We hope you enjoyed reading Part 1 and Part 2 that talked about Tata Steel’s journey from facing a major workforce crisis to the much talked about Corus deal. In today’s article, let’s see how recently the firm has been focussing on their digital transformation and how they are facing the challenges posed by COVID 19.
Digital Manufacturing Facilities – Tata Steel Kalinganagar plant Case Study
Management at Tata Steel (TSL) was of the view that digital transformation will be a major contributor towards the firm’s inorganic growth. In mid-2019, TSK was included in the Global Lighthouse Network’ list of 54 global facilities and was the first Indian facility to do so.
TSK plant (being a newer plant) provided Tata Steel an opportunity to introduce an implement tech enabled infrastructure that is advanced and also in accordance with Industry 4.0 standards.
These initiatives are not limited to TSK but also being carried out at TSJ (Jamshedpur facility). In 2020 alone, $25Mn worth of analytics driven projects were carried out across the value chain.
Plant level initiatives for the transformation
TSL started a $2Bn transformation program in mid-2018 that has already saved them around $1.47Bn till March 2020. Some of the initiatives are as follows:
1. Tata Steel Kalinganagar
2. Tata Steel Jamshedpur
How IBC became a blessing in disguise for a Bankruptcy prone Sector?
The Indian steel sector has turned out to be one of the biggest beneficial recipients of the Insolvency and Bankruptcy Code (IBC). Out of the 40 big defaulting accounts viewed by the RBI in mid-2017, 11 corporates belong to the steel sector. As per ICRA, eight out of these eleven entities have steel manufacturing capacities totaling about 23.8 MTPA, forming roughly 18% of the total domestic steel capacity.
The steel sector turnaround has been great following the anti-dumping duty, imposing minimum import price, along with the increase in international steel prices, and has been critical in reviving bidders’ faith. The stressed assets in the sector make for good candidates for acquisition by other big players to increase their market share and cater to the domestic demand. Compared to a greenfield setup, acquiring these companies would be more efficient from an operational standpoint especially for larger players like TSL, JSW, etc.
The combined plant utilization of the stressed assets was about 72% during FY2018. This can be increased to 90% with successful larger parent operational excellence.
This is a list of the completed Steel Companies Acquisitions as per IBC Resolution:
Handling the COVID era and TV Narendran‘s Efforts
TV Narendran, Global CEO & MD, Tata Steel, predicted well in advance what can a lockdown mean to TSL’s business as Europe had started facing covid-19 cases in early Jan 2020. He quickly started flagging the business risk in January itself on account of Covid-19. After all, he was at the helm of a global steel giant that was largely leveraged. A period of no sales had the capabilities to destroy & sink the ship.
As soon as the pandemic came to Indian shores, Koushik Chatterjee, CFO, TSL, set up a ‘virtual cash war room’. His team went to the source of every cash detail— from procurement to maintenance capex and operations and took a stern view at whether it needed to be done or can it be avoided. Although debt spiralled from ₹104,000 cr to ₹118,000 cr in the March-June of FY21—the strategy paid off. As sales rebounded in June (due to Unlock in India), TSL was left with a surplus cash flow of almost ₹1,000 cr in that quarter. It was an impeccable achievement for a company that had seen its revenues go down by a third that quarter and had high fixed costs.
What’s cooking inside TSL?
With 20 MTPA domestic production capacity, TSL is just behind JSW which stands at 22 MTPA. With the new chairman at Tata Sons, the strategy and directives are very clear: focus on cash and repay the debt. This financial prudence has led to an uptick in investor confidence.
Last one year has been phenomenal for Tata Steel as its market cap grew to around 148,000 Cr, making it India’s second valuable Steel enterprise. ROE has improved from 4% to 11-12% over the last decade.
Indian Steel industry is rapidly consolidating to just a few players, namely, TSL, JSW, Arcelor, Sail and Jindal Steel & Power. New capacity additions would be mainly brownfield in nature and post that any greenfield thought would be entertained.
As TSL prepares for the upcoming decade, Narendran is putting his bet on the prices being higher. He says that the average price would be greater in the upcoming decade in comparison to the decade gone by. The company has plans to expand domestic production capacity to 25 MTPA by 2025-26 riding on the demand from India.
TSL’s domestic capacity (20 MTPA) is spread across Kalinganagar, Jamshedpur and Dhenkanal. The acquired production facility (Bhushan steel) is where the gold mine is which TSL can utilize in years to come. Company is also planning existing plants capacity expansion to take the domestic production up to 40 MTPA.
TSL has also showed an EOI (expression of interest) for the Neelachal Ispat. Alongside, as per some news reports if Vizag Steel is also up for grabs, it will also be a good opportunity to be interested in for Tata Steel.
TSL is focussing on increasing the share of its value-added products to its revenue mix. The company currently has >50% markets share in products in the automotive steel and around 30% in products catering to O&G industry.
Roofing sheets, Gate designs, etc. are being sold under the brand Tata Aashiyana, whereas home solutions are branded through Tata Nest. Tata Tiscon take cares of commodities such as rebars. The company is aggressive in their marketing, and this is evident from Google ads being popping up during web searches.
As Tata Steel concentrates once again to its domestic business, its European dream seems to have taken a back seat. The business has been bifurcated into Tata Steel UK and the Netherlands, and the company clears that it is currently not in a deal mode considering last two deals with Thyssenkrupp and SSAB have failed on account of competition commission approvals.
With 30,000 - 32,000 per tonne EBITDA, Tata Steel is on well on track to have great results this fiscal. The management comments that, with every rupee that they earn, the first one $billion will go for debt reduction. They also opine that maintaining a leaner balance sheet with growth will be the key and it looks that the business will have a fair shot in achieving the same.
If they succeed, get ready for a re-rating of the business.