Tata Steel Ltd Q3 FY23 Earnings Conference Call Insights

Key highlights from Tata Steel Ltd (TATASTEEL) Q3 FY23 Earnings Concall

Management Update:

• [00:02:28] TATASTEEL said that Tata Tiscon, a retail product, achieved record sales in 3Q23, and is expanding its reach through physical dealers and an e-commerce platform.

Q&A Highlights:

• [00:15:36] Pinakin Parekh of JPMorgan enquired why the profitability of the India business is lower than peers and how it will trend in the coming quarters. T V Narendran CEO said that one area where TATASTEEL had a slightly different issue was with Neelachal, as the business was incurring costs but not earning much revenue. The company said it should be resolved during 4Q23 as production ramps up and sales start.

• [00:21:01] Amit Dixit from ICICI Securities asked if there will be any provisions for non-realized value in 3Q23, given that prices have gone up in Europe and if it will lead to EBITDA compression or a lower per-ton number than the current quarter. T V Narendran CEO replied that TATASTEEL has taken NRVs into account for 3Q23. If coal and iron ore prices do not decline significantly, there should be no more material NRVs. The company is also targeting stock level reductions to reduce the risk of any further NRVs.

• [00:24:27] Amit Dixit from ICICI Securities enquired if contracts negotiated in the coming months will be at a lower rate due to the Russia-Ukraine war, resulting in lower realizations for 1H24. T V Narendran CEO said that last year, most of the annual contracts were in excess of EUR1,000 a ton. This year, they are lower but still higher than spot prices. Spot prices have gone up by about EUR50 a ton in Europe. In 3Q, costs were higher due to NRV provision, but TATASTEEL expects realizations to be about GBP70 per tonne lower than 3Q.

• [00:27:12] Indrajit Agarwal of CLSA enquired about the relining capex and how long would the shutdown be and the cash fixed cost per ton in Europe. Koushik Chatterjee CFO replied that Tata Steel Netherlands (TSN) is planning to shut down their blast furnace for around 120 days and about EUR250-275 million is already spent on the relining process. TSN currently has around EUR600 million in cash, so no additional money from India is needed.

• [00:28:59] Indrajit Agarwal of CLSA asked about the coking coal prices going forward considering Australia China trade opening up. T V Narendran CEO answered that coking coal prices typically fluctuate between $250 and $350. China has managed to get the quality they need over the last few years without buying coking coal from Australia, instead opting to purchase it from Russia.

• [00:30:42] Satyadeep Jain with Ambit Capital enquired what is making the company fail to reach a breakeven point in Europe. T V Narendran CEO said that traditional views of spreads need to be updated to account for energy and gas costs, which now make up 10-20% of raw material costs. The Netherlands has traditionally been successful, while the U.K. is facing challenges due to higher energy costs and outages.

• [00:34:10] Satyadeep Jain at Ambit Capital asked if the $250-275 million for partial relining of the U.K. plant is high. T V Narendran CEO replied that the relining cost of $275 million is comparable to what relining costs in Europe, and the blast furnace being relined is expected to run till 2035.

• [00:34:34] Satyadeep Jain from Ambit Capital also asked are there other options beyond a standalone EAF being considered to convert the plant? T V Narendran CEO said that no comment can be made on the UK media reports of the proposal to the government, as they are speculative. The proposal included an EAF and other assets to keep the site sustainable, and the team is working out the next best thing with the money and policy support they will receive from the government.

• [00:41:00] Ritesh Shah of Investec asked what is the expected ROI if a 50% contribution from the government to the capex is factored in. Koushik Chatterjee CFO answered that the ROIC that is expected when considering an investment is 15%, while the IRR hurdle for approval of capex depends on the region, with India typically having a hurdle of 12% and Europe having around 9-10%.

• [00:41:56] Ritesh Shah of Investec also asked can TATASTEEL increase local steel prices in India. T V Narendran CEO said that steel prices in India are going to go up by $100 over the next three months due to increased international prices, and demand is strong with minimal import threat. The industry needs better balance to invest for growth and improve cash flow.

• [00:42:02] Ritesh Shah of Investec asked about volume guidance for FY25. T V Narendran CEO replied that Neelachal steel plant will produce 1 million tons of steel next year. Additionally, Kalinganagar is producing 300,000 tons a month, and may get additional volumes through debottlenecking. In two years, the Ludhiana plant should be up and running, with a total output of 0.75 million tons.

• [00:45:02] Kirtan Mehta of BOB Capital asked about the ramp-up sequence of Kalinganagar post-expansion, how long would it take to ramp up to full capacity. T V Narendran CEO said that TATASTEEL will have a pellet plant ramped up by the end of 1Q24 and a cold rolling mill will be ready. The Kalinganagar blast furnace, hot strip mill, and steel melt shops should be ready by FY25, with a full ramp-up taking around 16 months.

• [00:46:57] Kirtan Mehta of BOB Capital enquired if TATASTEEL thinks the market’s estimate of 1-1.5 years for the Tata Steel merger to occur is fair, or if it will progress faster. Koushik Chatterjee CFO said it should take less than a year to get the clearances from SEBI and other regulators since these are subsidiaries that have been in TATASTEEL’s fold for a while.

• [00:48:22] An analyst asked about the growth trajectory of auto sector going forward and the targeted mix from the sector for FY24. T V Narendran CEO answered that Tata Steel’s growth in the auto sector largely depends on the overall growth of the sector, and TATASTEEL is investing in new technology to help increase its market share. TATASTEEL is also focusing on the oil and gas segment, which it expects will account for a big chunk of its value-added sales going forward.

• [00:50:07] An analyst asked why the company is not doing merchant sales when the optionality is available on iron ore merchant sales. T V Narendran CEO said that TATASTEEL has the requisite permissions to sell iron ore, but logistics are currently a challenge. The company has sold some iron ore in the last two to three months, although not enough to be material yet.

• [00:55:22] An analyst asked about profitability of Europe for 4Q23 if it will weaken and the outlook on UK. Koushik Chatterjee CFO clarified that it will improve compared to 3Q. On UK, the company is looking for an optimal model that is investable, bankable, and fits the needs. Already the engineering and technical analysis has started and will present the results to the board and take guidance shortly.