Tata Steel may have been once bitten, but it’s certainly not shy the second time round. Six months ago, Tata Steel shocked everyone with an aggressive play for Bhushan Steel. A second smaller acquisition followed. ET travels to ground zero in Odisha and Jharkhand to see whether India’s largest conglomerate has an iron grip in the east.

How many times have you seen a $5-billion takeover get wrapped up within 72 hours flat? More importantly, how many times have you seen India’s oldest and largest business conglomerate work and deliver on such a timeline?

As you read this, the Tata finance team is busy negotiating with banks to raise $700 million of external commercial borrowings (ECB). This will refinance short-term loans raised to pay off Bhushan’s lenders as part of the Tata ‘fit for future’ programme that aims to bring down $1 billion of leverage in the next 12 months. It has already prepaid Rs 2,000 crore of the Rs 35,200-crore acquisition bill within six months of the takeover – its largest in India in its 111-year history.

Tata Steel has executed $60 billion in gross capital raising in 10 years and braved unprecedented upheavals. It went from net debt free in 2005-06 to a jaw-dropping $13-billion leveraged buyout.

Then came Corus that haemorrhaged £1 million a day in 2015-16. It ended the year as a £300-million loss and an unsustainable debt-Ebitda ratio of 8x.

For the Tatas, this financial management may thus seem inconsequential at first glance, but for outsiders, it certainly shows reinvigorating intent and conviction.

Surgical Strike

From sweltering May, when the Tatas got the green light to take charge of ailing Bhushan Steel and its three assets — the flagship Odisha plant and downstream units in Maharashtra and Uttar Pradesh — they moved with stealth. NCLT’s nod came on May 15. By May 18, the Tatas had organised funds and paid off lenders, issued new shares, nominated new directors on the Bhushan Steel board, achieved regulatory approvals and taken management and operational control.

That day, while Tata Steel managing director TV Narendran, chief financial officer Koushik Chatterjee, sundry executives, lawyers and advisors camped at the Grand Hyatt Hotel adjoining the Bhushan headquarters in Delhi, three operating teams — one for each plant — of close to 35 executives were also on standby near plant sites, ready to take charge. “It was like moving into a new kingdom,” recalls Rajeev Singhal, new managing director of Bhushan Steel.

Nothing was left to chance. Chatterjee had even organised two drills — including a mock one at Taj Mansingh a few weeks earlier. “Everyone said it would take a week from the court order to deal closing. We did it in two days,” quips Chatterjee. “We had done meticulous and micro planning. The team literally created memories of the future, planning for any eventuality.”

Even then, it remained precarious till the very end. The day of the NCLT judgement coincided with Tata Steel’s annual results call. In the middle of the press conference in Mumbai, Narendran received a text and then a frantic call from his legal counsel, who sensed Bhushan promoter Neeraj Singhal was planning to file for a stay order. He actually did get the case listed for the following day but the judge did not admit it, instead deferring it till the following Monday, which turned out to be too late.

“I kept stepping out of the results meet to address this emergency. We then decided to use the slim window of 48 hours to tie up all loose ends and just move in.” As late as May 18 morning, there were last minute anxieties on regulatory clearances. Finally, at 2 pm, all payments were cleared and by 5 pm, Tata employees had moved in and taken charge of all the three units. It was nothing short of a “surgical strike,” as some call it internally.

“The precision with which they moved over a weekend was unbelievable and shows a new hunger to get things done,” says a rival chief executive who had also scoped out the target. “Right from the bid that they put in, I have never seen such aggression in the Tatas.” To be clear, there was a Rs 5,700-crore ($800 million approximately) gap between Tata Steel’s winning bid and the second best offer, coming from Sajjan Jindal’s JSW.



Home is where Hope is

“A very large carrier is finally changing its course,” feels Pinakin Parikh, analyst, JP Morgan. It validates his hypothesis that the company is finally harnessing its recent India punts towards value creation in its profitable home base after three years of derisking its European empire through asset sales, pension settlement and finally, a joint venture with Thyssenkrup.

At home, it’s now all about maintaining market share through brownfield expansions and opportunistic M&As to pursue volumes growth.

“Cost corrections in Bhushan would drive higher margins,” argues Parikh. So would the singular emphasis on upping the share of value added downstream products to further insulate operations from commodity fluctuations.

But it’s fair to say the IBC process couldn’t have come at a better time. “Without them (the acquisitions), we would have struggled. Both Jamshedpur and Kalinganagar (TSK) are running flat out. And the next phase of expansion at TSK will take another three years. Till then, we would have lost market share because demand would have been growing at 8% and we had no incremental volumes to offer,” says Narendran.

“There’s a clear opportunity in India; we had not taken advantage of it,” acknowledges group chairman N Chandrasekaran. “So we decided we would go full steam ahead.”

The 3-mtpa Kalinganagar project, its first ever integrated steel plant ground up in a century, was a business lesson learnt the most brutal way, taking 10 years and Rs 25,000 cr to build. But today, with Bhushan and the subsequently small yet strategic bolt-on Usha Martin, the Tatas have reclaimed lost ground in the east.



Rebalancing Portfolio

Fundamentally, though, it underpins a much bigger structural shift playing out through Tata Steel’s painful trek back towards profitability and growth. Back in 2006, Corus gave them 18 mt of annual steel-making scale, of which 10 mt was the UK alone. But it did not have any structural strength. India was exactly the opposite —structurally solid but lacking scale, with only 4 mtpa.

Now, Europe has scaled down to 10 mtpa, of which the UK is just 3.5 mtpa.

Tata Steel is coming together with 200-year-old German conglomerate Thyssenkrup to create the second-largest European steel company that will control a fourth of the continent’s market for flat steel. “We have finally managed to create a stronger enterprise that can stand on its own feet and is sustainable,” says Narendran.

At the same time, the Tatas have achieved scale in India too. By 2025, capacity will be more than doubled to 30 mtpa as Bhushan and Usha Martin are integrated and Kalinganagar cranks up its second phase of expansion. More importantly, 93% of total Tata Steel capacity will be domestic versus a paltry 18% just a decade ago.

If this is not doubling down, then what is? “The Tatas had ceded their India leadership position to late entrants such as JSW or JSPL for almost five years. Now, it’s once again a pitched battle,” believes industry veteran Malay Mukherjee, a former ArcelorMittal chief executive.

“Kalinganagar coming through has given them that extra confidence,” feels SK Roongta, former SAIL chairman. “Capacity addition through M&As seems a priority.”

But such big India bets may also turn out to be risky, along with its concentration in the east that is close to natural resources but away from the market and end users.

With newer players such as Vedanta and ArcelorMittal, the oligopolistic nature of the Indian steel industry controlled by JSW, Tata and SAIL is also bound to be disrupted, feels Satish Kumar, head, India research, CIMB.

A bull steel cycle has also been predicated on supply cuts in China. “Domestic prices are Rs 5,800 per tonne more than imports from the Black Sea market. It is a matter of time before imported steel starts flowing in,” adds Kumar.

That’s where the Bhushan price tag has spooked some. “Valuation at $1,140 per tonne appears rich. We expect 7-10% value dilution,” warns Bhaskar Basu of Jefferies.

Tata Steel’s capex has always been higher than operational cash flows and is unlikely to change, reasons Kumar. “Although Bhushan has done well in the second quarter, its unintegrated nature leaves it much more vulnerable to steel price shocks,” he says. For the equity markets, leverage for M&A and expansion in a downcycle is the ideal combination for carnage.

And when Chinese export prices have corrected $100 per tonne in just three months, prospects of a downcycle seem real.

Geographical diversification may have derisked the company partially. “Essar Steel would have helped in getting a wider product and locational spread. They were already dominant in the east so ideally, a plant on the west coast would have been perfect,” says Mukherjee. He takes international examples from ArcelorMittal US or Thyssenkrup itself to suggest proximity to large auto manufacturers is becoming an absolute necessity, especially for supply of higher grades.

The Tatas argue that their distribution model helps cover the entire country. Proximity to the market is addressed by an extensive network of 147 distributors, 12,600 dealers/retailers, six hubs and 14 spokes, as per the company. “We have a 45% share in the auto industry and hardly any of them are in the east,” Narendran points out.

The region including South East markets of Vietnam, Thailand, Malaysia or Indonesia is a lucrative market. Clusters in India or even Europe help in operational oversight, to build common infrastructure such as pipelines and plants.

In retrospect, bailing out on Essar also seems a brilliant tactical call. “Imagine, with all the litigation, they would still have been waiting outside, like ArcelorMittal,” quips the India head of a large global distressed fund.



From B1 to BE1

But as with Corus, buying is one thing and managing another.

As Rajeev Singhal and his now expanded team of 70 Tata Steel executives — on deputation to Bhushan Steel for the next three years— blend in with its 5,000-odd workforce to debottleneck all 10 DRI kilns, revive the CONARC plant or even stabilise the two blast furnaces, over 60 initiatives are been pursued through cost synergies of Rs 1,500 crore, to boost operational efficiency and achieve the nameplate capacity. Value is getting unlocked as combined operations negotiate better rates for raw materials, charter bigger capesized ships or optimise railway freight.

“During bidding, the code word for Bhushan was B1. Now, with the asset firmly in the bag, the team wants to ‘BE1.’ One with the Tata group and number one operationally,” quips Narendran.

Production has already started improving, while power consumption is continuously reducing.

Over 100,000 tonnes of monthly exports have also been channelled back into the domestic market for 7-10% better realisations. Basic grades are being enriched for automotive clients.

“Bhushan has always been a great asset, the first to supply skin panels to marquee auto clients like Maruti. Their colour-coated products were also used by GE Appliances, Godrej, Samsung,” recalls Singhal, who dealt with Bhushan as a supplier almost 20 years ago. “Its cash flow problems had crippled it in the last few years. We are now integrating operations so each downstream stage synchronises perfectly with the one before.”

His target: Scale up capacity to 5.2 mt and increase Ebitda to more than Rs 5,000 crore per annum over the next 2 years, from the current Rs 3,000 crore.

Since value added products constitute 45% of Bhushan’s output, it compliments Tata Steel’s product portfolio with additions while consolidating its grip on auto. Historically, the Tatas focused on original equipment manufacturers (OEM) and Bhushan on ancillaries.



Upping the Value Curve

The discipline in costs will improve future margins. But even on its own, the management had initiated an endeavour to insulate earnings from price volatility by decommoditising steel, enriching existing units, focusing on value-added downstream products, services and solutions and diversifying into new materials.

“The whole idea is to move products to a differentiated mix, which gives premium over commodity grades. The configuration of Kalinganagar has been to look at emerging sectors such as oil and gas, defence and higher grades of automotive products,” explains Chatterjee.

Better plant balance will, in turn, drive cost efficiencies further. “Continuous annealing and galvanised lines in Kalinganagar will further augment downstream capabilities,” feels Amit Dixit of Edelweiss Securities. “Driven by the widest cold rolling mill in India, it has the potential to further improve product mix.”

The joint ventures with Bluescope for construction and Nippon Steel for auto are additional efforts to corner this high margin segments as was the 3.5x expansion in tin plate capacity to 500,000 tonnes to capture market growth in the packaging industry. Today, branded products alone generate Rs 18,000 crore or 35% of total sales.

The balance sheet too has been bulked up with capital raised from Rs 19,400 crore of divestments of the past seven years or restructuring in Europe and South East Asia to take out sub-scale operations, build financial resilience, support better returns on invested capital and fund newer capital needs.

“Instead of the earlier plans to totally exit Europe by retaining 50% in the proposed JV, the company remains in play for any future upside,” claims Chandrasekaran.

Things can still go wrong as Tata Steel’s brass looks to further expand by 5.4 mt in Kalinganagar, Bhushan and even Usha Martin, exploiting the land bank. On the back of Usha Martin, incremental focus will be on modular long products for construction that are today only 23% of their domestic capacity. The highly fragmented space is also ripe for consolidation.

For the moment, the Tata Steel team is well on track. “Our net debt-Ebitda is now 3.5-3.6. The intent is to first to bring it below 3 and then get it to 2.5 times,” says Narendran.

Tata Steel may have been once bitten, but it’s certainly not shy the second time round.