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Under the stewardship of T.V. Narendran, Tata Steel is making all the right moves in the domestic steel market
By: Ashish Rukhaiyar & Krishna Gopalan
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just say ‘steel’, and the affable T.V. Narendran’s eyes light up instantaneously. And if the conversation veers around to Tata Steel, he gets seriously involved. This, after spending more than three decades with the same company. Clearly, the enthusiasm has not dropped even a puny bit for the CEO & Managing Director of Tata Steel. Seated in the second floor of Bombay House, a heritage structure and headquarters of the diversified Tata group, Narendran, 57, is formally dressed, yet informal in approach. The large conference room is quite typical of the group—austere, understated, yet graceful. He sits behind a long table, from a different era, which blends well with a set of modern pushback chairs. At one end of the room are products from several Tata brands, among which are Tetley tea and Himalaya water.

Look at Vietnam or, for that matter, nothing is starker than China. Even when the growth rate was 10 per cent, steel consumption stood at 15 per cent only because more investment went into infrastructure-led growth.

T.V. Narendran
CEO and MD
Tata Steel

This is where many a strategic discussion takes place, often culminating in critical decisions. It could be for a big-ticket acquisition or for looking at disruptive technologies or just ways to relook at the existing cost structure. Narendran himself has a frenetic work schedule. Travel takes him to Jamshedpur (where its first and biggest steel plant is located), Mumbai and to Europe as well, as he jostles for space to think through a multi-pronged global strategy that is increasingly beginning to hinge on India. It is a life across time zones, but Narendran manages some time to indulge in reading and playing the drums. The latter stems from an interest in percussion and it was well into his corporate career when he decided to learn the instrument. Today, he does jamming sessions in Jamshedpur and smiles easily when he speaks of it.

Through all this, the honcho maintains a laser-sharp focus on the domestic market to ensure that Tata Steel makes all the right moves. It is a critical time for the company, “an opportunity of a lifetime”, he says, and the right strategy can set it up for the next couple of decades, if not more.

Why all this brouhaha over India? After all, its European operations—Tata Steel UK and  Tata Steel Netherlands BV, which it bought as Corus in 2007—even today generate nearly half its consolidated revenues— Rs 1,14,486.32 crore of consolidated revenues of Rs 2,41,441.93 crore in FY22; nearly 20 per cent of its consolidated net profit of Rs 41,100.16 crore in FY22 also came from Europe. So, why this shift? For one thing, the Europe business is facing challenges related to labour unions and weak demand, among other things.

Tata Steel Plant

At the same time, at the core of the steel story in India is one word—infrastructure. The build-up of the country’s infrastructure has been nothing short of remarkable over the past few years. In this year’s Union Budget, Rs 10.7 lakh crore was allocated for capital expenditure in FY23. This follows allocations of Rs 5.54 lakh crore for FY22 and Rs 4.12 lakh crore for FY21. Narendran points out that every Budget for the past three years has had a 30-35 per cent higher allocation on infrastructure. “Construction accounts for 60 per cent of steel consumption and [then there is] automotive, which is another 15-20 per cent,” he says.

Narendran, a Tata Steel lifer who joined the company right after passing out from IIM Calcutta in 1988, expects steel consumption in India to be at least equal to the GDP growth rate, if not get past it. The thumb rule for any country is that its steel consumption should outstrip the GDP growth rate. In India, as Narendran says, it is a tad behind. “Look at Vietnam or, for that matter, nothing is starker than China. Even when the growth rate was 10 per cent, steel consumption stood at 15 per cent only because more investment went into infrastructure-led growth.” Leveraging the Indian infrastructure growth story, therefore, makes immense sense for Tata Steel.

Founded as a single steel plant in Jamshedpur, the company now has additional steel manufacturing capacities in Kalinganagar and Angul (both in Odisha), because of its own greenfield plant in Kalinganagar that was commissioned in 2015, and buyouts of Bhushan Steel, Usha Martin and Neelachal Ispat Nigam in the past four years. Almost two decades ago, the company had gone on an overseas acquisition spree, with Corus being the big one, bought at the time for $13 billion.

There’s another ‘small’ matter, of market share. The company that founded the steel industry in India way back in 1907, and led the market for much of its independent history, fell behind when its focus moved to Europe in the mid-2000s. Upstart JSW Steel and public sector Steel Authority of India Ltd (SAIL) garnered greater capacities, and forced Tata Steel down the pecking order to third position a few years ago, though it is at second spot currently. Now, Narendran makes light of the market share battle, preferring to focus on profitable growth instead, but the fact is that there is a certain ring to Tata Steel being India’s market leader that has been missing lately.

That game is now getting played out in right earnest. Whether that is happening incidentally because of the infrastructure opportunity or as a deliberate strategy is of not much consequence, but Tata Steel’s domestic capacity—after a spate of acquisitions since 2018 totalling a mammoth `51,000 crore—is now more than 20 million tonnes. That puts it ahead of SAIL and only behind JSW Steel (27 million tonnes). That gap would ordinarily be large, but it is one that Tata Steel would hope to cross in the next five years as it leverages several advantages it has garnered in recent times—capacity and, more importantly, huge tracts of land from its acquisitions that it can leverage to add even more capacity, and the fact that it is the only company that has access to precious, captive iron ore.

Founded as a single steel plant in Jamshedpur, the company now has additional steel manufacturing capacities in Kalinganagar and Angul (both in Odisha), because of its own greenfield plant in Kalinganagar that was commissioned in 2015, and buyouts of Bhushan Steel, Usha Martin and Neelachal Ispat Nigam in the past four years. Almost two decades ago, the company had gone on an overseas acquisition spree, with Corus being the big one, bought at the time for $13 billion.

Now, it’s all about India. “Nowhere else in the world do you see 5-6 million tonnes being added each year,” says Narendran. “Even when I look back at 2015 or 2016, which was the lowest point in steel prices, India still had a 20 per cent Ebitda margin. That was in a down cycle and it is a clear indication of our structural strength but we did not have scale.”

The domestic focus finds favour with those who track the company. To Bhavesh Chauhan, Research Analyst at IDBI Capital, the important part is not just the acquisitions but the turnaround of Bhushan Steel and Usha Martin. “It also means lesser dependence on uncompetitive European operations. Going forward, Europe’s contribution will continue to drop,” says Chauhan.

In the last two years though, they [Tata Steel] have deleveraged meaningfully as the steel cycle is on an upswing. Going forward, they will continue to invest in growth capex and yet bring down leverage since steel prices are still robust despite a 30 per cent fall from the peak.

Bhavesh Chauhan
Research Analyst
IDBI Capital

The other positive is that Tata Steel’s new direction coincides with large steel exporters of the likes of China, Japan and Korea being forced to take a relook at their exports, driven primarily by issues related to carbon footprint. “The other two players are Russia and Ukraine,” says Narendran. “So, if you take a look at the top five exporters of steel, they have their own compulsions to take a different view on the export market, leading to a more balanced world trade.”

From a domestic point of view, Chauhan points out that over the past five to seven years, it has been a story of consolidation of market share among the top four players (see graphic Steel-ing a March). “Looking ahead, they are all expanding. Over a period of five to 10 years, we will only see a further increase in market shares,” says Chauhan. According to him, leverage was high for Tata Steel in 2019-20 (see graphic Financial Metrics). “In the last two years though, they have deleveraged meaningfully as the steel cycle is on an upswing. Going forward, they will continue to invest in growth capex and yet bring down leverage since steel prices are still robust despite a 30 per cent fall from the peak,” he says.

At a 1:1 debt equity ratio, they [Tata Steel] can spend between Rs 40,000 crore and Rs 50,000 crore on capex every year. This means that they can add 4-5 million tonnes of capacity every year.

Rakesh Arora
Go India Stocks

Tata steel’s India buyout story had an unhappy beginning, although it spurred the company to do better. Losing the bid for Electrosteel Steels in 2018—it was finally picked up by Vedanta—was the tipping point. Narendran says: “We did not put in our best bid.” The approach to a potential acquisition of Bhushan Steel (again in 2018), therefore, needed to be different. “It was to bid at a number, which we should not regret losing,” he explains. Eventually, Tata Steel paid `35,200 crore and clinched it. “We did not want to put `32,000 crore and lose it to someone for Rs 33,000 crore, when we knew we could make it work at Rs 35,000 crore. These opportunities are few and far between, plus it was a clean asset,” he says categorically. The beleaguered Essar Steel in western India—finally acquired by ArcelorMittal Nippon Steel—was also on the block but Tata Steel let it pass. “Assets in the east allowed us to leverage our iron ore. Essar is a good asset but the port issue surrounding it is quite complicated.”

In the pecking order for Tata Steel, Bhushan Steel was right on top followed by Electrosteel, and then Bhushan Power and Steel, which was picked up by Sajjan Jindal’s JSW Steel. Tata Steel then bought over Usha Martin’s steel business in 2019 and Neelachal Ispat Nigam earlier this year.

The strategic rationale for each acquisition comes out quite clearly. Bhushan Steel brought forth flat products (largely used in building and construction), a segment where Tata Steel needed a larger presence. “Bhushan Steel was producing only 3 million tonnes before the acquisition and for infrastructure-led growth, this is a vital piece. Besides, with export duty, long puts us in a better position since it is more about local trade,” points out Narendran. Interestingly, the erstwhile owners of Bhushan Steel visited Tata Steel’s Jamshedpur plant in the past and replicated most of it at their Angul plant housed in Odisha. In that sense, Bhushan Steel was an asset known to the Tatas. “The advantage of inorganic growth is that you get cash flows immediately. Today, Bhushan Steel produces more than we do in Kalinganagar, where it has taken us 10 years to get to where we are,” he explains.

The story of contrasts is interesting to say the least—at the time of the buyout, Bhushan was producing 3 million tonnes per annum and with minimal capex, that number is at 5 million today apart from being cash positive. Kalinganagar was started in 2005 and had issues for five years before revenue started only in 2018. “When you build a greenfield project, the ecosystem too needs to be created. You take care of the land, schools and hospitals. Though inorganic involves paying a little more, the business case is often stronger and one hits the ground running,” says Narendran.

Koushik Chatterjee, the company’s Executive Director & CFO, thinks Tata Steel, over the past decade, has had a “pretty sharp strategy and been clinical in execution”. Citing the case of Bhushan, he makes it clear why it made sense. “It was that one asset with a clear potential to align well with our line of business. Be it strategy, proximity or the ability to be leveraged in the future, it was a good fit,” he says. Again, he picks up the case of Usha Martin (Jamshedpur), where the attraction was long products. “It was a specialised product and that makes it interesting.” At `4,094 crore, it was a good buy.

The most interesting, in many ways, has been the buyout of Neelachal Ispat Nigam for `12,100 crore (the prime asset is a 1-million tonne plant) earlier this year, through a subsidiary, Tata Steel Long Products. It came with 2,500 acres in Kalinganagar. Add that to Tata Steel’s 3,500 acres in the same town, and you have a copious amount of land in addition to 100 million tonnes of iron ore. “The total of 6,000 acres is three times the amount of land in Jamshedpur where we produce 10-11 million tonnes each year,” says Narendran.

The Tata Steel CEO & MD says the company can now pace its growth: “Today, we can grow at a pace in line with the domestic market. We can still grow India to 40-45 million tonnes without acquiring any asset.” The other big advantage for Tata Steel is flexibility, since the assets are located within manageable levels of proximity. “You can choose to expand all at the same time or go for just one. We are strategically very well placed in terms of deciding how to grow and, of course, the land gives us more options.” Adds Chatterjee: “From here, it really comes down to an execution game.”

Rakesh Arora, Founder of Go India Stocks and a long-time steel industry tracker, maintains Tata Steel learnt its lessons the hard way. “As luck would have it, it was hit by the global financial crisis just months after the acquisition of Corus. This aggravated the fallout of a misplaced capital allocation strategy,” he says. Giving credit to the group for its standing in the Indian market, Arora thinks that helped Tata Steel “sail through some of the worst times, with the last decade being wasted as it grappled to shore up its balance sheet”. It was not as if competition sat still. “They let a newbie like JSW Steel come from behind and become the No. 1 steel player in India. But Tata Steel was quick to realise that the key advantage for them was in India, where they had access to cheap iron ore. That alone gave them almost $100 per tonne competitive advantage over most of their peers,” he explains.

On the buyout of Corus, Narendran is quick to say that at the time of the deal in 2007, inorganic opportunities were limited and a greenfield project took an inordinate amount of time. “The world was changing and we had to grow outside India. Now, we have shrunk the UK operations from 7 million [tonnes] to 3 million, while Netherlands at 7 million is efficient,” he points out.

There were a few other factors that clinched it for the company in the domestic market. “Tata Steel executed really well and managed to get the Kalinganagar project on stream and within the budget. Luckily for them, the IBC (Insolvency and Bankruptcy Code) got cleared at the same time just when the balance sheet was on a mend,” points out Arora. The positive fallout of that helped take the company to its current position of strength. “They were able to bid and get good assets. Now, with five brownfield sites to continue their growth, they are on a sound footing to regain leadership in India.”

Vipul Prasad, Founder & CEO of Magadh Capital Advisors, a portfolio management services (PMS) investment firm, feels the brownfield plants can make Tata Steel quick and flexible on planning and execution. “The expansion can be aligned with market potential. With the platform that they have created and other advantages like the strength of the balance sheet, distribution channels coupled with their standing in the market, they will tweak their plans to not only maintain but expand market share in India/Asia.”

Given that they have mostly brownfield plants, Tata Steel can be quick and flexible in their planning and execution to align their expansion with market potential.

Vipul Prasad
Founder & CEO
Magadh Capital

He identifies backward integration and low conversion costs as big differentiators for Tata Steel. “After all, that has been gained over a century of experience.” He also sees an opportunity in value-added products. “They have been working on this for the last 15-20 years with a fair amount of success. Increased proportion of high value-added products not only bolsters the margins but also reduces the level of fluctuation. In that sense, it shields the company from the vagaries of the commodity cycle,” he explains. However, he maintains this strategy comes with its own limitations. “Steel ultimately is a commodity and will always remain volatile. This focus on value-added products enhances your edge over competition and provides sustainability to the business.

Of course, the advantage of iron ore integration is a big plus and Arora is clear that it places Tata Steel in a better position compared to its peers. “Even at the bottom of the cycle, it has had good cash flows, plus the debt to equity is also very comfortable. In a weak cycle, we expect Tata Steel to make around `20,000-25,000 crore of free cash flow before capex,” he says. The implication of that is even at a 1:1 debt equity, “they can spend Rs 40,000-50,000 crore on capex every year”. That will facilitate adding 4-5 million tonnes of capacity yearly. “Given the market conditions, they may go a little slow initially but can still reach 40 million tonnes in the next four to five years without undue stress on the balance sheet.”

Around two decades ago, Tata Steel embarked on an exercise to understand consumer behaviour by studying a large FMCG company closely. “It was essential since we had limited visibility on our end consumer. This was a good starting point,” says Chatterjee. Even the smartest minds may not have been able to predict the digital revolution that was to unfold years later. The positive for Tata Steel was that it lay the foundation to be relevant to today’s consumer. “Buying steel is considered a messy exercise. Through digital, we want to have the mindset of an FMCG company and simplify the process apart from knowing who is buying my products,” explains Chatterjee. At this point, he fishes out his cellphone to show visuals of several homes before saying, “We want to be a complete building solutions company and not be known just for steel.”

That is a greater thrust on knowledge and not so much on capital. Narendran raises questions such as how to be more downstream or how can one be in services and solutions. “For instance, we got into graphene, composites, fibre-reinforced polymers and ceramics, and medical materials. We have knowledge on processes and materials apart from relationships with companies who buy composites,” he says. These are early days and to him, it is about building new revenue streams that can take off in a decade or more.

All that means is the company might bear a new look in a not-so-distant future. In a relaxed voice, Narendran confesses that steel is not for the faint-hearted. “Just to open the papers each morning and realise there is something that impacts you is the reality of this business. It could be someone increasing interest rates or an export tax being levied or a cut in infrastructure spend. It is an industry that is very vulnerable to geopolitical events,” he says. That unpredictability is unlikely to ever abate for the steel industry, especially in a growth market like India. To minimise its effect and still get a generous portion of the domestic story, Tata Steel will need to push itself.

The road map that it has laid out seems to have most of the building blocks in place. How it manages to piece together the rest of it will form the next round of this fascinating story.


Story: Ashish Rukhaiyar & Krishna Gopalan
Producer: Arnav Das Sharma
Creative Producers: Raj Verma, Nilanjan Das
Videos: Mohsin Shaikh
UI Developer: Pankaj Negi