Could the Neelachal investment be a boon for TATA Steel?

Tata Steel, JSW Steel, and ArcelorMittal – Nippon Steel plan to invest upto Rs 1.5 lakh crore in Steel Industry 

During the current cycle of high commodity prices, manufacturers make wholesome profits which will help the steel industry to lead private sector investments in India, said Tata Steel Managing Director (MD). 

As per the record, Tata Steel reported a net profit of Rs 9,573 crore for the December quarter. TV Narendran, MD of Tata Steel, said in an interview,

“The profits that we make, pretty much all of that is flowing back into the country as investments”

And when you look at the triggering private sector investment, I think the steel industry can certainly lead the way, and we should allow the steel industry to do that with more capacity in India.” 

Narendran added, “Why should countries which have no iron ore be exporting 50 – 100 million tons of steel? And India, which has Iron ore, is hardly exporting 20 million tons of steel.” 

Plans to invest up to Rs 1.5 lakh crore over an obscure period are discussed between the top three producers: Tata Steel, JSW Steel, and ArcelorMittal – Nippon Steel. 

The MD also explained the rationale behind Neelachal Ispat Nigam Limited (NINL)buyout for Rs 12,100 crore, which was considered expensive by many people. He said that the purchase was an asset and a perfect match for Tata Steel because it was 2,500 acres of land across the road from their Kalinganagar plant. 

The company had adequate capacity for flat products but required organic or inorganic growth opportunities in long products. The asset will help the company publicize the long products during its expansion plans, and it also came with 100 million tons of iron ore reserves. 

The added benefit of the proximity of the Neelachal plant to Tata Steel’s Kalinganagar setup would help leverage better-scale economies, said Narendran. 

Narendran also said, “We bid in a manner that we would have no regrets if we lost it at that price or higher. There is a huge opportunity in Neelachal that is unique to us; nobody else has that strategic value.” 

Tata Steel can reasonably meet its growth ambitions for the coming decade and organically reach upto 50 mtpa (million tons per annum) of production capacity with this new investment.

The installed capacity at the Kalinganagar plant is three mtpa but is being increased to 8 mtpa, and if the demand increases, it could be taken upto 16 mtpa. At the same time, the Neelachal plant can be upgraded to produce upto ten mtpa.  

The MD said that an ideal debt- EBITDA ratio for a capital-intensive industry like steel manufacturing is between 1 and 2.

The company now plans to invest its cash to fund growth rather than repay debt. The company has a debt – EBITDA ratio of under one by a narrow margin, having repaid Rs 17,376 crore in 9MFY22 as it has been using the current commodity price upcycle to repay its debt. 

For steelmakers, the steel prices and input costs like coal and iron ore are volatile, though Narendran expects the elevated commodity prices to remain “volatile at a higher level.” 

Despite its revenues being flatly progressive in the December quarter, TATA steel company faced a dip in its margins due to sharp commodity prices. Narendran said that a further margin squeeze could happen during the current quarter. 

Recently, Tata Steel and the Council of Industrial Research (CSIR) signed an MoU (Memorandum of Understanding) to pursue strategic technological partnership across multiple technical areas. This collaboration aims to create a global impact on society, industry, and the innovation ecosystem with first-in-the-world technologies.  

The partnership also aims to help the company further its pursuit of sustainable breakthrough technologies in the materials domain and accelerate digitalization in the manufacturing sector. The focus is also to lead the steel industry towards sustainable decarbonization and transform it.

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Edited by: Mahi Gupta

Published by: Vishakha Verma