Tata Steel Ltd (TATASTEEL) Q4 FY23 Earnings Concall Transcript

Tata Steel Ltd (NSE:TATASTEEL) Q4 FY23 Earnings Concall dated May. 03, 2023.

Corporate Participants:

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

T V Narendran — Chief Executive Officer & Managing Director

Koushik Chatterjee — Executive Director & Chief Financial Officer

Analysts:

Sumangal Nevatia — Kotak Securities — Analyst

Prashanth KP — Emkay Global — Analyst

Pinakin Parekh — JPMorgan — Analyst

Satyadeep Jain — Ambit Capital — Analyst

Alok Deora — Motilal Oswal — Analyst

Vishnu Kumar — Spark Capital Advisors — Analyst

Amit Murarka — Axis Capital — Analyst

Ritesh Shah — Investec — Analyst

Kirtan Mehta — BOB Capital Markets — Analyst

Mudit Bhandari — IIFL Capital — Analyst

Ashish Jain — Macquarie — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Tata Steel analyst call. Please note that this meeting is being recorded. All the attendees’ audio and video has been disabled from the back-end and will be enabled subsequently.

I would now like to hand the conference over to Ms. Samita Shah. Thank you, and over to you, ma’am.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you, Panshuk. Good afternoon, everybody, and to all our viewers joining us today. Welcome to this call to discuss our results for the fourth quarter and the year ending March 31st, 2023. I am joined by our CEO and MD, Mr. T V Narendran; and our ED and CFO, Mr. Koushik Chatterjee. I will request them to make a few opening remarks before we open the call and take your questions.

Before I hand it to them, I will remind you that the entire conversation today is governed by the Safe Harbor clause, which is on Page 2 of the presentation, which is uploaded on our website.

Thank you. And over to you, Naren.

T V Narendran — Chief Executive Officer & Managing Director

Thanks, Samita. Good morning, good afternoon, good evening depending on where you are. Just a few comments before I hand over to Koushik. Global commodity prices staged a recovery during January-March quarter and continued — but continued to face an uncertain and volatile operating environment similar to the rest of the financial year. And while global inflation and rate hike dynamics have been at the forefront, there were fresh concerns about the banking sector in the past few months, which also weighed on the sentiment.

Steel prices across key regions were up in March compared to December, with Western markets inching up, I mean, in the US, it was over $1,000. Key steel-making material coking coal and iron ore prices continued to be volatile on supply dynamics and wavering expectations about Chinese demand. And overall, the spot spreads have witnessed an improvement in the fourth quarter on a quarter-on-quarter basis and are above the FY ’23 average levels, but remain below the levels that we witnessed in FY ’22.

The economic activity in India continued to improve and apparent steel consumption was at 14% year-on-year for the fourth quarter and 13% for the financial year. And the year-on-year growth in the financial year is an indicator of prevalent domestic demand and was despite the imbalances created by the levy of export duty in — earlier in the year.

For Tata Steel, FY ’23 has been a year of strategic progress as we continue to align our portfolio with the India growth story. India’s crude steel production makes up two-thirds of the overall production for Tata Steel now and should further improve in the coming years. On an absolute basis, Tata Steel India achieved the highest-ever crude steel production of 19.9 million tonnes and grew 4% year-on-year by debottlenecking across sites and ramping up the Neelachal Ispat asset. NINL is currently operating at a run rate of a million tonnes of crude steel plus pig iron on an annualized basis. India deliveries grew mostly in line with the production to surpass the previous best recorded in FY ’22 and domestic deliveries grew 11% year-on-year with record deliveries across segments.

Moving to the quarter, our deliveries grew 9% quarter-on-quarter to 5.15 million tonnes and saw a steady improvement across sectors, particularly auto and retail. Our net realizations improved by INR1,700 per tonne and were better than the guidance of around INR1,400 to INR1,500 per tonne provided during the last earnings call.

Sustainability is at the core of our strategy and Tata Steel is committed to net zero by 2045. Our route and pace of decarbonization across geographies will be calibrated for each location based on the local regulatory framework, government support and willingness of customers to pay for the highest cost green label — green steel. We continue to pursue multiple initiatives to reduce our emissions, including a recently initiated trial for injecting large quantity of hydrogen into one of the blast furnaces at Jamshedpur, a global first.

In terms of growth, multiple projects are underway across India and we are steadily progressing towards an aspiration of 40 million tonnes in India. We commissioned the cold rolling PLTCM, the Pickling Line and Tandem Cold Mill, which is part of the 2.2 million cold rolling mill complex at Kalinganagar, and the Full Hard Cold Rolled coils are now being produced, and this marks the beginning of an improvement in product mix. The Continuous Annealing Line and the Continuous Galvanising Line will be progressively commissioned in the next year or so. And in Longs, we are well-placed to more than double the operations by FY ’30 via multi-location growth and also focused on product mix enrichment by expansion at our downstream operations.

Moving to Europe, steel deliveries were at 2.1 million tonnes in the fourth quarter and around 8 million tonnes for the whole year. The drop in realizations and ongoing upgradation of the cold mill at Ijmuiden have weighed on spreads despite moderation in costs. The cold mill upgrade is progressing and the product mix should improve upon commissioning in the next few months. We have also commenced the relining of one of the blast furnaces in early-April, which will be completed in the first half of this financial year. I’m also happy to share with you that Tata Steel has been recognized by World Steel as Sustainability champions for the sixth time in a row and by the World Economic Forum as the Global Diversity, Equity & Inclusion Lighthouse.

Thank you. And over to you, Koushik.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Thank you, Naren. Good morning, good afternoon or good evening to all who have joined in. Let me give you a deeper sense of the financial performance of the Company. I’ll begin with the quarterly performance, which is provided on Slide 21. Our consolidated revenue stood at INR62,962 crores, while our EBITDA stood at about INR7,225 crores, which translates to a consolidated margin of 11%. At Tata Steel Standalone, the EBITDA stood at INR8,089 crores, which translates to an EBITDA per tonne of INR16,258. Excluding the FX impact, the EBITDA was higher at INR8,318 crores and was up more than 75% on a quarter-on-quarter basis.

As provided in Slide 28, there was margin expansion during the quarter on account of improved steel realization and moderation in costs. Within costs, material costs were down, while there was slight increase in the conversion costs driven by royalty expenses and FX impact on intercompany loans provided over time. The royalty increased by about INR187 crores to about INR962 crores due to higher production and notified IBM prices.

In terms of FX impact, there was a loss of INR229 crores versus a gain of INR571 crores in the third quarter. The EBITDA margin overall improved from 18% in the third quarter to about 24% in the fourth quarter. Further improved profitability was also witnessed at our Indian subsidiaries including Tata Steel Long Products, which turned EBITDA positive on a consolidated basis within nine months of the acquisition of the NINL. At Tata Steel Europe, the EBITDA loss stood at about GBP176 million and on a per tonne basis was broadly similar to third quarter.

As shown in Slide 13, deliveries were up by about 9% quarter-on-quarter, an improvement in cost was mostly offset by the drop in the revenue. During the last earnings call, we had mentioned a drop in revenue per tonne of GBP70 per tonne and reduction in the overall cost by about GBP100 per tonne. While the revenue per tonne dropped by about GBP58 per tonne, the overall volumes were lower than anticipated, resulting in absolute revenues being lower than expected.

Further, the cost decreased by GBP60 per tonne, while the spot prices of energy have dropped sharply, our energy costs did not fall as much as we had hedges in place. You will remember, the hedging for energy cost has helped protect us during the European energy crisis last year. While there was a spike in natural gas and power prices in spot markets, our cost did not increase as much.

Spot prices of natural gas dropped sharply this quarter, but the drop in our costs will take a quarter or two to reflect in the profit and loss account. Taxes for the quarter stood at about INR1,755 crores and decreased quarter-on-quarter upon lower non-cash deferred tax. You are aware that over the previous 15 months, the British Steel Pension Scheme had completed about three insurance buyouts of its pension liabilities up to 62% with Legal & General UK. We had previously explained that with each buying a proportion or a portion of the accounting surplus of the pension, our so-called utilize to secure the insurance and a non-cash deferred tax charge is recorded in the profit and loss account.

We had also guided that we expect this movement to continue till the full derisking is completed. We can confirm that the residual insurance of 38% of liabilities is currently underway and will be completed in Q1 of this financial year, subsequent to which the business will be fully derisked from any pension fund exposure.

Tata Steel Europe assessed also the potential impact of the economic downturn in Europe on its business outlook. Based on the assessment, Tata Steel Netherlands is expected to have adequate liquidity. However, Tata Steel UK is expected to be adversely impacted. Tata Steel UK continues to implement various measures aimed at improving its business performance and conserving its cash and liquidity. The discussions with the UK government is still ongoing, but it remains uncertain whether adequate support for decarbonization would be agreed. Given these circumstances, we have taken an impairment charge of INR11,070 crores in the Tata Steel Standalone books, reflecting the investment in the overseas portfolio.

Moving to the cash flows. The operating cash flow for the quarter stood at about INR8,861 crores versus INR5,020 crores in the third quarter, and this was primarily driven by better working capital management.

Moving to Slide 23, our consolidated revenues for the full year was broadly stable year-on-year basis and stood at INR2.4 lakh crores or $30 billion. Our consolidated EBITDA stood at INR32,698 crores, which translate to a margin of 13%. The standalone margin was higher at 22%, while Europe was at 5%, reflecting higher input costs due to inflationary pressures and stressed supply chain.

The standalone EBITDA stood at about INR28,175 crores for the year and translate to an EBITDA per tonne of INR15,467, while TSE EBITDA stood at about GBP477 million, which translate to an EBITDA of about GBP58. We expect — we spent about INR4,396 crores for the quarter and INR14,142 crores for the full-year on capex. As Naren mentioned, it was a year of strategic progress with commissioning of the pellet plant and the PLTCM line at Kalinganagar. And NINL ramping up to 1 million tonnes on annualized basis.

In the financial year ’24, we look to deploy about INR16,000 crores on capex, INR10,000 crores in Standalone India largely focused on expediting and accelerating the Kalinganagar project. There are some subsidiaries like Tinplate, which are also expanding its capacity and that will also be reflected in the INR16,000 crores. And also for the blast furnace six reline in Ijmuiden in Tata Steel Netherlands and we continue to prioritize these strategic capex over the next 12 months. The free cash flow generated for the quarter was INR4,800 crores, and our net debt decreased by about INR3,900 crores during the quarter and stands at about INR67,810 crores.

For the year, we were successful in maintaining our interest cost despite a 250 basis points increase in the benchmark rate by the RBI and 475 basis point rate hikes by the Fed. Our financial strategy is calibrated to generate returns across the cycle and our financial matrices remain within the medium-term targets. Net debt to EBITDA is at 2.07x and net debt to equity at 0.61x. We remain committed to our long-term target of deleveraging, whenever we generate free cash flow, which is surplus to our needs and capex, and balance with growth aspirations and move towards a much more healthier balance sheet. We aim to reduce our leverage and resume the deleveraging journey in financial year ’24. As mentioned in the press release, the Board has recommended a dividend of INR3.6 per share.

With this, I will end my comments and open the floor for questions. Thank you so much.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] The first question is from Sumangal Nevatia of Kotak Securities. Please go ahead.

Sumangal Nevatia — Kotak Securities — Analyst

Hello, am I audible?

T V Narendran — Chief Executive Officer & Managing Director

Yeah.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Yeah, sorry. So, first question is on Kalinganagar 5 million tonne plant. If you could just share some specific timeline as to where are we as far as the commissioning is concerned? And what sort of volume guidance or volume growth we can look in FY ’24 and ’25?

T V Narendran — Chief Executive Officer & Managing Director

Yeah. So, Sumangal, basically, as you heard from Kaushik, we’ve commissioned the pellet plant and also the cold rolling mill without the Annealing and the Galvanising facilities, which are going to come up over the next 12 to 18 months. So basically, that’s on the cold rolling mill. In terms of volumes, will come up in stages. We are adding another caster in our steel mill shop, which will maybe give us a couple of hundred thousand tonnes this year, because we are — we will better utilize the existing blast furnace.

But the new blast furnace will not have any impact on this financial year, it will have some impact in the next financial year, because it is expected to come around March-April as of now. So that’s a 5 million tonne blast furnace. So you will see some impact of that benefit accruing next year. But the full advantage of volumes will come in FY ’26, I guess, right, because you will get some benefit of volume in FY ’25 and most of that 5 million in FY ’26. Pellet plant will help us bring down the cost, the cold rolling mill will helps us add value and the blast furnace will help us add the volume.

Sumangal Nevatia — Kotak Securities — Analyst

Understood. That’s very clear. Thank you. My second question is on the prices, both India and Europe. If you could just guide what are we looking at in terms of 1Q versus the previous quarter? And also in terms of cost, how are the costs moving? Especially with Europe, we see that the spreads have improved quite dramatically. So do we expect again, I mean, breakeven kind of profitability in the coming quarters?

T V Narendran — Chief Executive Officer & Managing Director

Yeah. So Sumangal, as far as India is concerned, we are expecting this quarter to be about INR1,000 to INR1,200 higher per tonne compared to the last quarter. It’s still — market is still looking for some direction, so keeping that in mind, this is what we feel. In terms of Europe, it’s going to be about GBP15 per tonne higher this quarter over last quarter. But I think I would like to comment a little bit on the cost side. So the coal costs are going to be higher this quarter compared to last quarter, both for India and Europe because see, you will be consuming what was bought a few months back. So the benefits of lower coal price will accrue to Q2 more than Q1, so coal costs are expected to be about $10, $10 to $15 at least higher in both places.

In Europe, as Koushik mentioned, we have not got the benefit as yet of gas prices dropping, because some of it are the hedges that we’ve done in the past, which benefited us last year, but hence will not benefit us this year, but will play out over the next two quarters. So as cost — actual cost versus the — what you call, the spot prices will converge maybe in Q2, Q3 more towards Q3. So that’s the second comment I want to make.

Third comment I want to make is, Q1 volumes will be lower than Q4. So I just want to want to keep — want you to keep that in mind, because in India, we’ve had a few shutdowns. In Europe, while the production will be lower because one last blast furnace is down this quarter, but we will use up the slabs. So we will not have the cost advantage that you would have when you’re running full out. The deliveries will be of slab which were actually produced last year. So to that extent, it will also reflect a bit of hyper. So while these spreads are — the fell spreads may not increase as much as we would have liked it to this quarter, I would say we — pretty much similar levels, volumes will be lower.

Sumangal Nevatia — Kotak Securities — Analyst

Got it. Got it. And just one last question, if I may. On this discussion with the UK government, I heard the interview that when you’re saying that there’s not much progress. But just want to understand when is the plant reaching end of life. And what is our strategy? I mean, do we shut the plant if we are not satisfied with the support? And what timeline are we looking at towards the final decision, because we’ve been hearing about this negotiation since quite some time now. So any specific timeline you would like to guide, sir?

T V Narendran — Chief Executive Officer & Managing Director

So basically the assets, the heavy — so there are two types of assets. The downstream assets are fine. It’s more the upstream assets which are reaching end of life. And those assets are reaching end of life in the next 12 to 24 months. So basically whenever we feel it is unsafe to run the operation in discussion with all the stakeholders, we will have to take that call. This is assuming nothing comes out of any of these discussions or nothing close to what we want comes out of any of these discussions. So that’s where it is, so in some sense, we will have to take a call within the next 12 to 24 months on the heavy end if there is no support from the government.

Sumangal Nevatia — Kotak Securities — Analyst

Yeah. Got it. Thank you and all the best. Yeah.

Operator

The next question is from Amit Dixit of ICICI Securities. Please go ahead.

Amit, we are unable to hear you. We request you to please send in your question via chat. We will now move on to our next question.

The next question is from Prashanth KP of Emkay Global. Prashanth, please go ahead.

Prashanth KP — Emkay Global — Analyst

Congratulations for the good set of numbers, on the India front. Sir, my question is regarding the European operations. Now, it’s been 15 years, we’ve done all the hard work, based on the integrity, commitment, and compassion, altogether. Now we are in a situation where in UK as well as in Netherlands in UK we either need it for the end-of-life situation or in Netherlands for the relining. And then the transition [Phonetic] of one of the blast furnaces and later for the next one. So eventually over the [Technical Issues] we will need government help in both of the countries.

And sir, if we closely look at what — the situation, we may be in a situation, wherein the government will only — will calibrate the help such that even if we are making good margins, they will calibrate their help, so that we never make any free cash flow at all, maybe for the next 20, 25 quarters if you look ahead. So in this situation, is it not a good idea to say quits. We have given all our blood and energy. So is it not a time to say quits, hasn’t it?

T V Narendran — Chief Executive Officer & Managing Director

So, Prashanth, couple of comments, right. I mean, firstly, I think we need to separate the Netherlands and the UK businesses, because they are very differently positioned. The Dutch business has traditionally been one of the strongest steel businesses in Europe, may not have been so visible, because it’s always under Tata Steel Europe. But just to give you a sense, last 15 years, the Dutch business has not had to seek any support from the India side and has been able to take care of its own needs. And we expect it to continue to do so even the year which has gone by is an EBITDA positive year, a cash positive year. But obviously, not in all quarters. And because of the blast furnace relining, we have a challenging quarter or two. But fundamentally the business is strong.

Even if we were to transition, yes, we need support from the government, but also the Dutch business generates its own free cash flows, unlike the UK business. So the government support is important, but also because other governments are supporting other steel companies, so we also want to make sure this as close to a level playing field as possible. So for those reasons, we will seek support from the government, but it’s not like it is in the UK, where the cash flows of the business don’t support the transition, the cash flows of the business don’t support investment in the end-of-life assets. So there the call is in some sense more urgent and we will, like I said, we have to discuss with all the stakeholders, including the unions and everybody else and we will take the right call at the right time.

Koushik, I don’t know if you want to add anything to my response here.

Koushik Chatterjee — Executive Director & Chief Financial Officer

No, that’s fine. I think what you have summarized is the most relevant. I think these are two different businesses, which will have two different paths. As Naren mentioned, he’s actually giving timeline of 12 to 24 months. So I’m sure we will come back to you when the time comes and talk about our plans in detail.

Prashanth KP — Emkay Global — Analyst

Sure, sir. Sir, my second question and just before that sir, the reason I clubbed both these together is that, so just for UK, there may not any takers. Only if we put them together as a jodi, they might be some interested suitors. That’s the reason I clubbed the two together. Sir, the second question is regarding — now given where coking coal costs are and the other cost structure is, are we — can we expect some more working capital release in the coming couple of quarters?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Yeah. I think we have seen a significant working capital release in the last quarter. We are watchful about it, but we are taking — not just depending on the price, but also on the efficiency factors on working capital. So each of the sites, each of the units, and on consolidated basis, we are looking as to how to drive working capital even better, because, I think some of our working capital elements like debtors, etc are really at the lowest level. But given the long supply chain, especially in Europe and elsewhere, we will look at working capital release through the year. This quarter also, when in Netherlands they would release the slab stocks for the sales, there would be some release. So we are — working capital is high on the agenda, because that’s something that can generate internal cash flows for the business.

Prashanth KP — Emkay Global — Analyst

Understood, sir. And thanks and wish you all the best, sir.

T V Narendran — Chief Executive Officer & Managing Director

Thank you.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Thank you.

Operator

The next question is from Pinakin Parekh of JPMorgan. Please go ahead.

Pinakin Parekh — JPMorgan — Analyst

Hello. Just wanted clarification in Europe. What has been the cash burn at Europe over the second half of FY ’23 between UK and Europe? Hello, am I audible?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Yes. You are. So [Speech Overlap]

Pinakin Parekh — JPMorgan — Analyst

Yeah, sure.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Go ahead, Pinakin.

Pinakin Parekh — JPMorgan — Analyst

I just wanted to understand what has been the cash burn in Europe between UK and Netherlands in the second half of fiscal ’23. So the interest payments, the capex, the inventory build, what would have been the total cash loss over there?

Koushik Chatterjee — Executive Director & Chief Financial Officer

So, in the UK, we normally have a burn of roughly about GBP100 million to GBP150 million in six months’ time. Whereas in Netherlands actually they are sitting on a cash of about EUR600 million. So there is no cash burn as such from Netherlands. Of course, when there are cycles of when energy prices increase, they will draw on working capital, etc. But otherwise, they are sitting pretty on more than EUR0.5 billion of cash.

Pinakin Parekh — JPMorgan — Analyst

And just to continue, for FY ’24 the CapEx guidance is INR16,000 crores consol, INR10,000 crores standalone, so that implies probably INR6,000 crores. Now how much of that will be in Europe and as a consol entity, how much would be — Europe be able to fund of that capex and how much will be required from India?

Koushik Chatterjee — Executive Director & Chief Financial Officer

No, so let me explain. I said INR10,000 crore is Standalone India, which is Tata Steel Limited, which — of which about 70% would be on the Kalinganagar project and 30% will be sustenance and other projects. And when I say Kalinganagar, I’m also including the raw materials, which are linked to Kalinganagar. So that’s the proportion as far as India is concerned — Standalone is concerned. When I’m — as I said, there are other Indian subsidiaries which are actually on an expansion mode, be it, Tinplate Company, be it Metaliks and others. So that’s about INR2,000 crores and all of them are value accretive.

The Tata Steel Netherlands is going to spend about INR3,000 crores, and this will be spent completely on their own. Of the INR3,000 crores, INR1,100 crores is kind of one-off in the blast furnace reline, and the rest of it is actually sustenance, environment and improvement projects. And all of this will be spent by Netherlands from its own cash. As far as UK is concerned, we are somewhere between say INR600 crores to INR800 crores, which is again the critical capex license to operate safety, compliance and so on. So this is broadly the mix that you see as far as the INR16,000 crores is concerned.

Pinakin Parekh — JPMorgan — Analyst

Thank you. And just lastly, on the UK, one of the key investor concerns we get is that, what kind of shock can a Tata Steel shareholder expect in 12 to 24 months from UK? What are the extremes in terms of capital support, which will be required if either the Company goes ahead to fund their new investment or it has to shut down operations? Is it the hundreds of millions of pounds number, is it billions of pounds, is that uncertainty which is really creating concern? Can you give us some color over there?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Yeah, surely. So I think, as Naren mentioned that it is not one bucket, it is the downstream assets or good assets, the distribution is an important part of the UK market, that’s good. And there are other value-added products, which are — which comes out from the downstream. So — and they are not reaching end-of-life, they can certainly continue. When we’re looking at the upstream facilities, I certainly think it is hundreds of millions and not billions, that much of a point I can make.

And secondly, it is also a question of getting an orderly — addressing it in an orderly manner. And therefore, it’s not a shock that we would be looking at, at least from a cash flow point of view. But it is how do you orderly address that issue depending on the conversations that happens with various stakeholders and which includes the government, which includes the unions and other stakeholders. And we will have to find an alternative where the volumes continue from a downstream point of view. If there is a solution to it, which comes in between, we will see as to how it has to be. But any incremental investment on a new asset will have to be value accretive, it cannot be one which does not have an investment case.

Pinakin Parekh — JPMorgan — Analyst

Understood. That’s very clear. And just lastly, the Company goes back to deleveraging, but maybe you — I missed the target. But can we expect back to the old target of $1 billion a year?

Koushik Chatterjee — Executive Director & Chief Financial Officer

I mentioned that. I think that is the — last year’s volatility in performance and the markets etc meant that we had to hunker down on creating the cash flows, and also we did that Neelachal acquisition, which itself was about INR11,000 crores, along with some of the downstream ferro alloys business. So all taken together, it was INR12,000 crores. So we expect to resume the same this year at about INR8,300 crores, about $1 billion for the full year. It may not be equally paced across the year, it will be more H2 number — H2 period when we will have the ability, because just now honestly, our biggest priority is to allocate capital for Tata Steel Kalinganagar, because that is the most value-accretive capital deployment that we can have at this point of time.

Pinakin Parekh — JPMorgan — Analyst

Understood. Thank you very much, sir.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Thank you.

Operator

The next question is from Satyadeep Jain of Ambit. Please go ahead.

Satyadeep Jain — Ambit Capital — Analyst

Hi. Am I audible?

T V Narendran — Chief Executive Officer & Managing Director

Yeah.

Satyadeep Jain — Ambit Capital — Analyst

Couple of questions. Firstly, on Europe, I think in the accounts it’s mentioned that TS Global Holdings is looking to provide letter of comfort on refinancing of UK debt, given we are looking at different opportunities and options in the next 12 to 24 months. Would it be prudent to take on that debt and refinance the TS Global Holdings, what’s the thought behind that?

And tied to that is, you — mentioning that the downstream assets are in a much better shape. I understand the conversations with the government, whatever the headline figures are of about GBP1 billion to GBP2 billion are tied to some support for downstream also that kind of figure I’m guessing cannot be just for upstream. If downstream assets are in good shape, does the Company need that support from the government for downstream also, or is support for upstream sufficient, that’s the first question on Tata Steel Limited.

Koushik Chatterjee — Executive Director & Chief Financial Officer

So if I can take this question, Naren, then —

T V Narendran — Chief Executive Officer & Managing Director

Yeah.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Fundamentally, the letter of comfort is not something new. It has — first of all, all of the debt is reflected in the consolidated balance sheet. So it’s not a new debt that we are taking on. And over the last few years, as we’ve been deleveraging, especially in ’20-’21 and ’21-’22, we have actually paid off the debt from the overseas subsidiaries and that has been our focus. Because, we — that’s the weaker part of the business from a cash flow point of view, and therefore those debt has been taken out as much as we could. So that’s — what we have is the remnant of that debt which originally was much larger. And this letter of comfort is more from a going concern point of view, audit requirements, etc. And honestly, we have supported that company for 15 years. So this is not going to add any additional burden on Tata Steel, because it’s the debt which is already reflected in Tata Steel books. So one shouldn’t kind of worry about it, even when we look at the orderly transition, this debt is essentially Tata Steel debt.

Second part of it is, you talked about the government support on downstream, etc. Actually, what we have asked the government is a full kit, which is upstream, midstream and downstream. That’s — if this has to transit, it has to transit through the EAF route, and that EAF includes a steel making, it includes the TSCR, which the hot strip mill and the downstream will continue. So it is the upstream and midstream, which will then feed into the downstream. And therefore, this GBP1 billion to GBP2 billion is — not GBP1 billion, it is more than GBP1 billion. And that project size was an integrated project, it was not just parts of the project. So I don’t know if I have been able to clarify. But fundamentally, it’s been a new configuration in an integrated manner.

Satyadeep Jain — Ambit Capital — Analyst

Just a clarification question on the first part. We do understand that Tata Steel — TS Global Holdings had historically provided a letter of comfort, refinance certain debt. But given you are now looking at a situation where there could be a hard decision maybe 12 to 24 months down the line, would it be prudent to take on the debt at the TS Global Holdings or keep that debt at TS UK and then depending on what that action is that debt — those debt holders can also bear that liability or whatever that is based on that decision? Or what is the thought process behind refinancing that debt?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Yeah. No, I think — and that’s why I stressed upon the point on orderly transition in whichever way we do. And it is — these debt are essentially debt out of our relationship banks, and we have taken the debt over many years. And one of the things that Tata Steel and indeed Tata Group doesn’t do is to leave the lenders in the lurch. So I think that is something which is fundamental. You can say that, how do you minimize the exposure by pairing of the debt or pairing of the liabilities that you have, which is what we’re working on at this point of time. But I think it would be unfair for lenders to kind of bear this as a part of it. And therefore, we are typically principally always in the zone where we honor the stakeholders who have provided capital.

Satyadeep Jain — Ambit Capital — Analyst

Fair enough. Sir, second question on the capex, of the INR10,000 crore you are looking at KPO2 — INR7,000 crores, let’s say, for KPO2 in FY ’24. How much has been spent on KPO2 in the last maybe two odd years, including the budgeted amount you’re looking at for FY ’24? Is there any capital cost inflation compared to initial estimates or is it largely in line? And where is that — there is a lot of capacity coming online in flat steel in the next two years. And given Europe is also looking at Carbon Border Adjustment Tax, do you think — where do you think the outlet for that — all that capacity for flat steel could be, which markets could you be looking at for that product?

T V Narendran — Chief Executive Officer & Managing Director

I’ll answer the second part and Koushik can address the first part on how much we spent so far on Kalinganagar. So, if you look at Kalinganagar 5 million expansion, there is a 2.2 million tonne cold rolling mill coming with it. So actually, we will go through a time when we’ll have less HR than we’ve had, because most of the HR will get converted into cold roll. And we think the cold rolled market will continue to be strong because of auto demand and many other cold rolled applications. So the incremental HR that we will sell even after the expansion is not significant.

Secondly, we’ve always sold 85% of what we produce or oftentimes 90% of what we produce in the domestic market. And if the domestic market is growing at 7 million tonnes a year or 8 million tonnes a year, then again, this incremental volume that we add, we don’t see much of a problem. I know others are also adding capacity, but I think we are quite confident about our reach and equity and relationships, and product pipeline, etc. So I don’t see a volume pressure, exports will always be exercised more as a strategic option for us, 10% to 15%. But balance should not be a problem for us to sell in the domestic market.

Yeah, Koushik?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Yeah. So I think the first, in the last few years, we have spent about INR17,000 crores on the Kalinganagar expansion; of which, about INR6,500 was in the last financial year. So we will do the similar numbers in this financial year. And the project is broadly in line, I think, the issue is more in terms of we had slowed down the project for a year or two, but other than that, it’s in line.

Operator

The next question is from Alok Deora of Motilal Oswal. Please go ahead.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Seems like Alok is not audible. So maybe we go to the next one.

Operator

Hello. Alok, can you hear us?

Satyadeep Jain — Ambit Capital — Analyst

Yes.

Operator

Please go ahead.

Alok Deora — Motilal Oswal — Analyst

Yeah. Just had a couple of questions. First is, on coking coal. So what would — what was our consolidation cost for the quarter? And how do we see that? I think you mentioned about $10 higher for the first quarter, but with the current pricing now at around below $250, what is the price — what is the benefit we’re looking at in the second quarter?

T V Narendran — Chief Executive Officer & Managing Director

Yeah. So, Alok, the coking coal, if I look at it from an India point of view, for fourth quarter, it was around $267, I think consumption, and now it will be around $277. These are FOB prices actually, so you need to add the freight. So basically we are seeing $10 increase in Q1, and — but if you look at the purchase, we are buying on an average, I mean, at least so far this quarter at about $25 less than what we bought last quarter. So that will certainly accrue and if the coal prices keep softening, then, of course, it will accrue more. So I think minimum of $25 drop for next quarter, and hopefully more if the coal price continues to stay soft. This is for India. And for Europe, it’s about $7 higher for this quarter compared to last quarter and purchasing is at about $35 lower than last quarter so far.

Alok Deora — Motilal Oswal — Analyst

Sure. And also if you could just indicate, we have seen pretty sharp correction in global steel prices across several geographies in the last couple of weeks. So what’s the sense you’re getting and how do you see the price shaping up in near-to-medium term? I mean, we have seen pretty sharp cuts across the board, be it iron ore, coking coal, steel. So I mean, just your thoughts on that would be helpful.

T V Narendran — Chief Executive Officer & Managing Director

Yeah. So obviously, a lot depends on what’s happening in China. So I think if I look at the last few months after China removed its restrictions in December, there was a lot of burst of optimism and everyone thought the Chinese economy is going to take off and which was reflected in steel prices and everything else, coking coal prices, everything else. But I think few things have happened since then. One is, of course, China is expected to grow at 5%-plus. But China is shifting more and more to consumption-led growth and which need not be as steel intensive as the traditional investment-led growth that China had.

Second point is, as Chinese industry, steel industry particularly ramped up, in anticipation of growing demand, they were almost producing at the highest level. If I remember right, they produced 96 million tonnes or something in March and they exported and hence they also exported 8 million tonnes, which is higher than what they’ve done for a long time, which had an impact on the global sentiment, because suddenly an extra 2 million tonnes of steel coming out of China at a point in time when the rest of the world was still a bit fragile didn’t help the sentiment.

The coal prices, etc, kept dropping because, firstly, I think China has also developed other sources for coal in the absence of buying coal from Australia. So it’s not necessary that they need to buy all the coal that they used to buy earlier from Australia. So we’ve seen coal prices a bit soft. And when coal and iron ore drops, there is a — and this happened in China, steel prices dropped because the margins were reasonably good. But now I think where we are currently, there’s not much margin for the steel companies in China. So I don’t expect this level of exports or prices continuing to drop at these kind of coal prices. If coal prices go below $200, that’s a different matter, right?

Globally, of course, input costs are settling in, like we said, gas prices in Europe, energy, electricity prices, but we also feel that as some of those prices dropped, some of the user industries who were suffering in Europe because of very high energy prices will have a slightly better situation. So while overall, yes, there is still some fragility, but I think we feel that this year should end up better than last year for us, because overall we don’t see the volatility that we saw last year when coal prices went to $650 and then dropped and steel prices went to $800, $900 and then dropped. It’s a little bit more within the normal band of $500 to $700 that is fluctuating.

Alok Deora — Motilal Oswal — Analyst

Sure, sir. That’s all from my side. Thank you and all the best.

T V Narendran — Chief Executive Officer & Managing Director

Thanks.

Operator

The next question is from Vishnu Kumar of Avendus Spark. Please go ahead.

Vishnu Kumar — Spark Capital Advisors — Analyst

Hello.

Operator

Yeah, Vishnu. We can hear you.

Vishnu Kumar — Spark Capital Advisors — Analyst

Hi. This is Vishnu from Spark, sir. I just wanted to understand what will be the effective production that we be expecting from US this year considering the [Indecipherable] duties.

T V Narendran — Chief Executive Officer & Managing Director

FY ’24 you mean compared to FY ’23?

Vishnu Kumar — Spark Capital Advisors — Analyst

Yeah. FY ’24, that’s right.

T V Narendran — Chief Executive Officer & Managing Director

Yeah. FY ’24 will be 1.5 million higher than FY ’23 on a consolidated basis.

Vishnu Kumar — Spark Capital Advisors — Analyst

Specifically for Europe, given that we will be taking some shutdown for this maintenance.

T V Narendran — Chief Executive Officer & Managing Director

Yeah. So I’m talking of deliveries, so while we had a production shutdown in Europe, actually last year we produced more and sold less, because some of what we produced were slabs that we stocked up. This year in Europe, we will — particularly, in Netherlands, we will produce less obviously because the blast furnace will be down for four months, but we will sell more than we produce, because we’ll roll those slabs into hot rolled coils and sell, and which will release working capital as well as give us more sales and production. So when I say 1.5 million, it is sales, not production. And half of that will be in Europe and half of that will be in India.

Operator

The next question is from Amit Murarka of Axis Capital. Please go ahead.

Amit Murarka — Axis Capital — Analyst

Good afternoon. Sir, just on Europe again, like we used to — like we were used to maintain — that is not going to be any cash support from India. But now with this — the TS Holdings providing some support to the previous TS UK debt, is it essentially like some change in policy or stance that we are kind of having on that now?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Amit, this cash — this letter of support has been in place for possibly a decade. It’s not something — it is neither a guarantee nor a binding letter of comfort. This is, as I said earlier, it is required for audit purposes, because when you do the going concern testing, there are various stress tests that are done. And one of the stress tests is that if the company does not have the ability to support or refinance the loan that comes due — and these loans are fundamentally working capital loans, so if that is — that comes up for renewal, etc, then, will there be a support from Tata Steel. And that is an intent letter and not a guarantee. So that is — nothing has changed between what has been given in the last decade versus today. It’s more explicit today, because that’s the part of the stress test that has been done.

So I think there is no change in policy. We focus on the businesses to ensure that they are cash neutral to cash positive. In Netherlands case, the focus is to push them towards being or the way the plans are done is to become cash positive, which is one of the reasons why I mentioned that they are sitting on EUR0.5 billion of free cash. And in case of UK, it is essentially working within the means to be cash neutral, so that is how we look at it. Pending the outcome of the discussions with the government and a more strategic call on the UK upstream, this is the status that has been carrying on.

Amit Murarka — Axis Capital — Analyst

Okay, understood. And also like I had a question on the India Standalone business from a Q4 perspective. So this quarter we have seen quite a sharp drop in our RM cost on a Q-o-Q basis, while coking coal is down a bit. But it still doesn’t explain the big drop on a Q-o-Q basis that we have seen. So could you help better understand that fall?

Koushik Chatterjee — Executive Director & Chief Financial Officer

One was royalty I know, that’s been the iron ore royalty, which is the re-notified prices of the IBM. But we can explain it and give it to you subsequently.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

It’s largely — yeah, it’s largely that. So we have the royalties coming just with a lag. And that’s why you’re seeing some of the benefit in this quarter.

Amit Murarka — Axis Capital — Analyst

And could you quantify that, because I guess this will be a bit of a one-off in nature in that sense then?

Koushik Chatterjee — Executive Director & Chief Financial Officer

No, no, it’s not one-off in nature. It goes through the ups and down, the IBM prices are notified with a lag. And then that affects it, so at times, it goes up, at times it goes down. It is also benchmarked to the international prices, but there is a significant lag associated with it, and that’s what it — what happens. Unless the royalty rates are revised, which is a very different thing, which is what has happened in the past, the royalty rates have actually gone up significantly in the last few years, but the benchmark rate also moves along with a lag. And I think that is the — that is what can happen every quarter or anytime. So that is what you’re seeing at this point of time. Maybe, Samita, you can give the exact number offline.

Amit Murarka — Axis Capital — Analyst

Okay. Sure. Thank you. Thanks.

Operator

The next question is from Ritesh Shah of Investec. Please go ahead.

Ritesh Shah — Investec — Analyst

Hello? Am I audible?

T V Narendran — Chief Executive Officer & Managing Director

Yes, please.

Ritesh Shah — Investec — Analyst

Yeah. Sir, first question is on ESG. Sir, can you — so if I go back to September ’21, I think the Company had a release stating IJmuiden operations opts — to opt for hydrogen-based DRI. And the current press release, we have indicated about injecting hydrogen into blast furnace. So just wanted to understand thought process on hydrogen-based DRI for IJmuiden economics gas versus green hydrogen. And the same thing on what scale are we doing at Jamshedpur operations right now? That’s the first question.

T V Narendran — Chief Executive Officer & Managing Director

Okay. Should I answer that?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Yes.

T V Narendran — Chief Executive Officer & Managing Director

Yeah. Okay. So when you look at making steel with a lower carbon footprint, there’s going to be a bouquet of solutions and it depends on the context and the geography and the regulations. So if you look at Europe, the natural progression is coal to gas to hydrogen. And there’s a lot of hydrogen infrastructure being built, a lot of work is going on and so the whole plan in IJmuiden is convert from coal to gas. And then when hydrogen is available, convert from gas to hydrogen. So which means you eventually shut down the blast furnaces and build gas-based DRI production, where you will substitute the gas with hydrogen.

So, when you look at India, the challenge we have is most of the steel capacity, not only for us but for the industry will be in Eastern India, because that’s where the iron ore is. And we don’t see too much of availability of gas, at least, at the scale at which we want or hydrogen in the near future, right? It may be 10 years later, 15 years later, we don’t know. So till such time, we cannot just be static and hence we are looking at various other options.

So injecting hydrogen into a blast furnace is addressing the problem to some extent. You can’t replace the coal with hydrogen in the blast furnace, you can replace some of what we call the PCI with the hydrogen. And even that needs to be done very carefully, because — and that’s why the amount of hydrogen we injected was higher than what anybody else has done. And that’s why it’s caught a lot attention globally. So we have in our E furnace which is a 500 and 550 cubic meter blast furnace, a smaller blast furnace in Jamshedpur, injected hydrogen for about four to five days and which gives us a lot of data and a lot of information which helps us go to the next level of scale.

So in India, we will keep exploring these options to reduce the carbon footprint of the blast furnace route. In addition, of course, as you know, we are also setting up a scrap-based recycling-based unit in Ludhiana, which will be more about recycling and no coal etc. So — but Europe, the transition particularly in Netherlands will be in this direction, more replacing the blast furnace.

Ritesh Shah — Investec — Analyst

Sir, Netherlands, I went through some research. Again, we are — whatever we have indicated in past, it’s contingent to the government support. So also a leve of confidence that we will have some support from the government, not that we see something what’s happening in UK. So what gives us comfort? So we understand it’s one of the best furnaces on carbon intensity.

T V Narendran — Chief Executive Officer & Managing Director

So, there are two, three things. One is, of course, the conversations from the government indicate that they will be supportive. But what is the extent of support, we haven’t concluded yet.

Secondly, our transition to hydrogen is also very important from the Dutch government’s hydrogen ecosystem point of view, because we will have one of the biggest offtakes of hydrogen if we convert to a hydrogen-based usage. So when the Dutch government is building infrastructure for hydrogen, we are a very important part of the plans.

Thirdly, the Dutch asset also generates — it’s always been free cash flow positive unlike the UK. So the Dutch assets has its own ability to support a lot of the transition, of course, we need support from the government. But the situation is not as dire as one would have seen in the UK, where the cash flows of the business don’t support the transition at all. Here the cash flows of the business can also support the transition.

Ritesh Shah — Investec — Analyst

Sure. I just have one question quickly on P&L and one on balance sheet. This is for Koushik sir. Sir, you indicated NSR increased by INR1,700 rupees on a sequential basis. If I look at the blended number, if it was simple math, the increase comes at INR4,500 per tonne. So how should we look at the gap of INR4,500 versus INR1,700? This is on a per tonne basis sequentially.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Which slide are you referring to?

Ritesh Shah — Investec — Analyst

Sir, this is — probably, I can take it offline. I’ll check with Hriday sir or Pavan.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah. Look, Ritesh, maybe we will speak because hopefully if you look at my income from operations, it’s INR3,500, but that is the entire income. But we are just talking about NR when we’re talking about INR1,700.

Ritesh Shah — Investec — Analyst

Okay.

Koushik Chatterjee — Executive Director & Chief Financial Officer

The income is INR3,677. Maybe we’ll break it up between the NR and the other incomes.

Ritesh Shah — Investec — Analyst

Sure. And sir, last question is what prompted impairments for UK right now? And how should we look at the next testing, what will prompt more impairments? We just checked the balance sheet I think the exposure via loans and investments is upwards of INR20,000 crores. So how should we look at this number going forward?

Koushik Chatterjee — Executive Director & Chief Financial Officer

So, this is part of the — again, the year-end as per the accounting standards, there is always a review of the investments across any company, I guess. But in our case, we do it either on a six months basis or a year-end basis and that is based on the value in use assessment of that unit. And as Naren mentioned that as the business would be — the part of the business, the upstream and the midstream businesses coming towards end of life in some time, we have to moderate the future cash flows and earnings and cost and so on. And that was the basis on which the investment, the PPE in Europe, in UK, in particular has been written off many years back to a very low number compared to its original number in 2016 or ’17.

So what remains is the investment in the standalone books of Tata Steel, and that investment has been calibrated down by about INR1,100 crores in the standalone books. As we move forward, this will get tested again at either quarter-end or six months end. The assumptions will not change much in quarter-to-quarter, but certainly six months period it will be reassessed and that’s the discussions which we have internally along with the auditors. And the outcome of that will have to come about. So as I said, the PPE numbers are not something which is very significant, it is there, but it has been significantly impaired over the last six, seven years. And we’ve done deep restructuring of the assets also. So this is something that will continue to be assessed at every period end.

Ritesh Shah — Investec — Analyst

Sure. This is helpful. Thank you so much.

Operator

The next question is from Kirtan Mehta of BOB Caps. Please go ahead.

Kirtan Mehta — BOB Capital Markets — Analyst

Thank you, sir, for giving this opportunity. Couple of questions from my side. Just to take on the books, would you be able to clarify the investment numbers that we have in the books of India towards UK and Europe. Would it be possible to sort of give us that breakup as well?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Well, you have to look at the balance sheet when it comes and see the investment numbers, those are — those investment numbers are largely reflecting Europe. So I think that is how we give it. We don’t give UK and Europe separately, because it is flowing from Tata Steel India into the overseas holding company, which essentially holds these two businesses apart from Canada.

Kirtan Mehta — BOB Capital Markets — Analyst

Right. And just one more thing in terms of — there has been a mention about the delay in ramp up of cold mill at Ijmuiden. Would you be able to sort of clarify its capacity and potential contribution to the margin for the Netherlands plant once it comes up?

T V Narendran — Chief Executive Officer & Managing Director

So, it’s an existing plant which had an upgrade. I think the capacity is about 1.6 million, if I remember right. So it’s an existing plant which is being upgraded. And there were some problems post-upgrade, and one of the subcontractors who was involved went bankrupt and so there had to be alternate measures taken etc, etc. So there were some complications because of which the ramp-up post the upgrade did not happen at the speed that we had wanted. But now we are working very closely with the main contractor and we are improving week-on-week. We had to announce force majeure, because that mill was supplying to a lot of auto customers, so that we gave them enough notice to plan alternatives. Now I think we are close to a stage where we will withdraw the force majeure, because there’s a lot more stability. So it was more a mix impact than a volume impact, because if you didn’t produce cold rolled, then you sold it as hot rolled or whatever. So I think the impact, maybe Samita can clarify. I think it was about 70 million a quarter or something like that.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah. It was partly reflected in the last quarter and also partly [Speech Overlap]

T V Narendran — Chief Executive Officer & Managing Director

So that’s also part of the reasons why the numbers were not so great for the last two quarters. And because the product mix was worse than what we would have normally done.

Kirtan Mehta — BOB Capital Markets — Analyst

Right. Understood. One more question, if I may. In terms of the India business, we recently did around INR16,000 per tonne on the standalone operations. When we want to look at this number in the sustainable context or more in terms of the average margin over the cycle, how far we are from the cycle and the margin? How should we think that margin would change as we commission the pellet plant as well as the cold rolled mill there?

T V Narendran — Chief Executive Officer & Managing Director

So normally, we look at a long-term margin of around INR14,000 to INR15,000, that’s how we, when we plan long-term, we look at it because that’s been our numbers, if you look at the worst quarters, not on a quarterly basis but on a annual basis, right, so it fluctuates. We’ve seen INR30,000, we’ve seen INR7,000. So, that — and so if you see last year, despite all the challenges, we are still in that range, right? I’m talking about the standalone, not the consolidated. So pretty much INR15,000 is close to the range, slightly higher than the range.

Kirtan Mehta — BOB Capital Markets — Analyst

Right. And would you be able to add color, how this sustainable range of margin of INR15,000 could change with the commissioning of the pellet plant as well as the cold rolled mill?

T V Narendran — Chief Executive Officer & Managing Director

Yeah. So obviously the pellet plant and cold rolling mill is impacting — the cold rolling mill is 2 million tonnes of value-add and a 21 million mix, right, and the pellet plant adding about 6 million tonnes of pellets. So pellet plant cost advantage depends on the pellet price. If the iron ore price is higher, then the gap is significantly higher. But I would say, typically INR800 crores to INR1,000 crores a year is what we would get a benefit of the pellet plant. And the cold rolling mill, again, normally, if you look at it HRCR gap on a long-term basis, you would look at $100. So just now it is lower than that. So if the gap is lower, then the benefit is lower. But if you go on a $100 basis, and plus, I think the advantage you will have with this cold rolling mill is it will be really one of the most advanced cold rolling mills in the world. So in terms of the kind of product mix, it helps us get into the very high end auto, etc. So it gives us a high end of the margin range. So it will — both of these will be value accretive, will help push the EBITDAs beyond INR15,000 on a like-to-like basis.

Operator

The next question is from from Mudit Bhandari of IIFL. Please go ahead.

Mudit Bhandari — IIFL Capital — Analyst

[Technical Issues]

Operator

Mudit, we are unable to hear you clearly. We request you to please send in your questions via chat.

Now, I would like to hand over the conference to Ms. Samita Shah for chat questions. Over to you, ma’am.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah. Thanks, Panshuk. The first question is on the ramp-up of TSK Phase 2, which I think we have answered. So the other question on TSK Phase 2 is, how much raw material integration will be there, especially for coking coal and iron ore for this 5 million tonne expansion?

T V Narendran — Chief Executive Officer & Managing Director

Sorry Samita, I missed that. Can you just —

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah. So the question is on TSK Phase 2, what will be our material integration for the 5 million tonnes coking coal and iron ore?

T V Narendran — Chief Executive Officer & Managing Director

So, as far as iron ore is concerned, all the iron ore that we need we will produce ourselves. And so, we are fully integrated and the expansion of the the iron ore production continues. I think this year, we are around 36 million, 38 million tonnes. And we will keep — we are on track to expand as fast as the need of iron ore is concerned. The goal is not to buy any iron ore or pellets in the market.

Coaking coal, we are typically about 15% to 20% coverage, because we can’t expand in coal as fast as we can do in iron ore. We are in the middle of an expansion in West Bokaro, from the current level of about 6 million tonnes of raw coal to about 10 million tonnes, 6 million tonnes of raw coal means about 2.5 million tonnes of clean coal. So taking it up to about 4 million to 5 million tonnes of clean coal is what we are working on. But, by this time our steel-making capacity would have also grown. So 15% to 20% is the range at which we will be in for coal. Rest we are currently importing and we’ll continue to import.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. The next question was on coking coal consumption cost, which I think we have answered. There are lot of questions on Europe and TS UK. What is the rationale for the impairment right now? Can you quantify what is the value of investment on the books of Tata Steel? And what will be the volume of — at Europe after the restructuring that you’ve talked about? So I think the restructuring is what we talked about downstream, but these are some of the questions.

Koushik Chatterjee — Executive Director & Chief Financial Officer

So I clearly answered that question little while back, when I mentioned that the impairment is part of the annual exercise as per the accounting standards to look at investments. And this is being done effectively in a manner where the future cash flows and the value in use is tested against the carrying value. And depending on how the business performs, there will be triggers for looking at this potentially every quarter, if not every six months.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. The next question is how much coking coal do you expect to import for Indian operations in FY ’24? And how much of that will be through quarterly contracts?

T V Narendran — Chief Executive Officer & Managing Director

So, overall, we buy 15 million tonnes of coking coal, both for Europe and India. I would assume, India, if I were to look at — must be about 10 million, 12 million tonnes — sorry, 8 million tonnes or something like that. Yeah. Yeah, and how much would be quarterly contracts, Samita, you can check with Piyush and —

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah. So it’s largely quarterly, but we can come back.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Index based.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah. We can come back to you with the exact number. So there is a question around funding of UK. And I’ll just club some of the questions together. So given the impairment, how much funding do you expect to provide TS UK in FY ’24? And how much will your debt increase on funding to UK and the INR16,000 crore capex spend?

Koushik Chatterjee — Executive Director & Chief Financial Officer

So, as I mentioned earlier that first of all the impairment doesn’t trigger any funding, impairment is a non-cash charge of your investment. There is no cash impact on that. We are also — as I guided in the beginning that we are looking at starting the deleveraging process in — or rather restarting the process in FY ’24. It will be done more in the H2. We do have target about $1 billion to do that, which has been our long-term target and we will look forward to take as much as cash flows that we can towards deleveraging after we meet our cash flow requirements on capex, etc, and the INR16,000 crore capex is largely borne out of internal generation.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. Next question is, if we decide to close the UK business, what would be the one-time closure cost including the pension cost?

Koushik Chatterjee — Executive Director & Chief Financial Officer

So the pension is not going to be a cost at all, because that’s been taken care of. The closure cost or the restructuring costs, I would say, because we would certainly look at the downstream business. But the upstream, we will have to assess that, and that some assessment is being done as we speak. But it all depends on how the conversations with the government and stakeholders happen, because that’s a decision, which will happen after consultation with all stakeholders.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. The next question is on Kalinganagar. Could you share the total capex spent so far and the remaining capex? I think you answered this, but maybe the remaining.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Yeah. So I think we said INR17,000 crore has been spent, this year we will be spending about INR6,500 crores, INR7,000 crores, and thereafter, the numbers will be much smaller, maybe about another INR3,000 crores, INR4,000 crores.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. The next question is on NINL expansion. Could you share the timeline on the finalization of the 5 million tonne NINL expansion after completion of DFR? I’m not sure what DFR is, and getting Board approval?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Feasibility Report.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Feasibility Report.

T V Narendran — Chief Executive Officer & Managing Director

No, so basically our focus just now is on ramping it up, now that we’ve ramped up, hopefully in the second half of the year, we’re already doing the work on what should be the configuration, what are the assets. And during this financial year, we will go back to the Tata Steel Board with our proposal for the next expansion, so that we can get started on that soonest.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Okay. Thank you. The next question is on the working capital and the debt reduction. So it says inventory is still high, given that coking coal prices have cooled off. How much working capital unlocking is possible in H1 and does the $1 billion debt reduction guidance assume this working capital raise?

Koushik Chatterjee — Executive Director & Chief Financial Officer

Yeah, of course. I think the $1 billion debt reduction takes all sources of capital, which is working capital release, earnings and running the business across all geographies more tightly. So I think it is a confirmation that the working capital release will contribute to the debt reduction.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. The next question is on the interest cost. What has helped Tata Steel maintain interest cost in a reasonable range despite the sharp increase in benchmark rates and despite an increase in your gross debt?

Koushik Chatterjee — Executive Director & Chief Financial Officer

So one of the things that we have done is using the long-term short-term arbitrage through the year, which ensured that in spite of the increase in the benchmark rates, we have been able to hold on to it. In the previous years, the significant deleveraging has been one of the key aspects of ensuring that our interest rates are within control. And now with further deleveraging targeted during this year and for the years ahead, I think, we will ensure that the interest rates are within the control. Our interest coverage is at a healthy 5.2 times.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. The next question is on green hydrogen project. So, it says, the economics of the pilot injunction which you’ve done in India, what is the timeline — what are the economics and what is the timeline for hydrogen-based DRI at TSN? By when do you expect to do this?

T V Narendran — Chief Executive Officer & Managing Director

So as far as India experiment is concerned, obviously, it’s still early stages, smaller blast furnace, some injection we will study it, keep scaling it up. But there is a limit to how much hydrogen you can put into a blast furnace. I think, whoever is was working on it is trying to see how much of the PCI that we inject can be substituted with hydrogen. And we see that when we inject hydrogen, there is obviously a net benefit. You can bring down the coke rates by about 10%, 15%.

Obviously, the cost of that hydrogen, the hydrogen that we injected for instance in the blast furnace today in Jamshedpur has cost us about $12 a kilo. But if you bring it to maybe around even $4 or $5, you’ll have significant advantage. Of course, if you’re looking at using hydrogen and scale as a reductant to reduce DRI, then you’re looking at hydrogen to be made available at around $2 a kilo or less. And obviously, all this has to be green hydrogen if it has to make sense.

In Netherlands, there is a plan which has been submitted to the government. We are in conversation with the government, and our plan, as proposed to the government was to shut down one of the blast furnaces over the next year, convert it into gas-based DRI. So that by 2030 you have one blast furnace down and a gas-based or hydrogen-based DRI line. And by 2035, you have the other blast furnace down, so that you become a completely gas or hydrogen-based DRI production unit. So that’s the timeline, but once our conversation with the government moves to the next level, we will be able to give more definite timelines.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. There’s another question on hydrogen, so I’ll just take it right now. It says with regards to the trial of the hydrogen injection at Jamshedpur plant, by when does it look feasible to use hydrogen more widely for Indian operations? And has there been any government support to procure hydrogen at a cheaper cost?

T V Narendran — Chief Executive Officer & Managing Director

The answer for the second question is no. But yes, I think this was a big step, like we said, nobody else has injected too much hydrogen into a blast furnace, we did it over four, five days. So that itself is first in the world kind of thing. Some others have done it by mixing it with coke oven gas and injecting it. But whereas, we injected itself into the blast furnace. This is giving us more data, typically in process industry when you try out something new, you take it up step-by-step, because you want to see the implications of any change that you make in the process, particularly in terms of the energy balance and the constituents of what was inside a blast furnace. So, we’ll do it gradually. But I think it’s a big development, and let’s see how fast we can accelerate it.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. There’s a question on the merger of the subsidiaries. When do we expect the merger of Tata Steel Long Products to be completed? And can we expect any tax benefits from the merger?

Koushik Chatterjee — Executive Director & Chief Financial Officer

So the merger process is underway with the NCLT hearings and the first motions started. It will happen progressively for each of the companies. And the purpose of the merger is to drive synergies on all fronts. So we’ll see what other things that we can draw. Certainly, there are multiple synergies in the business case, which is why we are proceeding with the merger.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. There’s a question on NINL, on the iron ore mines. What is the status? Are these mines running?

T V Narendran — Chief Executive Officer & Managing Director

Yes, the mines are running, and are feeding the Neelachal plant. I think we are running the mines at an annualized rate of 1.5 million tonnes. So it’s — again, as the rest of the plant as it is, gone as per plan.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. One more question on India. If INR17,000 — this is on the capex spend and the CWIP on the balance sheet. So, it says if INR17,500 crores has been spent on KPO till date, the CWIP is about INR30,000 crores. So what accounts for the balance INR12,500 crores of CWIP as on March 31st of ’23?

Koushik Chatterjee — Executive Director & Chief Financial Officer

So, there are several other projects, including for KPO there are projects relating to the iron ore mines, the infrastructure around it, the augmentation of various capacities. So, it is a large part of those CWIPs are there, plus there are significant amount of sustenance capex, which is an ongoing scheme over five years in each of the facilities now, be it Jamshedpur or in Kalinganagar or Meramandali and so on. So the CWIP is, in a steel plant if you do a tracking, which has been growing, there are multiple projects that continue to grow both from a sustenance improvement perspective, as well as from a capacity growth perspective.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. Then there are questions around steel demand internationally, especially given what is happening in China. So I’ll just club a couple of questions. Are we seeing any production cuts in China as their demand has not picked up as expected? And what is your view on international steel markets this year? Do you see steel prices and demand subdued this year because of slowing economic growth and higher interest rates across the globe?

T V Narendran — Chief Executive Officer & Managing Director

So I think on the first one, what I read was that CSR did call actually in early-May or end-April to ask these producers to tone down because they were also concerned that if steel prices drop and everyone goes back into zero margin, then the business is not sustainable. So I think there’s already pressure on the Chinese steel producers to cut production to more reflect domestic demand. And I think while exports should go to 8 million, if they continue to export at that level, I’m sure there’ll be trade actions which will also follow. So I think that is the comment on the Chinese steel side.

In terms of globally, yes, on the demand side, a lot depends on what happens in China. India continues to be strong growth in demand. Europe, we expect things to slowly get better as energy cost goes up and helps the user industry and we also expect that the transition to other energy sources beyond Russia or transition to greener sources also will spur some investments. In the US, because of IRA, there’s a lot of investments happening. So we do see that as a positive impact.

Yes, rising interest rates typically are not good for steel demand. But I think some of the actions that I described suggest that we will have a — when I say better year, because last year itself, we saw so much volatility, it depends on which quarter you compare to. One data point I want to share is that, steel trade as a percentage of total steel production has been dropping over the years. So that is also positive because that means it’s likely to be less disruptive. I think it has come down from about 40% of steel production to about 30% of steel production now over the last 10 years. And this is largely to do with Chinese exports being more moderated and a lot more of regionalization of supply chains and value chains.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. Multiple questions on the steel market in India. Firstly, I think, we’ve said there will be slightly lower volumes in Q1. Are there any shutdowns? Is there — how do you see demand shaping up in the domestic market, specifically which sectors are you seeing growth? And thirdly, is there an impact of pre-election spend expected on steel demand?

T V Narendran — Chief Executive Officer & Managing Director

So, yes, Q1 every year normally has a lot of shutdowns, that’s normally the time when we plan a lot of our shutdowns. So we did have a lot of shutdowns in multiple sites. Nothing as big as the one we are having in Netherlands, but few days here and there. So that’s why the volumes of Q1, as I said, is about I think 400,000 tonnes less than for Q4, that is one.

In terms of demand, we still see auto is quite strong, commercial vehicles, passenger vehicles are strong, motorbikes are not back to where it was in 2019, but improving quarter-on-quarter. Export markets have been a little bit more subdued for two-wheelers, etc, tractors have been strong. If I look at construction, industrial construction is strong, the pre-engineered building customers have four, five months, six months order books. Infrastructure is strong, of course — and that’s an area where I expect some acceleration before the elections, so that the government can compete both at the central and state many of the projects which will have a positive impact on the public.

If I look at residential, it’s a bit of a mixed bag. And if I look at commercial, I think it was strong, but, of course, one needs to see the impact of tech on the overall commercial space. But generally, the sense we get is all shopping malls, and those kind of commercial spaces are quite strong. So overall, Indian demand is quite strong. I think the only part of Indian demand which is a bit fragile is Indian customers who are — Indian customers or Indian producers who are dependent on export markets. I’m talking about Indian customers of steel who may be exporting their products to the global markets. That’s the only area where the slowdown across the world may have a larger impact. Yeah. I think I’ve covered it.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah. And the third question was if there is any pre-election impact on steel demand.

T V Narendran — Chief Executive Officer & Managing Director

Yeah. So there I said, I believe in the infrastructure side, yes, there’s more and more acceleration, there is more and more push to complete projects, so that will certainly happen. So that’s right. If you talk to some of our bigger customers, they’re full up in orders, construction companies.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thank you. Some questions again on Europe. So Koushik maybe you could sort of talk about it a little more. Again, in terms of the impairment, what is the expectation for the future? How much more do we expect? Are there any triggers? Also a question in terms of what is the PPE — what is the gross debt PPE for Tata Steel Europe as of FY ’23? So a lot of questions around the impact likely and the Europe exposure.

Koushik Chatterjee — Executive Director & Chief Financial Officer

So, I think, I would only kind of try to articulate, it’s like looking into the future, but I would try to articulate that if and when a decision after consultation with all stakeholders going through the due process, we do come to a conclusion on the assets. At that point of time, it will certainly trigger a full review of the value in use of the business, because only the downstream will remain, whereas the upstream will not be there. And therefore the cash-generating unit will certainly have an impact of how much will be the impairment, it is likely to be more in the standalone, because that’s the investment carrying value.

As I mentioned a little while back that the consolidated impairment has been taken some years back on the PPE, as well as through the losses that have been over the years. So the standalone impact on a relative basis will be lower — the consolidated impact will be lower, the standalone impact will be higher. And that’s when the investment review will reflect on the numbers. These numbers are very hard to kind of predict and talk about because of the fact that at the time when the impairment actually happens, that’s the time when you do the full assessment of the numbers. As I said that we carry the overseas holding in the books of Tata Steel as in the investment numbers and that largely reflects IJmuiden and UK. In about large part of it is IJmuiden in Netherlands and some part of it in the UK. Maybe taking a guess it would be in the region of 65-35 kind of ratio.

And — but the other thing which I would like to say is any impairment, whenever triggered is a non-cash charge and therefore it will not have any cash impact. Other than any cost that is taken or undertaken for closure and that’s when Pinakin answered whether this is in hundreds of millions or is in many billions, I said it is in millions. And I think you should take comfort from that. And if that were to happen, then the residual business, the target will certainly be ensuring that that works on a cash-free basis.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Okay. Thank you. I think we have time for maybe one audio question, which we will take it before we end the call. Over to you, Panshuk.

Operator

Thank you, ma’am. The next question is from Ashish Jain of Macquarie. Ashish, please go ahead.

Ashish Jain — Macquarie — Analyst

Hello?

T V Narendran — Chief Executive Officer & Managing Director

Hi.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Yeah.

Ashish Jain — Macquarie — Analyst

So, Kaushik, I have just two quick questions. Firstly, you made a point that in the second-half UK had a loss of GBP100 million and GBP115 million cash loss. So what is — how are you funding those losses today?

Koushik Chatterjee — Executive Director & Chief Financial Officer

So we — it was not a cash loss, it was a cash, it was not a loss by itself. But it is — if I have a cash loss, I don’t have cash flows to fund my capex and so on. So just now it is being funded through the working capital route mostly because there are more securitization and more working capital arrangements, which provides the cash flow, it’s like a revolving credit, etc, which is what funds them and we stand behind them.

Ashish Jain — Macquarie — Analyst

But if I can just delve into this stand behind them thing a bit more means, in worst case, this will devolve on Tata Steel India? Is that the way to think about it or —

Koushik Chatterjee — Executive Director & Chief Financial Officer

[Speech Overlap] it will devolve on India.

Ashish Jain — Macquarie — Analyst

It will. Okay. Got it. Got it. And secondly, on Kalinganagar, I think Narendran spoke about it —

Koushik Chatterjee — Executive Director & Chief Financial Officer

One point I just want to mention, there is nothing called European balance sheet, Netherland balance sheet, India balance sheet, Tinplate balance sheet. There is only one balance sheet, which is Tata Steel balance sheet. So whatever is reflected in the consolidated debt of Tata Steel is for Tata Steel to service. It depends on wherever it is in the world. So I think that one — this must be clear. And that’s why I was answering that letter of comfort, etc. It is a conscious decision to carry on till we have an orderly decision to — one way or the other.

Similarly, when we are — the amount that is in the Netherlands balance sheet of EUR600 million, it is reflected in the total cash. So it is one balance sheet and one cash flow that drives Tata Steel. So we don’t run the business as parts of — individual parts. We run it as one balance sheet. And if there are any parts which are challenging, we deal with it. If it is something strategic to be taken, we deal with it, or investment to be done, we deal with it. So I think we need to be very clear that it is one balance sheet and anything that is reflected in that balance sheet, Tata Steel is responsible for it.

Ashish Jain — Macquarie — Analyst

Right. Right. And just one clarification on Kalinganagar, did we say we are expecting production sometime in April 2024?

T V Narendran — Chief Executive Officer & Managing Director

We said the new blast furnace.

Ashish Jain — Macquarie — Analyst

Yeah. Yeah. Yeah.

T V Narendran — Chief Executive Officer & Managing Director

I mean there are different facilities coming up. The blast furnace is expected to come in the next 12 months.

Ashish Jain — Macquarie — Analyst

Okay. Got it. Got it. That’s just a clarification I want. Thanks so much.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Thank you.

Operator

Thank you very much. That was the last question for today. I would now like to hand the conference back to Ms. Samita Shah for closing comments. Over to you, ma’am.

Samita Shah — Vice President, Corporate Finance, Treasury & Risk Management

Thanks, Panshuk. Thanks, everyone, for dialing in. I hope you got the answers you were looking for on the call. Look forward to connecting with you again at the next call. Thank you. And good day.

T V Narendran — Chief Executive Officer & Managing Director

Thank you.

Koushik Chatterjee — Executive Director & Chief Financial Officer

Thank you.

T V Narendran — Chief Executive Officer & Managing Director

Thank you.