Tata Steel regrets its debt-reduction plan, highlighting the necessity for future balance between expansion and deleveraging

According to a top official of the firm, Tata Steel’s decision to prioritize debt reduction by slowing down capital investment at the Kalinganagar plant did not benefit the company and highlighted the need for future growth and deleveraging to be balanced.

The project would increase the profitability of Tata Steel’s integrated Indian operations and serve as a natural hedge against the unstable European industry, thus the firm is currently working very hard to finish the expansion of the Odisha facility to 8 million tonnes (mt) from 3mt.

The Kalinganagar unit’s phase-II expansion was officially launched in November 2018 with a goal of completion in 48 months at a cost of Rs 23,500 crore.

The project was already delayed by the Covid pandemic before the Black Swan occurrence, and the corporation itself had temporarily reduced capital spending in accordance with market circumstances.

Even though certain components of the unit—a 2.2 mt cold rolling mill and a 6 mt pellet plant—have started operating, the expansion is now anticipated to be finished by the end of 2023–4.

The company’s executive director and chief financial officer (CFO), Koushik Chatterjee, told analysts the day after the first quarter results were released: “In the past, we had put deleveraging ahead of capex and by doing so, we also slowed down our capex like Kalinganagar, which in hindsight, actually has not helped us.”

Chatterjee was answering inquiries from analysts with managing director and CEO T.V. Narendran. A particular query on the stated goal of reducing debt by $1 billion yearly prompted the CFO’s response. If Tata Steel will be able to fulfill the goal, the JP Morgan analyst questioned.

According to Chatterjee, Tata Steel is allocating more funding to the project and wants to make sure it doesn’t run out of money. He stated that the goal is to finish the project and begin collecting money from it while keeping an eye on the deleveraging plan.

He said that Tata Steel refinances the remaining debt and pays off part of it everytime it matures. The net debt may have trended lower in Q1FY24 if the first quarter’s rise in the need for working capital had not occurred. Rather, it increased by Rs 3,587 crore.

Tata Steel’s net debt increased from Rs 51,049 crore at the end of March 2022 to Rs 71,397 crore as of June 30. However, because of vigorous deleverage supported by record-breaking steel prices in 2020–22, it is still substantially lower than the Rs 104,779 crore it had achieved in March 2020.

The purchase of Neelachal Ispat Nigam for Rs 12,200 crore is partially to blame for the increased debt level from the low of March ’22.

At the end of FY23, Tata Steel had a 21.6 mt domestic capacity. Narendran said Tata Steel will start a 4mt expansion of NINL later this year in response to a different query.

In contrast, JSW Steel, Tata Steel’s closest rival, already possesses a 28mt capacity. The Sajjan Jindal-led organization would increase capacity by an additional 9mt to reach 37mt in two years.

Tata Steel hopes to increase domestic capacity to 40 mt by the end of this decade, whereas JSW wants to reach 50 mt.