the group. It has increased its focus on the retail business and downstream product portfolio to reduce the cyclical pressures inherent in the steel business. It has commenced building a Services and Solutions (S&S) business for steel-based solutions for end-user industries experiencing significant growth. The company developed 155 new products in FY20 in high-strength automotive structural applications. In long products, it has commercialised high-strength, high ductility rebar-grade products and low nitrogen steel grade wire rods.
• The world of Tata Steel is one without boundaries – growing, changing and challenging. It continuously expands its operations by acquiring various companies. The company initiated its inorganic expansion route in 2005 with the acquisition of Nat Steel, Singapore and a 67 per cent stake in Millenium Steel, Thailand. Consequenly it acquired a 20 mtpa steel-making capacity in Europe through the acquisition of AngloDitch Steel producers Corus Plc for $ 13 billion in 2006. At home, it acquired Bhushan Steel and the alloy steel business of Usha Martin (now renamed Tata Long Products). Now the company is in the process of acquiring Neelachal Ispat Nigam, for which the share purchase agreement has been completed. The company has now guided for a ball park Rs 20,000-Rs 26,000 crore capex for Neelanchal for a 4 mtpa expansion. Now in an attempt to hive off its European steel operations, the company has entered into a joint venture with German steel producer ThyssenKrupp Ag. All these developments have speeded up the pace of growth of the company.

The company .expects Rs.8,000-crore revenue from its new materials business (NMB) which includes graphene, fibre reinforced polymers and medical materials such as hydroxyapatite and collagen. The company has been developing the intellectual property-driven business to overcome cyclical nature of steel business. The company had set up the NMB division four years ago to explore opportunities other than steel. The composites business of NMB focuses on three segments – industrial, infrastructure and railways. The product offerings in industrial segment include pressure vessels, tanks and customised chemical handling equipment. The infrastructure segment has products like pipes, poles, smart architecture and pultruded products. The offerings in the railways segment are panels, windows and troughs. The company expects sizeable benefit under the scheme.

ANALYST PICK

All these developments indicate that future prospects for the company are bright. Little wonder, the renowned global brokerage and research firm Jefferies has selected Tata Steel as its top pick in the Indian metals space, pointing out that its price is close to its long-term averages, which are attractive parameters amid the company’s improving asset footprint and balance sheet.

Going ahead, the company plans to capitalise on growth opportunities by (a) elevated steel prices opportunities, (b) deleveraging its balance sheet, and (c) a diversified product segment. Again, Tata Steel BSE and Tata Steel Long Products are expected to continue deliver improvements in the operating business which will translate into better profitability. Also, Tata Steel Europe bids to turn around its business performance through a transformation programme. We expect the company’s share price to scale sky-high levels within the next 5 to 10 years.