Tata Steel is going to invest Rs 10,000-12,000 crore per annum for the next five years to scale up the India business even as it plans reduce leverage by at least $1 billion (Rs 7,400 crore) on an annual basis in the next few years.
The company wants to blend the urge to grow with the caution of strengthening the balance sheet, taking advantage of the commodity up-cycle which has led to record profits for steelmakers .
In 2021-22, Tata Steel will step up investment from Rs 7,000 crore spent in the last fiscal even as it may reduce gross debt as much as $2 billion or twice the stated target. In 2020-21, it had brought down gross and net debt by $4 billion.
Much of the cash will be funnelled to Kalinganagar in Odisha, where the company is scaling up capacity to 8 million tonnes (mt) from 3mt to take the India business at 25mt by the end of fiscal 2024. The investment numbers do not, take into account potential acquisitions, the company told investors on Tuesday.
“We are now poised to capitalise on the growth opportunities in India. We have 3 active sites viz. Kalinganagar, Jamshedpur and Angul. And between these three sites, we can go up to 40mt if we have the EBIDTA, balance-sheet and the demand for that,” T V Narendran, CEO and managing director of Tata Steel, told investors.
The share of the profitable Indian business, vertically integrated with iron ore mines, to the overall pie of Tata Steel Group, will reach 73 per cent by 2030, if the company decides to scale up the three sites by 15 mt between 2024 and 2030. The share now stands at 57 per cent with India capacity of 19.6mt.
The company pointed out they would look out for acquisitions to bolster long products capacity and mentioned opportunities that may come up from disinvestment programmes of Neelachal Ispat Nigam Ltd and RINL.
Debt to fall
The company informed the investors that it would prioritise retiring offshore debt. In the first quarter alone, Tata Steel has made repayment of debt from their Singapore and European balance sheets, though it did not quantify the amount.
“This year we can certainly say that it will be much more than the announced policy of $1 billion,” Tata Steel executive director and CFO Koushik Chatterjee said
Investors wanted to understand why the management is guiding a net debt to EBIDTA ratio of 2, wondering if the company is holding back cash for big ticket deals.
The management took pains to remind the investors that steel is a cyclical business with ups and downs but informed that net debt to EBIDTA number would be “much lower than 2x” in this fiscal.
“For the next 2-3 years, we intend to prioritise, at least about a $1 billion of repayment each year prior to the allocation of surpluses towards growth. If there are acquisition opportunities, we will revisit the level,” Chatterjee told the investors.
The company ended the last fiscal with a net debt to equity of 2.44. Net debt has been restored to FY 18 level of around Rs 75,000 crore in the last fiscal despite the acquisition of Bhushan Steel and Usha Martin’s steel business for Rs 40,000 crore. “We reduced interest cost by about Rs 600 crore in FY 21. You will see more reduction in the current year,” Chatterjee added.
The management said the European business would be cash positive this fiscal and the company plans to maintain that and stop cash burn at the Indian side. It would spend around Rs 3,500 every year for sustenance capex.
