In the last couple of years, India's top private sector steelmakers, Tata Steel and JSW Steel, have been aggressively adding capacity and buying sick steel assets under the Insolvency and Bankruptcy Code (IBC). The aim - becoming the largest player in the world's fastest-growing steel market to make most of the expected demand pick-up in 2020/21.
While demand for steel is expected to grow at 7 per cent, and prices are high, there are obstacles in the mid-term outlook which could make things tough. The companies have been betting big on the fast-growing automobile market for selling their high-grade, high-margin products, but the slump in automobile sales in 2018/19 hit margins during the year. Consumption of automotive steel has dipped by 4 per cent in the fourth quarter of 2018/19. Automobile sales outlook for 2019/20 is not very bright either.
Automotive steel accounts for 12 per cent steel demand in India, of which passenger vehicles comprise a big chunk. Also, after a decline lasting several quarters, mainly due to imposition of safeguard duties on Chinese products, imports are back - they rose 46 per cent in March (while exports fell 16 per cent). Experts blame circumvention of Chinese products through Asean countries. India became a net importer of steel in 2018/19, the first time in three financial years, as exports dropped 34 per cent to 6.36 million tonnes (MT) and imports rose 4.7 per cent to 7.84 MT. Tata Steel's EBITDA per tonne fell 17 per cent in the fourth quarter compared to the third quarter, though revenue and profit showed decent growth in 2018/19 (see Heavy Burden). JSW Steel's profit rose from Rs 4,625 crore in 2017/18 to Rs 8,259 crore in 2018/19.
The continuing economic slowdown also does not bode well for the industry. Global iron ore and coking coal prices are rising, though Tata Steel, with its captive mines, is better placed, say experts. Apart from this, both the companies have a mountain load of debt - Tata Steel is sitting on a consolidated debt of Rs 95,000 crore, while JSW's total debt is Rs 45,000 crore. However, this is not coming in the way of ambitions as they splurge to buy bankrupt companies up for sale under IBC. While Tata Steel bought Bhushan Steel (5.6 MT) for Rs 35,000 crore and Usha Martin (1 MT) for around Rs 4,600 crore, JSW acquired Monnet Ispat (1.5 MT) for around Rs 2,500 crore. The Jindal Group company is awaiting approval from the National Company Law Tribunal for its Rs 19,000 crore acquisition of 3.1 MT Bhushan Power and Steel. It has also offered Rs 1,500 crore for Asian Colour Coated Ispat. The acquisitions, and greenfield expansions, have propelled the domestic steel capacity of Tata Steel to around 19 MT and that of JSW to 18 MT.
While the two were hoping to gain from a future demand spike, they also felt that it was the right time to consolidate as competition such as the Ruias of Essar Steel and the Singhals of Bhushan were going out of business. A number of regional players, too, were moving towards bankruptcy, leaving the market open for the big two or three players.
Tata Steel's capital expenditure was Rs 9,000 crore in 2018/19. It has guided for another Rs 8,000 crore in FY2020 (excluding European operations). JSW, on its part, will need fresh funds to purchase Bhushan Power and Steel and Asian Colour Coated Ispat. With this, its debt is likely to go up to Rs 60,000 crore, say experts. Can it generate enough cash for such huge repayments?
Though there are no clear answers, Tata Steel, under Managing Director T.V. Narendran, is going ahead full throttle. It is expanding the Kalinganagar plant's capacity from 3 MT to 8 MT per annum at an investment of Rs 23,500 crore. Thanks to these focussed growth plans, the company's revenue from Indian operations rose 47 per cent year-on-year to Rs 88,987 crore in 2018/19, driven by higher volumes and better realisations, while the adjusted Ebitda for the year rose 56 per cent to Rs 23,883 crore. But the company also spent about Rs 40,000 crore on acquisitions. This is apart from the money it will have to spend to turn around Tata Steel BSL (earlier Bhushan Steel) and Usha Martin, especially when the economy is expected to face turbulence in the near term.
Tata Steel has managed to reduce its gross debt by Rs 17,864 crore in the second half of last financial year, but its long-term problem is going to be repaying the loans of its European subsidiary, especially after the European Commission's rejection of its proposal to form a joint venture between its European operations and Germany's Thyssenkrupp.
A Tata Steel executive says they are working on the three mantras of simplification, synergy and scale. The focus is on scaling up India operations - expansion of the Kalinganagar plant, ramping up and leveraging synergies at Tata Steel BSL, growing downstream and long products portfolio, carve-out of the Europe business, and divestment of South-East Asia operations and other non-core assets. JSW Steel is looking to expand its footprint in the domestic market as international demand goes through a soft patch, besides enhancing the product portfolio with emphasis on high-margin specialty steel products.
Tata Steel is also pinning hope on product innovation. "We expanded our product portfolio with the Kalinganagar plant and see demand for such products from different customer segments," says the company executive. Tata Steel is a key supplier of automotive and special products. Its auto steel sales in India registered 21 per cent increase in 2018/19, thanks to an improved high-end products mix, despite the auto sector slowdown.
JSW Steel is expanding capacity from 18 MT to 24 MT at its plants in Vijayanagar and Dolvi. That will be completed by March 2020. At the same time, the downstream capacity will go up from 5 MT to 9 MT by next year. The new capacity will be more efficient. JSW is also investing in power plants, batteries, pipe conveyors and slurry pipelines for cost reduction.
In Kalinganagar, Tata Steel is investing raw material capacity expansion, upstream and mid-stream facilities, and infrastructure and downstream facilities. "Work has also started on the cold rolling mill complex, which will help in enriching our product mix, servicing downstream industries, especially automotive, and optimising cash flows," says the company executive.
In view of changing customer needs, competition from alternative materials, and increasing regulatory risks, Tata Steel is trying to innovate. "Our focus is on leveraging capabilities in research and development for new products, advanced materials, process improvements and digitisation across the value chain. These innovations are being driven by creating new materials business or designing new services and solutions," says the executive.
Tata Steel is also hoping for gains from acquisitions. Bhushan Steel, it says, was a strategic investment given the process technology and enhanced manufacturing capabilities that will help it increase product portfolio and consolidate market leadership. "A key logistical leverage is proximity of Bhushan Steel to markets, mines, raw materials, ports as well as in-house processing centres. A systematic integration of operational processes and policies, maintenance practices and improvement initiatives has been mobilised," says the Tata Steel official.
Will these initiatives decide who wins the race? Eight years ago, in 2009/10, both Tata Steel and JSW were neck and neck in domestic capacity. Tata Steel produced 6.44 MT steel within the country and JSW was marginally behind at 6 MT. Jindal saw an opportunity in the downturn and raced ahead of Tata Steel in capacity creation, putting up additional capacities at its Vijayanagar plant in Karnataka, and acquiring the 3.3 MT facility of Ispat Industries in Maharashtra. In FY 2017, its output shot up to 15.8 MT, while Tata Steel's rose to 10.97 MT on the back of the 3 MT plant at Kalinganagar in Odisha and the 3 MT plant in Jamshedpur. That was the period when Tata Steel was struggling to digest its $12-billion acquisition of Corus, a problem that, in spite of massive write-downs, it is still grappling with. If the proposed merger of Tata Steel Europe and Thyssenkrupp is finally called off, it will find it tough to handle the mess in Europe and growth plans in India at the same time. That may well decide who wins the race in India.