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BW Businessworld

Managing A Tight Rope Walk

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The $27-billion Tata Steel is back on track to carry on its delayed expansion. According to sources, the company will spend about $6.5 billion in greenfield and brownfield projects over the next three years. As its European division is on the verge of a turnaround, the group's plans would be completed mostly from the cash accruals from the Indian division.

Tata Steel had kept most of its greenfield projects on the backburner during the downturn. Plus, there were delays in land acquisitions and environmental clearances.

"The company doesn't foresee any marked increase in leverage or risk profile going forward as the earnings of the firm are set to grow with additional capacity being commissioned in India," says an emailed response from Tata Steel.

But the group's debt burden of $13 billion is the primary concern of investors, who pulled down the share prices of the steelmaker many times. As the firm had restructured its loans, the debt repayment would be about $1.7 billion for the next two years. The debt came on its books with the acquisition of Corus for $12 billion in early 2007. The steelmaker was four times bigger than the Indian acquirer.

Prasad Baji, senior vice-president of Edelweiss Securities, says Tata Steel India's performance would negate the concerns on the group's debt burden. "At conservative level, the Indian division is expected to generate a cash flow of about $2.5 billion annually for the next three years. With the cash reserve of over $4 billion, the company could manage its expansions and debt repayments," he says.

In 2010-11, the group had repaid $7.6 billion in loans and taken $8.8 billion, mostly for changing the loan terms. A follow-on public offer of Rs 3,477 crore in January helped the company accumulate the cash reserve for expansion.

The Indian operations reported a 17 per cent jump in turnover at Rs 29,396 crore in the last fiscal, and highest-ever Ebitda at Rs 12,224 crore, up 25 per cent. The profit at Rs 6,866 crore was due to higher volumes, improved product mix and higher realisations. On the other hand, the European division's turnover went up 15 per cent to $17 billion.

The new plants and capacities and mine acquisitions and developments will be crucial for Tata Steel. The India division is increasing its crude steel capacity from 6.8 million tonnes per annum (mtpa) to 9.7 mtpa at Jamshedpur Works by this financial year. It is also setting up a 0.6-mtpa continuous annealing and processing line at Jamshedpur, in joint venture with Nippon Steel Corporation (NSC) of Japan.

The 6-mtpa greenfield steel plant at Kalinganagar in Orissa is progressing faster than others. The boundary wall along with trench cutting and barbed wire fencing has been completed. Warehouse has been made operational and construction of Sinter plant has also started. The 5-mtpa plant in Chhattisgarh, 3-mtpa plant in Karnataka and 4.5-mtpa plant in Vietnam are expected to be set up soon.

Tata Steel has coal mining projects in Mozambique and Australia under joint ventures. Direct shipping ore project in Canada with New Millennium Capital Corporation, iron ore mining project in Ivory Coast, lime stone project in Oman, Dhamra port project with Larsen & Toubro and the joint venture with Steel Authority of India for raw material are also on cards.

For Tata Steel, it is a tight rope walk for a big play. 

(This story was published in Businessworld Issue Dated 08-08-2011)