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Tata Steel prudent on capital allocation: Not looking at global acquisitions, debt reduction to continue. Promising counter in the long term.

When the economy is at the verge of an upward trajectory and the cues are in vogue and the predictions are fairly encouraging the first sector that would get the attention of the business community  is the infrastructure and housing and naturally the steel sector and cement will surge. In this context the Tata steel and Jindal steel show a lot of promise.

Tata Steel’s debt levels, which were way above Rs 1 lakh crore last year, will be reduced below Rs 50,000 crore by the end of this fiscal

Tata Steel’s fortunes have turned. After almost two decades of struggle with debt management post the Corus acquisition at the peak of the steel cycle in 2006, it is set to make operational profits of Rs 50,000 crore this year if this steel cycle uptrend persists. Tata Steel’s debt levels, which were way above Rs 1 lakh crore last year, will be reduced below Rs 50,000 crore by next year as steel prices support performance with global economies re-starting activity in the post pandemic phase.

Tata Steel’s biggest strength has been the captive iron ore mines, a key raw material for steel, which made it one of the only profitable steel companies in the world during many steel downturns over the years due to its low cost of production.

TV Narendran, Managing Director of Tata Steel told Moneycontrol, “If you really look at Tata Steel’s debt, lot of the debt has come because of what we had to do in Europe over the years.”

For the last three years, Tata Steel’s strategy has been to reduce debt by at least $1 billion every year and that will continue. “…focus on the balance sheet continues and we do believe that the India business in good times and bad times will generate enough cash flows to deleverage,” Tata Steel MD said.

Narendran highlighted, “Structurally we are moving to a better place, we are helped by the current steel prices.” Global steel prices have helped the UK business of Tata Steel to become Ebitda positive and the company is confident of this to continue while most experts do question the sustainability of current steel prices. The jury is still out on the movement steel prices, but Tata Steel is hopeful that the UK business will not saddle the growth of the rest of the profitable steel units of the company.

Not eyeing large global acquisitions

Despite comfortable cash position and steel outlook looking strong given China’s lowering dominance, the steel major is not looking at big bang acquisitions across the globe. TV Narendran added, “Certainly not outside India, we are looking at inorganic growth within India.”

Focus will be on enhancing the company’s presence in the long steel vertical, “The government has announced Neelachal disinvestment, we are part of the process, we have put in our EoI [expression of interest] through Tata Steel Long Products.”

There aren’t many acquisition targets available in the private sector, Tata Steel shared and pointed out that the government will open bids to sell RINL and they will participate in the sale process.

Narrative change on debt in capital intensive sectors

Burnt by past experiences of not being able to take the burden of ballooning debt on books, especially, due to the cyclical nature of the steel business, Tata Steel now takes a more prudent approach to its capital allocation strategy, Narendran added, “India business makes enough cash to support its own growth and we don’t need to have debt on our balance sheet to grow and as we grow we will generate even more cash to support any other incremental growth we need.”

During the Raghuram Rajan era at Reserve Bank of India, the asset quality review led to a long phase of debt management and recovery, which led to Essar Steel being sold to ArcelorMittal, add to that the uncertainties of COVID-19 pandemic, large business houses are moving towards a debt-free structure.

With big business houses going the debt free way, Tata Group’s focus on consolidating current businesses in all verticals after a series of leveraged buyouts over several years is a clear structural shift in the capital utilization strategies of Corporate India.

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