Tata Steel Limited (500470) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tata Steel Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Samita Shah. Thank you, and over to you, Ms. Samita Shah.

Good evening, and good afternoon, and good morning to all of you joining us from the far east, India, Europe and the U.S. On behalf of Tata Steel, it is my pleasure to welcome you all to this call to discuss our results for the first quarter of FY '21. I hope all of you and your families are safe and our best wishes [Audio Gap] we cover the performance of Tata Steel, Tata Steel BSL and Tata Steel Long Products, and we will be happy to take your questions on any of them. Since last year, we have also opened the call to our retail shareholders, and we will take a few questions from them as well. So please feel free to type in your questions. I would like to draw your attention to the safe harbor clause on Page 2 of our presentation, which will cover the entire discussion today. I will now hand it over to Mr. T.V. Narendran, CEO and Managing Director, Tata Steel; and Mr. Koushik Chatterjee, Executive Director and CFO, Tata Steel. Thank you, and over to you, Naren.

Thanks, Samita. Again, good afternoon, good morning, good evening, depending on where you are. Thank you very much for joining us. This has been an unprecedented quarter for all of us as well as for the industry and for all the economies. The health and safety of our employees and the communities in which we operate remains our foremost priority. We've taken significant steps in building COVID-19 ready medical capacity with more than 1,000 beds in India and different locations that we are in and state-of-the-art facilities in many of these locations. We have also taken several precautions across our sites, including creating PODs, as we call these are small work teams for that in case of any instance, we are able to isolate them very easily rather than spend a lot of time doing contact tracing. And this has enabled us to limit the impact of COVID on us. So despite more than 40,000 employees and contract workers coming into our multiple sites across India, on a daily basis, so far, we've been lucky to have only about 300 cases. We continue to be extremely vigilant and to ensure that our people are safe, and obviously, our operations are also stable. From an operating perspective, during Q1, we recalibrated our operations across all the geographies in Europe and India and Southeast Asia, in line with the underlying regulatory and market conditions in these regions. India obviously imposed a very stringent lockdown and the domestic market was completely closed in April and for a good part of May. As a result, the steel demand declined by about 55% quarter-on-quarter, to about 11 million tonnes in the first quarter Q1 -- in Q1 FY '21. In line with the lockdown, we reduced our upstream operations across Tata Steel stand-alone, TSBSL and TSLP to around 50% of the capacities in April before ramping up gradually till June. As a result, our India deliveries in Q1 dropped to 2.93 million tonnes, which is obviously a significant drop from our normal levels, and the result and unabsorbed fixed costs have been entirely expensed off during Q1, which has affected our margins. To counter the closure of the domestic markets in April and May, we increased our exports significantly to 1.46 million tonnes in Q1 and while this tactical shift has obviously impacted our realizations and our margins, it's ensured that the India business generated free cash flows, which was key, and which was a big focus area for us. And it also helped limit the drop in our deliveries to 27% quarter-on-quarter as compared to the 55% drop in the domestic market. So with the [Technical Difficulty] opening of the economy, capacity utilization has ramped up -- was ramped up to about 90% in June. We also increased our sales sharply. In fact, our June sales was around 115% of FY '20 average monthly sales, while our June sales in domestic markets was about 74% of FY '20 average monthly sales. The numbers for July are even stronger. And as domestic markets normalize, we are reducing our exports and the increase in capacity utilization and higher domestic sales will lead to an improvement in our margins in the second quarter. In Europe, the lockdown was less severe, but the steel demand was weak. And additionally, the share of imports continue to be elevated. Of course, the EU has taken some actions during the quarter to have quotas on the different sources of steel, which is starting to help, but capacity utilization in Europe continues to be quite low and so there is headroom for increasing production even if demand picks up a bit. So strong iron ore prices pushed spot spreads to an unsustainably low level of about EUR 150 per tonne, which has had a sharp impact on the performance of the European steel manufacturers, including Tata Steel Europe. We operated at close to 78% capacity utilization during the first quarter and also suffered from an adverse product mix. While the transformation plan is underway, the impact is not visible due to the extremely adverse market conditions. We expect the demand recovery to be slow. The forecast for 2020 is a drop of 15.8% to 133 million tonnes for the whole of Europe. This is as per the World Steel Association forecast. But we expect the spreads to improve going forward because at EUR 150, it is not sustainable for the industry. We are engaged with the respective governments in U.K. and Europe for their support in these conditions. And of course, both the Netherlands and U.K. have existing schemes, which we are availing of. The economic situation is gradually normalizing and the sharp recovery in China, along with the normalizing steel inventories and declining steel net exports from China has led to a recovery in Asian steel prices. The Indian steel spot spreads have also started picking up in line with improvement in regional prices and the recovery in domestic markets. While the risk of further COVID outbreak remains, we are cautiously optimistic the worst is behind us. As discussed in the call last time, we continue to remain extremely focused on cash flows and liquidity management through this crisis and for -- will be for the rest of the year. I will now hand over to Koushik to comment on that and share details of our financial performance during the quarter. Over to you, Koushik.

Thank you, Naren, and good morning, good afternoon, good evening to all of you. I hope all of you are safe and well. Let me start by commenting on our financial performance. Our consolidated revenue was INR 24,289 crores, which was lower by about 28% on a Q-on-Q basis, largely due to lower deliveries and adverse product mix across geographies. Our consolidated adjusted EBITDA stood at about INR 1,038 crores. As our operations were running lower than the normal capacity utilization, there were some idle or unabsorbed cost, which has been fully expensed with. If we remove the impact of the idle cost of around INR 2,000 crores to INR 2,400 crores, the adjusted EBITDA would have been at about INR 3,038 crores. As before, these numbers do not include our Southeast Asia operations as they continue to be classified as held for sale under the discontinued operations. Our India operations, which includes Tata Steel stand-alone, TSBSL, TSLP generated revenues of INR 12,689 crores and an EBITDA of about INR 1,455 crores. Tata Steel stand-alone revenues declined to about INR 9,339 crores due to lower deliveries and adverse product mix. Tata Steel stand-alone EBITDA stood at INR 1,291 crores with an EBITDA margin of 13.8%. This translates into an EBITDA per tonne of INR 6,100. If we remove the impact of idle cost on Tata Steel stand-alone of about INR 766 crores, the EBITDA would have been INR 2,057 crores, and EBITDA per tonne would be in the region of INR 9,700. Moving to Europe. Our revenues fell to GBP 1.2 billion in the quarter 1, primarily due to lower deliveries and inferior product mix. The EBITDA for the quarter was a loss of GBP 67 million. Improvements from transformation program, careful cost management and weight support from European on the Netherlands and the U.K. governments, help limit the EBITDA loss. The focus across Tata Steel group during this quarter was primarily on cash flows. The business environment during the quarter was very fluid, and we took several initiatives to effectively manage our risk and focus sharply on liquidity. We focused on the cash flow management to generate a free cash flow quarter and maintain the net debt at March 2020 level. And this was a very important priority to maintain the balance sheet as well as to generate the cash flows to ensure the business continuity and robustness as far as the operations are concerned. As such, despite the sharp drop in margins and in an extremely challenging quarter, we generated free cash flows of about INR 700 crores after CapEx and other obligations with the India business, generating free cash flows of about INR 1,791 crores. This was achieved through cross function coordination and cash borrow initiatives, which included fixed cost reduction, working capital management through better inventories, focus on debtors and debtor collections, working with suppliers and other initiatives. With our gross -- while our gross debt increased by about INR 2,500 crores, including INR 504 crores, mainly due to the ForEx translation, the net debt reduced by INR 88 crores due to free cash flow generation, and as I said, was broadly in line with the March end net debt number. We have also turtled our CapEx to -- for the full year. And as last time around, we had given the guidance that it would be at/or under INR 5,000 crores for FY '21. While the CapEx for first quarter is about INR 1,852 crores, some of this actually reflects previously committed spend, and the reduction will be more visible in the coming quarters. We will revisit our CapEx plan in H2 or when the business conditions normalize because, as you know, that our expansion project is on a slow track at this point of time. We also increased our liquidity buffer and extended our debt maturity profile by raising about INR 5,935 crores of long-term debt. As of June 30, our liquidity stood at about INR 20,144 crores, including INR 14,178 crores of cash and cash equivalents. We will use this to deleverage as the business conditions start to normalize as you heard from Naren. And the India business looks to be increasing as far as the underlying conditions are concerned. I would like to highlight that our long-term debt prepayment across Tata Steel group are less than $250 million each in the financial year '21 and financial year '22. But we have sufficient liquidity in our facilities to prepay and we will keep reviewing it as the underlying conditions change. With this, I would like to end and open the floor for questions. Thank you.

[Operator Instructions] We take the first question from the line of Anuj Singla from Bank of America.

So my first question is for Mr. Narendran. Sir, can you talk about what kind of price increases we have seen over the last -- course of last couple of months, and what is the outlook going forward on the restocking cycle? Have you already started seeing some amount of restocking being done by customers in the run-up to the festive season, the seasonally strong season? Or is it still very subdued?

Yes. Thanks, Anuj. You know -- yes, things have actually picked up much faster than we had thought. And I think it started with China pretty much getting into a V shaped recovery, if I can call it that. So while things did look bad in April and May, I think China became less and less of a net exporter. And steel prices started going up, and hence, all of us started exporting into Southeast Asia and China. So steel prices, if I compare with what it was end of April or early May in terms of hot-rolled coil prices in the Southeast Asia or East Asian markets, it's gone up by almost $100 in the last 3 months. And that has also led to release of inventories in India where the inventories had built up as people were ramping up production. And today, I think the demand and supply in India is very well balanced. And the Indian market has also started picking up based on the rural economy. It started with the rural economy or anything to do with the rural economy, whether it was tractors or motorcycles or the retail sales that we do into the rural markets. So in April, May, June, initially, the long product prices were stronger because a lot of construction activity started getting completed as the lockdowns opened up, and that led to the long product prices being a bit strong in May and June. But then as monsoon started coming in longs softened a bit. But again, it started going up because international scrap prices have gone up, DRI prices have gone up. Iron ore prices have been very strong. So what we are seeing now is certainly the domestic markets restocking certainly. We are also seeing improved auto sales having cascading effect on multiple sectors, particularly the MSMEs. So not only is it restocking, but we are seeing that people who are postponing purchases, thinking that prices will drop are now preponing purchases or purchasing what they need. And as a consequence, the hot-rolled coil prices have gone up by at least INR 2,000, INR 2,500 since June. And we expect some more price increases in the rest of the quarter. Long Products was a bit slower off the bottom in some sense. But I must also say that the current price levels are still below what it was pre-COVID because the prices have dropped, it's gone back, but we are not yet at pre-COVID levels.

Okay. And sir, so it's fair to assume that the inventory levels in the channel, including the steel producers and customers now that they are at a very reasonable space. So if there is any uptick in demand that could lead to a strong restocking cycle, if that were to happen in the second half of the year?

I think what is happening now is, I mean, firstly, it's very unusual for steel prices to go up in the monsoon months, okay? So it reflects the demand/supply balance. Second thing is, I think the demand in the export markets are still quite strong, okay? So today, the domestic producers have a choice between exporting at decent prices or selling in the domestic market. So at this point in time, there's no pressure on inventory anywhere because in India, at least all the primary producers are pretty much coming as close to full production capacities as possible and have the options of selling in the domestic market or exporting, okay. So we don't have the pressure that we normally see in monsoon months, and which is a good thing, the way we see it because normally, October onwards things anyway start picking up. If you see last year's price increases started happening from November, right? It was actually going the other way between June and October last year, and it started going up in November until the pandemic tripped it in March. So normally, second half of the year, more specifically, January to June is the best 6 months for steel prices. And typically, after the monsoons, there is a buildup, which starts happening till January, and then normally, it does well. So the good thing is, after a long time, I'm seeing monsoon months when prices are going up, which is positive for the industry.

Understood. Very clear. Sir, very good. Second question is on Europe. Is there a one-off related to carbon credit sales in this quarter? And if you can quantify that?

Yes. So there has been a one-off sale in the last quarter. I think it's about GBP 60 million, Koushik?

The total amount of sale is about GBP 132 million, and there is a gain, which is about GBP 78 million of this GBP 56 million is in the U.K. and the rest of it is in Netherlands. So that's the impact. So the sale amount, which is a cash flow amount is about GBP 152 million, and the gain amount is about GBP 78 million in the sale.

So Mr. Chatterjee, just to clarify, GBP 132 million?

Pounds, yes.

Yes. So this is what has been incorporated in the EBITDA for this quarter?

No. No. First saying that GBP 132 million is for cash flow purposes. For the EBITDA purposes, we will take GBP 78 million.

Okay. Understood. And lastly, sir, on the outlook in Europe, given the -- you already mentioned EUR 150 per tonne. I mean, these are close to multiyear low kind of spreads. So if anybody's call how long the spreads will take to improve. So meanwhile, is there a prospect of additional regulatory support in terms of there have been news flow on industry loans or some investment by the government in the company. Is there anything -- any color you can share what kind of handholding the government can provide us in this challenging period?

So 1 thing is from the market side, the EU is set in some quotas now. So there is a product-specific country-specific quota, okay? So which is kind of acting as a cap on imports. Imports is about 20%, which is, if you look at the long-term average, 20% of domestic demand being met through imports is quite high. But there have been a few players who have been quite aggressive and strong, particularly Turkey. So the product-specific, country-specific quotas will help limit the share that any single country or source can enjoy. And that we believe will bring more discipline into the market, and we are already seeing the impact of that in terms of the sentiments changing. And I think in Europe as well, the prices have started creeping up over the last few weeks, not as quickly as it has happened in Asia. That's also partly because Europe, still, the capacities are underutilized. So there is headroom for people to increase production if they want. But still, sentiments have changed. Again, this is traditionally a weak season in Europe because it's holiday season. But still we are seeing prices going up. And we expect that after the holidays when the factories -- the consuming factories pick up steam, we will see some more positive sentiments may not be to the extent that it's in Asia. From the government side, there are some announced schemes which we are availing of, both in the Netherlands and in U.K., some of it has to do with wage support, which we have got for the last few months, and that is linked to economic activity staying where it is. If the production slow up to 100%, then you will not get some of those benefits. The second part is related to deferral on payments to the governments, which, again, we have got -- that helps cash, it doesn't help EBITDA. So these are the 2 things that we've got. All other conversations are a little bit more strategic in long term, which at this point in time, we don't have anything very specific to share.

The next question is from the line of Pinakin Parekh from JP Morgan.

Yes. I have 3 quick questions. My first is, if we look at Tata Steel India realizations, moving from the first quarter to the second quarter, there will be a benefit of lower exports, higher prices on exports and higher domestic prices. So broadly, what kind of realization increase can we see on a quarter-on-quarter basis for the India operation? My second one is that when we look at Europe, the EBITDA loss was even after some support from the governments over there. So going forward, as that support has withdrawn, should we expect a spike in the EBITDA losses in Europe? And my last question is that the company reduced the debt in such a tough quarter. So would the company like to give a guidance for any kind of net debt reduction plans it has for FY '21?

Yes. So Pinakin, I'll address the first 2 and ask Koushik to take the third one. So on the first one, yes, for the multiple reasons that you said, we expect Q2 to be at least INR 3,000 per tonne better than in Q1. And let's see how it goes. We are still only halfway into August, and let's see how it goes. So INR 3,000 is a minimum expectation and let's see what better we can do on that. The second point on Europe, yes. This is despite it being 1 of the toughest quarters in Europe because if you -- I mean, I guess you know that in Europe, we are very auto dependent. Auto is a very big part of our -- in India, it's about 20%, in Europe, it's about 35%, 40%. And auto has been very weak, as you know, during the pandemic, and that is starting to improve. So in Europe, we had a very, very challenging quarter, and that's reflected in the EBITDA. So I would say, going forward, while, yes, some of the support may go away, but that support is linked to the revenues coming back to where it was pre-COVID, which would imply that the economic activities are better. And if the economic activities are better, then obviously the volumes will pick up, and we expect the spreads at EUR 150, I don't think anyone in Europe will be making money. So it can't stay at that level. So if the spreads trend back to long-term averages, then we will see the improvement there. We do see that situation can't be as bad as Q1. And also the European stimulus that the governments have announced is very significant once that starts flowing into the economy, that will also have a positive impact. So if you saw Q4, Q4 was, I would think that's a little bit more reflection of what we would expect normally when I say Q4, Q4 of last year. I can also say that operationally, we are much more stable than we were last year. So as the markets pick up, we should be able to deliver operational numbers, which are better than it was last year. So all set and done, I'm not saying Q2 will be significantly better than Q1 because things are still challenging in Europe. It's not improved as significantly as it is done in Asia. But going forward, we expect things to get better.

Understood.

Mate, you want to?

Yes. Pinakin, so this has been 1 of the toughest quarters to manage the balance sheet. And I think we've pulled all stops to ensure that we do not fill it up with debt. And I think the company all across have done tremendously well on that front. I think we will certainly focus on ensuring that the net debt number remains the same, is the base case focus. I'm looking at Q2 very carefully and to get a sense as to how the Q2 improvements happened. So maybe around October, November -- October, in particular, I think we would be in a better position to say how much we would be able to reduce net debt. If it was only the India business, I would be more confident to say that we will certainly have a net debt reduction. The volatility in Europe makes me to hold back till September to understand how the European recovery will happen because the current level of spot is very, very significant. And also in the context of what you're seeing, our peers are performing at this time. So I think we will certainly focus as principle on net debt reduction. How much would be the range of that reduction? I would hold -- it's too early in the year to comment on it. As a principle, we've always said we -- for many years now, last 2 years, at least, that we want $1 billion of net debt reduction. But I can't see that at this point of time. I would like to hold on till October and then be in a better position because the volatility in Europe is something which does not allow me to give away this answer at this point. Our intention has always been, and in the first quarter, it has happened that we have not actually sent any capital from India to Europe in the way we had done it in the past. The European management is also very focused in ensuring that they manage the cash within the pool of cash that they have. So there are a lot of actions being taken there also. Long story short, I think base case, keep the net debt at this point of time, in a better visibility, we will be coming back with the ranges to how we will do. The long-term intention is very clear that we would like to get back to $1 billion reduction in the year.

[Operator Instructions] The next question is from the line of Indrajit Agarwal from CLSA.

A couple of questions from my side. So when we actually engage in the carbon credit sale, what is the thought process? Is it like which you will not be using the carbon credits that we have for the rest of the year or foreseeable future? Or is it more to manage the cash flows? And does this reflect the net debt as you have reported for the June quarter?

Koushik?

So I think it's a mix of both. First is when you go down very sharply in the operating levels, then the opportunity emerges. Otherwise, those opportunity doesn't remain if that company or the industry is going full out on volumes, then obviously, there is no opportunity to do this. But when you look at sharp reductions like what we have seen all across the globe, where the capacity utilizations have been lower at about -- depends on different areas, but in Europe at about 70% roughly. Then we also do assess that whether this level will continue for the foreseeable future. Also within Europe, when we look at it, we see between U.K. and Netherlands. Netherlands typically goes full out, and therefore, you will not do much in Netherlands. U.K. has been lower and the capacity utilization and the market is different. So that's the philosophy within which we look at it. And then, of course, if it's in -- if you give target to the management team that you need to live within the means, this is 1 of the means from a short-term monetization perspective, which has also been the issue. So once that -- when that happens, then it helps us to essentially monetize for the short term. So it's a mix of both, but it is essentially -- it is essentially a short-term tactical move rather than a structural move.

So in the second half, if you were to reach the 10 million tonne annualized run rate of production, could there be possibility that we really needed to buy carbon credits?

So at the end, if it goes beyond what our current plan is, 10.5 million tonne is the kind of capacity that we are using, there would be in the second half -- towards the end of the second half requirement to buy back some part of the carbon credit. Yes.

Sure. And my second question is on the financials of consolidated numbers. There's a big other comprehensive loss items that will not be classified into profit or loss. Is there any cash flow impact of that? Or is it just a book entry?

So let me explain that, maybe I should have put it in my main explanation. So this relates essentially to the British Steel Pension Scheme 2, which is a new scheme. I think we have said it in the past that this scheme is a ring-fenced scheme within Tata Steel U.K. and does not have with Tata Steel U.K. only as the sponsor and doesn't have any impact on the rest of the group. Also this scheme was in March end was in surplus of about GBP 2.7 billion. And in the last quarter, the scheme assets have increased by GBP 0.6 billion on quarter-on-quarter basis to GBP 11.2 billion. That's the full value of the scheme. But the liabilities have also increased by about GBP 1.3 billion to about GBP 9 billion. And these changes were largely driven by the discount rate changes with a decrease in the corporate bond deals and increase in the CPI assumptions. And partly offset by the gains on the assets and the increase in the value of the bonds held by the scheme. So the reduction is about GBP 731 million. That goes through to the OCI, and the deferred tax impact of that actually goes to the P&L. So that's why you will find in the consol, the number is almost about INR 1,300 crores on the tax, which is essentially the deferred tax element on the BSPS Scheme 2. So that's the explanation of these 2.

It's noncash, Koushik.

Yes. Both of it is noncash. There's no impact on cash. So the OCI, what you see, represents about INR 5,500 crores of remeasurement loss on actual valuation of the employee benefits. And all of these are actually noncash impacts.

That is helpful. And 1 last, if I may squeeze, there is a difference of INR 500 crores between reported and adjusted EBITDA at consolable. So is -- sir, what is the cash flow impact of this?

Reported and -- maybe I'll come back to you. I'll just give you that explanation. Reported and the adjusted in the press release that you are saying?

No. So in the presentation, I'll just refer to the slide number. So the slide number is 9. So EBITDA reported is INR 597 crores. Adjusted EBITDA is INR 1,038 crores .

So that is the FX element is also part of that, which is almost about INR 400 crores.

Sure. So no expense specifically?

Yes.

The next question is from the line of Subrat Dwibedy from SBI Life Insurance.

First, just wanted to understand about the debt outside India. So what is the total debt now? And whether it is bank loans or bonds? And how -- because bonds would perhaps be slightly difficult to refinance. And you mentioned there is no support, which was given during the quarter from India to Europe. But going ahead, if you see that happening?

Koushik?

So the India debt, if I really look at the total number of debt, it is about half and half between India and the rest of the outside. A large part of it is bank debt. For example, the European debt of about INR 17,000 crores roughly is actually bank debt. There is 2 bond debts, bonds, I think, about INR 10,000 crores in Singapore. So a large part of the debt is still -- in our system, is still a bank, about 25%, 30% would be in bonds. And some of the bonds are in India, for example, there are like fee bonds and NCDs, et cetera, which are mostly in India. And the overseas debt is predominantly bank debt, but there is also some bonds in Singapore. So that's how I would classify.

Yes. And the support from India, if it is required going ahead to Europe?

So our fundamental position is that we work with our European colleagues to ensure that there is no requirement of support. And that's how the whole system is geared towards. So there is -- but I think, as I mentioned earlier, the volatility of the European business is very high at this point of time. It's always been higher than India. And I think what we are looking for is to come to a structural solution at some point in time, which will ensure that this support is no longer required. But at this point of time, we are going quarter-by-quarter. So last quarter was not required. Hopefully, this quarter also will not be required. And so -- because that's an important part in ensuring that the net debt reduction is achieved at the end of the year.

Okay. Sir, my second question is on net debt only. So ratings have put on negative outlook sometime in April. And they have such covenants -- its -- expectations in terms of net debt-to-EBITDA thresholds. It is reaching those levels in March and perhaps in March '21 also it will reach. So is there any thought on equity infusion? Or what is the strategy on net debt going ahead?

So net debt reduction will happen. I can't see equity injection at this point of time because that there will always be a limited number that equity can bring it. It can only meet for the short-term in sometimes recalibrating these numbers. But fundamentally, the better business, better cash flows, lower CapEx and at some point, some portfolio actions is what would bring the net debt down. So I think all of this, there's a lot of work going on in the company, and we're not in a position to talk a lot beyond what you're seeing, the cash flow numbers on the operating side. But some of it will -- that's our focus to bring on the net debt numbers.

Okay. Okay. And sir, just 1 last small bit from my side.

Sir, I am so sorry to interrupt...

Just to add to that, is that our CapEx has been 1 of the biggest levers from a discretionary capital allocation point of view. So our focus has been on safety, essential CapEx and maintenance CapEx. Growth CapEx is obviously come down. And in terms of sequence of cash flows on cash allocation, the balance sheet comes ahead of the capital allocation for growth at this point of time. And that's a stated position that we have adopted in the company at least for the immediate term, and we will continue to do so till we reset and get to the balance sheet.

[Operator Instructions] Next question is from the line of Gaurav Rateria from Morgan Stanley.

So firstly, if you can elaborate a little bit on how demand looks in various segments in auto, retail, ECA, industrial products, from a month-on-month perspective for July and August? And has that changed your inventory position?

Yes. So I think let me start with auto. We are certainly seeing auto things improving by the week. Even sometime in June, the forecasts were not so great. But I think in July, we're seeing that almost every week, they are revising their forecast, the auto customers are revising the forecast. So I think passenger vehicles, like I said earlier, it was mainly tractors, which was very strong, and it was pretty much at pre-COVID levels. Motorcycles was the next one, which started picking up, which is, again, linked to the rural economy. We are now seeing passenger vehicles go up, as you saw from the Maruti's numbers and everyone else's. It's still maybe at 50%, 60% of what it used to be 2 years back. But things are certainly improving because they were at 10%, 20% of what they were, 2 years back. Good news is medium vehicles, medium-sized commercial vehicles, again, starting to pick up a bit. Heavy commercial -- not medium, the light commercial vehicles are picking up a bit. The medium and heavy, still a bit slower. They will be the last of the block. So we are seeing different segments grow differently. And at least over the last few weeks, every week has been a more positive upgrade from our auto customers, so which is good. But it's been at the end of 2 bad years. So there's a lot of catch-up to do to go back to where we are. Surprisingly, if you've been following China numbers, China is already 2 million vehicles a month, which is where they were 2 years back or 1, 1.5 years back. In terms of retail, retail has been strong because retail for us is more rural and small town led. And whether it's roofing sheets, whether it is construction steel or anything else that we sell in retail has been quite strong and -- which is good. The ECA business, which is largely linked to MSMEs, we deal with about 8,000 to 9,000 MSMEs. Maybe 2 months back, we saw about 4,000 of them active, now we are seeing about 7,000 to 8,000 quite active. So more and more are coming back. Again, they are also linked to auto. They are also linked to many other areas. In terms of indu segments, I think wherever there is government spending like oil and gas, we're seeing things pick up. We are also seeing panels or any hospital related infrastructure. So there are many subsegments, which we are seeing, again, with Aatma Nirbhar Bharat be it solar panels, for instance, a lot of components used to get imported. We are seeing that now getting indigenized. Wind energy was always indigenized quite a bit. So there are different parts of the economy, which we are seeing picking up. The only disruptive point is the local lockdowns, which are sometimes announced, which is disruptive for manufacturing units in those areas. But beyond that, I think we are slowly seeing week-on-week, month-on-month things improving.

Sir, I just wanted to check on the inventory position also, how that has changed versus the, let's say, June end. And second question is with respect to Europe, I understand what you said that things may not improve significantly. But do you have visibility for 2Q to be at least similar to 1Q as far as profitability is concerned, and not worsen from here? That's it from my side.

Yes. So I think inventories are coming down month-on-month. It came down significantly in June. A lot of the cash release has also been because we managed inventories quite well last quarter, and it continues to come down significantly. July also the inventories have come down. So we are seeing month-on-month inventories go back to where it should be. So the inventory that we have built up in the first week -- of the last week of March because of the shutdown, the lockdown in India is now pretty much helping us meet with the increased demand. In terms of Europe, I would say that we expect Q2 to be similar to Q1.

The next question is from the line of Sumangal Nevatia from Kotak Securities.

First question is on the net debt. It's encouraging to see debt in this quarter, also net debt has not increased. Is it possible to break the free cash flow number, which you had given at the opening remarks into what was the operating earnings, working capital reduction and the CapEx?

Koushik?

So just give me a second. Can you repeat your question? You wanted -- is it...?

Yes, the breakup of free cash flow in terms of operating earnings, CapEx, what we've done and the working capital reduction, what we've seen in 1Q.

So are you looking at it from a consolidated perspective? Or is it from...

Yes. So consol should be fine. And then if you can just give the final FCF number for Europe, that will be very helpful.

So let me give you consol numbers. So if I look at the EBITDA for the -- consolidated EBITDA was about INR 597 crores. So our free cash flow before CapEx and dividend was about INR 2,453 crores. We had a CapEx of about INR 1,705 crores, which leads us to a net free cash flow of about INR 700 crores.

Understood. And this means that we have a significant working capital release. So is it something sustainable thing or something when sales will pick up, we will see a reversal here?

So the working capital release was about INR 2,585 crores. And of which, the bulk of it was in India. When I say India, it is between Tata Steel India, Bhushan Steel and Long Products, that itself was about almost INR 2,200 crores. And Europe did have cash flows emanating out of the sale of carbon. So that has also gone in there. And so all taken together, it's been INR 2,500 crores of release. And to your question of whether it is sustainable, I think in India, it is sustainable. We are seeing pickup in the volumes, as Naren elaborated on this. But we are focusing our working capital, both on inventory debtors and also in stuff like spares and loose tools, et cetera. So I think as far as India is concerned, we don't see a reversal of where we were into -- into the second quarter. So it is very clear from an India perspective that the working capital release. In fact, we are pushing for more working capital release in the second quarter. So I think that's achievable.

Understood. And in terms of Europe, is it possible to share what would be the free cash flow burn, which we would have seen in 1Q?

In the last quarter?

Yes, yes.

So last quarter, the free cash flow burn would be roughly around in the zone of INR 700 crores.

Understood. And just secondly, in terms of costs in coming quarters in terms of coking coal and others, I mean what are tailwinds which 1 should expect?

So in terms of coal, basically, we got about a $10 benefit in Q1 over Q4. And in Q2 over Q1, we expect about $5. This is just on the coking coal, but cost, particularly in India, will also come down because the volumes are picking up. So there'll be better utilization of facilities. So that is positive for cost what is negative in some senses, the mix is getting more richer. So that's, of course, will get reflected in the -- will get offset in the prices, but I'm saying if you're producing more downstream and finished products, then obviously, from a cost per tonne point of view, you will see an increase because of that. But net-net, the cost in Q2 will be lower than Q1.

Understood. And just a follow-up on the first one, sorry. The CapEx is INR 1,700 crores. So can we expect this run rate as a bare minimum maintenance CapEx, which we require for the business?

No, I think currently -- yes, go ahead, Koushik.

So in the first quarter, actually, there was a lot of CapEx which happened -- and a lot of payments which happened on CapEx, which is already done in the previous quarter. Also as far as Kalinganagar was concerned, there were some payments which had to be done on committed CapEx, which the equipments had come into the site, et cetera. So we have to ensure that we agree on a certain amount of payments. And then we have renegotiated with various suppliers on the new schedule of when we would want the work to be done, et cetera. So there's a lot of activity that has happened because it was a running project, a project with full steam and then to break it or rather bring it to a pause, they involve a lot of effort without impacting whenever we want to start it back. So I think there will be some CapEx payments still happening of that kind of a nature in the second quarter, though a lower number. And I think we would be keeping our guidance that it would be less than INR 5,000 crores as a group. So around INR 5,000 crores to less than INR 5,000 crores. So I said that in the first quarter call that it would be around 50%. I think we will be around that level itself. So that's our plan for this year. So there will be some -- you should go ahead with the overall levels, which was last year about 8-ish, and we're talking about INR 4,000 crores to INR 4,500 crores. But I can also assure you that we have, we are limiting the CapEx outflow as much as we can in all geographies and ensuring we stick to the safety environment and the compliance CapEx. That is very important to keep but anything which is discretionary and good to have, we are reprioritizing it.

Yes. We will take a couple of questions on the webcast. A lot of questions have already been answered, but I think the common ones, which have -- we actually answered. Firstly is on the Southeast Asia asset sales. What is the update on that? And the second question is, what is the net debt-to-EBITDA target for the year?

Yes, Koushik?

So Southeast Asia is ongoing. This is not exactly the season where the M&A activities can be expedited well, as you can really imagine. But we are ongoing conversations and a lot of documentation negotiations are going on. So we will come and talk about it more in details post September. The net debt target I've already mentioned in the past, in 1 of the questions that our base case is certainly two-folded. And based on how the -- how we see the next few months, maybe in October, I'll be in a better position to give the guidance on how much could be the range of reduction. And the path is clear. We would like to reduce about $1 billion. But this year is a very exceptional unprecedented year. So we have to take it as we move forward.

I think, Koushik, the question was net debt to EBITDA. And I think basically, what we had said in the beginning of the last financial year was that, obviously, our goal is to bring it to below 3. At that time, we were at 3.2 or 3.3 but obviously, the pandemic and the slowdown in India has derailed our plans a bit. But obviously, the long-term goal is to bring it below 3. I know it just not looks tough. But like Koushik has said, we are prioritizing the balance sheet over a growth.

Yes.

Samita, what else?

Do we have any more questions? Maybe a last question?

Sure. We take the next question from the line of Rajesh Lachhani from HSBC.

I just wanted to -- if you can throw some light on Europe sequential movement in EBITDA per tonne. So last quarter, we had a $4 profit in Europe. And this is now a negative 43. So I just want to understand what can you -- if you can provide some breakup of how much was it due to lower realizations? How much was due to cost and how the carbon credit supported?

Yes. So I think there are 2 things which, if you compare with the previous quarter, 1 is the volumes are completely lower and that has had an impact. And prices have also been lower for us because of the fact that the auto markets were quite slow. The auto factories were the first ones to close in Europe in March, and that had an impact on our product mix for Q1. So these are the 2 factors which played an important role in the Q2 numbers being lowered. Cost takeouts were there. But obviously, when you have a lower volume, there's a fixed cost overhang. So while last year, we have actually taken down fixed costs by about 7%, 8% compared to the previous year in the lower volume environment you don't see that fixed cost take-out visible. So Q1 compared to Q4, volume impact and price impact played a significant role. There have been cost takeout at an operational level, which is offset by the fact that we had lower volumes. The carbon credit, as Koushik said, from an EBITDA point of view was about GBP 78 million, isn't it, Koushik?

Yes. So I just wanted to add to Naren what you said. The volume losses accounted for about GBP 71 million, and that was a very significant bit. And there was obviously production which was lower because mainly driven by the lower market demand. So that also had an impact on the cost. But the spend was overall GBP 21 million improvement, which is the cost takeouts that happened. In fact, during this quarter, on a YTD basis, the transformation plan delivered about GBP 100 million. So the spread impact was the most severe and the volume loss and the spread impact was the most severe as far as the operations in Europe is concerned.

Understood. So in case the carbon credits in next quarter are not available. Do we see a further decline in Europe EBITDA per tonne?

So that's what -- so as Naren mentioned, that the Q2 will be similar to Q1 without the carbon credit. So in effect, we are saying that there will be -- actually be an improvement in the underlying situation. So there is based on the fact that there is more cost takeouts that are happening, and a lot of commercial actions are also being put in place. So the outcome guidance is that Q2 should be similar to Q1, carbon credit is not included in that.

[Operator Instructions] The next question is from the line of Ritesh Shah from Investec Capital.

Sir, my first question is what is the status on Bhushan merger? And what that would mean on tax synergies? That's the first question.

Koushik?

Yes. So the Bhushan merger is -- process is undergoing. I think the next hearing is in -- towards the end of August. If everything goes well, we will have the AGM based on the dates when the NCLT gives. And following that, we will go forward towards the completion. So I think we are certainly likely to progress to closure during this financial year. That's what our target is. Tax synergies is not something that I can comment on at this point because I think it will all depend on -- it's not the reason for the merger. It's the other synergies, which are important. And I think those synergies are significantly important because they sustain for a longer period of time, including procurement synergies, raw material synergies, operating supply chain and various others. If there are some tax synergies, which is there because they are losses, but that will be more sequential than I think it is.

That's useful. My second question is on Europe. How should one read conversion of GBP 3.6 billion intergroup debt-to-equity and GBP 1.9 billion intergroup debt being waved off, that is from a cash flow perspective. And secondly, the auditors have been flagging off concern on INR 20,000 crores of investment into TSGH. So what is the thought process behind this? And you did indicate earlier that there won't be money which will be flowing from India, Europe. But should 1 put the same into the context that ex Europe, that is India and the Singapore entities, there won't be money flowing in ex Europe into Europe. Should 1 look at that statement in that perspective?

Yes. So the intergroup money is the money of the last 12 -- last 12 years of support and also working capital lines provided, et cetera. So that should be seen from that perspective. And so long, we are not going to increase. So therefore, if we don't increase further support, then that number will be there. And when the surplus happens out of Europe in due course in the future, we would expect that to be reduced. That's the traditional way of looking at it. But at this point of time, I would say that the intergroup is lying there as something which we have lend in the past. And some of it, we have converted to equity because it doesn't -- from a system point of view, it doesn't make sense to accrue interest out of it. So we've kept it more as a converted into long term capital, which is equity. You talked about the auditors bit. They have -- that's the investment from Tata Steel into Tata Steel Global Holding, and that represents the equity bit for the entire international portfolio. So I think the point is -- the point which the auditors wanted to highlight is that if this portfolio has problems in this investment is a problem, so -- which I think is restating the obvious. So I think that's how I should -- I would suggest you to look at.

The next question is from the line of Ashish Jain from Macquarie.

Sir, is it possible to quantify the government support amount which is there in the European EBITDA this quarter? And how could that number change in 2Q and going ahead as well?

I think the support is roughly about GBP 50 million in Q1. And some of it will stay in Q2. But like I said, as the economic activity picked up and the revenues come back to normal levels, then you will see this going down. So hopefully, any support that goes down will be made up by the improvement in performance. Then from a cash point of view, I think we've had about EUR 80 million to EUR 100 million of deferrals. So this is roughly the numbers. Koushik, is that correct?

Yes. So I think there has been a deferral of about -- from a cash flow point of view, about GBP 54 million in the U.K. and about GBP 90 million pounds in the Netherlands.

And sir, when we say deferral, is it again linked to any particular level of economic recovery? Or these are deferrals for a quarter or 2 or much longer?

Yes, it's for a couple of quarters. So it will come back towards the end, but the way it looks like some of it is also being extended.

The next question is from the line of Prashant Kumar from CGS CIMB.

Sir, my question is on the other operating income in Q1 FY '21, stand-alone is lower by roughly INR 320 crores, which is due to the -- which is due to the MEIS benefit going away, sir? And what is your take on the RoDTEP? And if you could give some color or light on what is the dialogue you're having with the government and nongoverments?

Yes. So I'll comment on the general MEIS and RODP, whatever, ROEDP (sic) [ RoDTEP ], and Koushik can comment on the impact on the financials. So basically, I think our conversations with the government as an industry, I mean, not the steel industry, as industry is that, obviously, over the last 3, 4 years, the payout from the government has been from anything from INR 35,000 crores to INR 50,000 crores, depending on the year on the MEIS scheme. And the MEIS scheme had been extended till December, and many exporters had actually quoted for orders and booked orders, assuming that this MEIS scheme is valid till December. I think what has come out is that the government has notified or government has basically guided that there will only be about INR 9,000 crores available. And so the question is what happens to all the orders that have been booked and things like that. So this is the overall industry issue with the government. So the conversations are -- can they be different way out? Can we -- can the government, obviously, we respect the fact that the government is short on revenues. So if the original plan to keep this scheme going till December if it is supported, but the payments to be made later, then that can help, otherwise, exporters have a challenge. From a Tata Steel point of view, India point of view, the impact is for the full year, maybe about INR 200 crores or INR 300 crores. So it is not as material as it may be for some of the smaller exporters for whom this is a very important part of their bottom line. So we are in conversation with the government and trying to find a solution as an industry. And obviously, Tata Steel will benefit accordingly. So -- but going forward, we are also expecting exports to come down. In Q1, we did about 50% of what we sold was in the export markets. In Q2, we expect that to be about 25% and keep going down in the domestic market picks up. So the impact of that on Tata Steel will continue to reduce.

The next question is from the line of Abhijit Mitra from ICICI Securities.

So I have 2 questions. Firstly, on the stand-alone product mix. So from a quarterly volume run rate in autos of around 0.5 million tonnes, down to 0.08 million tonnes, by what time do you feel you can go back to your old run rate? And what kind of mix change has it held to in this quarter? I mean this 0.5 million tonne coming down to almost 0 and had to be sort of diverted to exports.

Yes. So yes, your question is pretty much when will auto industry go back to what it was 2 years back, right? We were doing about 2 million tonnes a year into auto, 2 years back, and that has shrunk. So to me, just now, it looks like auto industry is moving from 10% of 2 years back to maybe 30% to 40% of 2 years back, okay? So that's where it is. And if Tata Steel protects its market share, you will see those volumes go up accordingly, right? What you said is right, a lot of what we lost in auto ended up in what we call IPPE or in exports, okay. IPPE is more the general grades and exports. In IPPE, we have value-added grades, but the volumes in IPPE, which is industrial products and projects is largely that. So -- but the product mix continues to change as we divert from exports to domestic because whatever we -- the product that we sell in domestic, typically, the price is better than the export price. Secondly, even within domestic, we are seeing retail sales are strong, which is normally a higher-priced product for us. We are also seeing the oil and gas sector pick up. Which has been a segment which we opened up post Kalinganagar, so that will also help us. In auto, what is more steel intensive is commercial vehicles, particularly the medium and heavy vehicles. And that has been the most hit in the last 2 years for multiple reasons, even before the pandemic because of the overweight -- overloading issues because of the NBFC and credit availability issues, et cetera, et cetera. But we expect that sector to come back as construction activity picks up, if the government is able to spend on infrastructure, what it plans to do. And construction activity picks up in the second half of the year, particularly. Then the medium and heavy commercial vehicles can come back and hence, auto can go back more quickly to where it was 2 years back. So this quarter, we expect the numbers to be -- to auto to be at least 2x to 3x what we sold in the last quarter, but that is still a fraction of what we normally settle in any quarter.

Right. That's helpful. And secondly, on the standalone operations, what kind of cost initiatives can you take? Because there are certain line items, which we see, for example, in Bhushan, the employee cost has gone up by INR 60 crores on a Y-o-Y or on a Q-o-Q basis. So are there any sort of cost takeouts that you can see, you can implement and sort of look better if you can throw some light?

Yes. So 1 is there are a lot of ongoing initiatives in all sites, whether it is Tata Steel, the main plants in Jamshedpur or Kalinganagar, the Bhushan plant in Angul or the Long Products plant in Gamharia, et cetera. In fact, if you look at Bhushan and which is TSBSL and TSLP, and if you really look at the cost quarter-on-quarter, in last year -- in the last financial year, from Q1 to Q4, you would actually see the cost drop by anything from INR 5,000 to INR 8,000 a tonne, okay? So there's been huge cost takeouts there. In Jamshedpur and Kalinganagar, there's also a lot of focus on fixed cost takeouts. And this year alone, we've targeted at least INR 1,500 crores of fixed cost take outs, of which we have some line of sight for about INR 1,000 crores, and we're working on the rest. So cost takeout initiatives constantly go on. It is reflected in some of the metrics that you will see over the years most important being the coke rates, which have gone down. The PCI rates have gone up, so on and so forth. So there are large number of those initiatives. So specific comment you made on employee cost in Bhushan was linked to some one-off payments for the -- we are also trying to bring some of the regular practices in terms of -- at the end of the year, we normally pay some incentives, et cetera. I think some of these things were not done in a structured way in the past. So we've brought some structure to it. So it was more a one-off some payments that we made based on the last year's performance that was accounted for in Q1. That's why you're seeing that quarter-on-quarter increase.

The next question is from the line of Bhavin Chheda from Enam Holding.

So can you guide us on the current capacity utilization now in August around plants in India and Europe? In India, I mean Jamshedpur, Kalinganagar, Bhushan market has they reached 100% and above?

Yes, yes. In India are pretty much all sites. Actually, the Long Products TSLP plants reached 100% in June itself. On the other sites were 90%, plus now we are 95%, 98%. In September, there are some planned shutdowns for a few days here and there. So -- but at the overall level, this quarter will be in excess of 95% in all the main sites and pretty much at 100% in August, I mean, 98% or 99%. In Europe, it is at around 75% to 80%.

So in Europe 75%, 80% you mean IJmuiden, IJmuiden would be at 95%, 100%, right?

No, no. Both are around 75%.

Both are around 75%, okay. And in terms of the iron ore integration for Bhushan Tata Metaliks, Tata Sponge, how much percentage it would be at right now?

One of the things that we did during the pandemic was we kept our iron ore mines running full out. So as a consequence, we built some iron ore stocks. And hence, in -- I mean, the original plan, if all the plants were running full out was, we would have had to buy some iron ore for the Bhushan plant. But since we stocked up on the iron ore, we are unlikely to have to buy iron ore, maybe some small quantities here and there. But we're pretty much in these...

So it should be close to 100% now for all group companies, right?

Yes. Absolutely. Metaliks, I'm not remembering, maybe Koushik can comment, but the TSLP and the rest is pretty much 100%. We, of course, buy some pellets off and on depending on the pellet availability. Yes, Koushik, did I get it.

Yes.

And my last question, there was a press article regarding U.K. government investing close to GBP 1 billion for 50% or so stake in Port Talbot operation, which can be carved out separately. So any time lines or any further talks on same? Because as -- I think as you mentioned in the call, Europe is still in very bad shape. And though there is a steel buy and see all across Asia, U.S. and -- Asia, India and even U.S. recovering, Europe still doesn't look to be generating free cash flow positive or even a positive EBITDA. So -- and demand is also expected in volume terms to remain down 15%, 16%. So it is not going anywhere for next 3 -- 2, 3 quarters or so. So is there any time lines for cash support or that deal happening soon?

So 1 is there are multiple conversations going on with the government for short-term support and long-term support. So I think, one is, we are plugging into existing schemes, and which is what we articulated in terms of the rate support that we got, tax deferrals that we got. And there are some other supports that we are seeking, both in Netherlands and in U.K., which is available to a lot of the industry there. The long-term support conversations are a little bit more with the U.K., but too early for us to comment very specifically on it. So obviously, the conversation with the government is going on and multiple proposals are being discussed. So I'll leave it at that. In terms of recovery, actually, Asia has recovered, I wouldn't say U.S. has recovered yet. So U.S. and Europe, we're waiting to see how things pan out for a change, the prices in U.S. are actually lower than in Europe. Normally, it's the other way around.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Ms. Samita Shah for her closing comments.

Thank you very much, everybody, for dialing in, and we hope you found this call informative. So we see for the next quarter call. Thank you. Bye, and stay safe.

Thank you.

Thank you very much, bye.

Thank you. On behalf of Tata Steel Limited, that concludes this conference. Thank you all for joining. You may now disconnect your lines.