Tata Steel Limited (500470) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tata Steel Limited 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, ma'am.

Yes. Thank you, Janice. Good afternoon, good morning and good evening to all of you joining us on this call today. On behalf of Tata Steel, welcome to this call to discuss our results for the second quarter of FY '22. The results were published yesterday, and I hope you've had a chance to go through them. We have with us our CEO and MD, Mr. T.V. Narendran; and our Executive Director and CFO, Mr. Koushik Chatterjee, who will walk you through the numbers and address any questions you may have. After a few opening remarks, we will move into Q&A where we will take your questions. Just a few comments. As the merger of Tata Steel BSL and Tata Steel has been approved, all the numbers for Q2 are inclusive of Tata Steel BSL and past numbers have also been reinstated to reflect the same. Secondly, as usual, we will also take questions on TSLP. So investors of TSLP, if you have any questions, please feel free to use this opportunity and ask us. Lastly, for our retail shareholders, do type in your questions in the chat box, and we will try and address as many as we can. And finally, the disclaimer, which is there on Page 2 of our presentation, which is loaded on our website, will cover the entire discussion today. So thank you, and over to you.

Thanks, Samita. Good day, everyone. I'm Narendran here. Just a few comments before I hand over to Koushik. The global economy has recovered faster than most people expected with the policy support from governments as well as accommodative monetary policies from central banks and also progressive vaccination. However, the increasing number of cases in China and Europe continues to pose a risk, as well as supply chain disruptions and taping of liquidity are areas that we are watchful about as we bank for this recovery. The steel prices have been volatile within a range over the last few months, and a few factors are contributing to the situation. One is the input costs continue to be quite high. Iron ore prices have dropped from over $200 to less than $100, but coking coal prices continue to be high at $550 to $600 in China and $380 to $400 for the rest of the world. This, in some sense, keeps a floor on the prices. And that's why while there has been volatility, it had been range-bound at a higher end of what we've been seeing for the last few years. On -- the second point I want to make is China has continuously cut production month-on-month. So you will see that Chinese exports have been below 5 million tonnes. It's been in the 4 million to 5 million tonne range, and that has made sure that China is not yet or no longer a disruptor in the international market. So I think, overall, it's been positive. As far as Indian demand is concerned, it shrank by about 2.3% quarter-on-quarter due to seasonality and temporary weakness in various steel consuming sectors because, typically, July, September is the weakest quarter because of low activity in construction. And this time, it was supplemented by the semiconductor issue for passenger cars and the commercial vehicles, volumes had not picked up in Q2. India's domestic steel demand is expected to improve at the onset of the festival season, and steel prices, which were typically -- I mean, for most of the last year at a discount to import parity prices, have started increasing with improving demand across segments, and high coking coal prices and steel prices now are slightly above the landed import prices. Moving on to our performance during the quarter. During the quarter, Tata Steel India crude steel production moved -- improved 2% quarter-on-quarter to 4.73 million tons as opposed to the previous quarter and was -- because the previous quarter was also impacted by the supply of liquid medical oxygen to different states in India. Our steel deliveries improved 11% quarter-on-quarter to 4.58 million tons despite the contraction that I mentioned earlier. And this is a testament to our strong customer relationships and a superior distribution network. We also launched a new superior rebar, Tata Tiscon 550SD, for our retail customers. And this quarter, we developed 53 new products in India for our customers across segments, including automotive, industrial products and projects, branded products and retail. On ongoing projects at Kalinganagar, our ongoing projects at Kalinganagar have picked up steam following a slight slowdown due to the second wave. And a 6 million tonne pellet plant in PLTCM is now expected to be commissioned in the second quarter of the next financial year. We are making good progress on our various initiatives to derisk the business, and Aashiyana has recorded a 38% quarter-on-quarter growth in its quarterly gross revenue, while services and solutions witnessed best of our operational performance in the second quarter '22 -- FY '22. Our steel recycling and new materials businesses are also growing well. On Europe, our economic activities and steel consuming sectors are witnessing recovery, while the automotive sector is impacted by the semiconductor shortages. Our steel production in Europe declined by about 4% quarter-on-quarter due to some temporary operational issues at both Netherlands and the U.K. steelmaking sites. And steel sales volume declined about 8% quarter-on-quarter to 2.14 million tons in the September quarter, but better product mix improved our underlying performance sharply. Koushik will further elaborate on our financial performance there. And European steel prices are expected to remain resilient, with continued supply tightness, though we remain watchful of the surging power and energy costs, especially in the U.K. I'm happy to say that the merger of Tata Steel BSL with Tata Steel has been approved by the Honorable NCLT, Mumbai bench with appointed date of the merger as 1st April 2019. We continue to progress on our ESG commitments, and we recently commissioned the 5 tonne a day carbon capture plant in Jamshedpur. We also started increasing our scrap charge in our operations across sites in India. In Europe, we've announced our plans to pursue a transition over the decade towards a more hydrogen-based route, and a detailed assessment of the same is underway. Recently, we won the high-quality Gandhalpada iron mine, which is situated close to our facilities, to our existing Khondbond iron mine in Orissa and within approximately 200 kilometers from our facilities in Jamshedpur, Kalinganagar and Angul. And it's next to the Kalamang line -- mine, which we got along with the Bhushan acquisition. This is another step towards our raw material security beyond 2030. With this, I hand over to Koushik for his [indiscernible].

Thank you, Naren. Good afternoon to all of you. Hope you and all your loved ones are safe and getting vaccinated. As mentioned by Samita, the Tata Steel Standalone numbers have been restated from 1st April 2019 to reflect Tata Steel BSL's merger into Tata Steel. However, as the business model for TSBSL is slightly different from Tata Steel with more downstream and 100% purchased coal, et cetera, the second quarter numbers for Standalone, including Tata Steel BSL, are not a simple extrapolation based on additional volumes, that you will need to tweak your models a bit and we can discuss that later. Coming to the performance. Continuing with our strong performance in the last 2 quarters, our consolidated financial performance for the quarter was again strong on the back of underlying business performance across geographies despite the impact of the sharp increase in coking coal prices and additional royalties to be paid in India on iron ore with the amendment in the MMDR Act. Our consolidated revenue increased during the quarter by 13% quarter-on-quarter and 55% year-on-year to INR 60,283 crores. We have achieved a new highest-ever quarterly consolidated EBITDA of INR 16,618 crores, which reflects a margin of 28%. The consolidated profit after tax was also one of the highest at INR 12,548 crores with a net profit margin of 21%. Our India operations, which include restated Standalone and the Tata Steel Long Products, generated revenue of INR 34,220 crores, supported by increase in steel prices and higher deliveries. We achieved highest-ever quarterly adjusted EBITDA of INR 13,877 crores during this quarter. The Tata Steel Standalone revenues increased by 18% quarter-on-quarter and 51% year-on-year to INR 32,582 crores with the benefit of strong steel prices and higher deliveries. The Tata Steel Standalone also achieved the highest-ever quarterly adjusted EBITDA of INR 13,574 crores with a 4% quarter-on-quarter and 133% year-on-year growth. This translates into an EBITDA margin of about 42%. The operations generated free cash flow of more than INR 4,300 crores in second quarter of this financial year. Based on the commentary that we've been seeing this morning, it appears that the India performance needs some deeper explanation, which is partly because the second quarter numbers needs to be seen beyond simple extrapolation. Let me add a few points on this. In second quarter, the overall net realization, which is Standalone plus Tata Steel BSL, increased by about INR 3,400 per ton quarter-on-quarter against our earlier guidance of INR 3,000 per ton. Coming to revenue per ton in second quarter, the revenue per ton for combined -- for Standalone plus Tata Steel Bhushan increased by about INR 4,550 per ton quarter-on-quarter to about INR 73,700 per ton, which is higher than many of the consensus estimates that I've seen primarily by an increase of about INR 4,350, which is what was seen earlier. Tata Steel BSL, the overall revenue increased by 6% quarter-on-quarter, i.e., about INR 450 crores, driven by higher prices, partially offset by adverse mix impact due to higher slab sales on account of operational issues and lower exports. For the Standalone inclusive of Tata Steel BSL, the second quarter costs were higher by INR 4,850 crores on account of a couple of factors. Let me talk about them one by one. The total raw material costs, excluding the impact of change in inventory, which increased by about INR 1,800 crores on a quarter-on-quarter basis, primarily due to a INR 750 crores increase in coal consumption cost with higher prices and higher consumption of imported coal by about INR 400 crores increase in the consumption of purchased pellets that we did more specifically in TSBSL. As a result, on a per ton basis, the total raw material cost per ton increased by about INR 3,600 quarter-on-quarter. Secondly, there was about INR 1,600 crores on account of higher royalty and taxes, which is reflected in the other expenses. Of this, about INR 1,200 crores is on account of MMDR amendment, of which about INR 320 crores is actually a pass-through. So TSLP takes about INR 219 crores and Metaliks takes about INR 198 crores. For TSBSL, the additional royalty was about INR 510 crores and which will no longer be relevant as we go forward. For third quarter, the outflow on account of Tata Steel BSL, which is a run rate of about INR 100 crores per month, will not be there on completion of the merger. In addition, TSLP performance was weaker than expected due to lower DRI sales and higher material costs amidst the higher royalty and higher iron ore and coal costs. Let me now -- I hope that clarifies to some extent the movements that everybody was expecting. Moving to Europe. Our revenues improved to about GBP 2.1 billion during the quarter, with the increase in the market prices getting translated into the profit and loss account. The reported EBITDA for the quarter more than doubled to about GBP 328 million on a quarter-on-quarter basis with higher steel prices and better mix, which was partially offset by increase in the raw material costs, especially coking coal, and certain increase in the energy costs. This is after a charge of GBP 32 million for the CO2 emission rights. There is also a GBP 13 million one-off credits. The underlying EBITDA was around INR 315 crores -- GBP 15 million, sorry. We had INR 1,192 crore ForEx revaluation in the second quarter on account of the adverse movement in the FX on account of the external and internal company debt versus INR 293 crores in the first quarter, which was a gain. Our CapEx is being prioritized on value-added expansion, as Naren mentioned, including Kalinganagar and strategically essential investments. On a consolidated basis, we have spent about INR 4,200 crores in the first half of this financial year. So far, our total spend on Kalinganagar is about INR 7,850 crores. As mentioned previously, our financial year '22 consolidated CapEx guidance is around INR 10,000 crores to INR 12,000 crores. The operating cash flows continue to be strong despite working capital pressure due to price effect on coal -- in coal price increase in recent months. Besides this, the quarter also witnessed major cash outflows in the form of tax, which was about INR 4,223 crores and dividend of about INR 3,000 crores. Despite this, the company generated consolidated free cash flow of over INR 3,300 crores during this quarter. And just to repeat, as part of our enterprise strategy, we continue to deploy the free cash flow for deleveraging the balance sheet with about INR 11,400 crores of debt repayment in the first half of the current financial year. And we are certainly targeting additional aggressive deleveraging in the second half as well. Our net debt to equity has further dropped to about 0.79x, while the net debt to EBITDA improved to about 1.2x. Group liquidity position remained strong at about INR 20,000 crores, including about INR 9,300 crores of cash and cash equivalent. At the start of this financial year, we had set a target of achieving the investment-grade financial matrices. And I'm happy to state that this has been achieved in the first half of this year. And we are happy to also note that Standard & Poor's has upgraded Tata Steel to investment grade of BBB-. In line with our strategy to exit noncore markets, we successfully divested our 100% holding in NatSteel Singapore at the end of this -- the previous quarter, which is quarter 2, to realize about INR 1,200 crores that has resulted in a realized gain on divestment of about INR 720 crores for the quarter, which has been accounted for. So with this, I will end my comments and open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Amit Dixit from Edelweiss.

Congratulations for record EBITDA in Q2. I have a couple of questions. The first one is on coking coal cost. So what was the coking coal cost in P&L in Q2? And what increase do we expect in Q3?

So Amit, the increase from Q3 -- I mean from Q2 to Q3 in coking coal cost for India will be roughly about $100 a ton, okay? And for Europe, Europe, I think it is going to be about EUR 55 a ton.

Okay. And that takes into account the partial security we have?

Yes.

Okay. The second question is, essentially, there is a -- in Standalone cash flow statement, there is a loan given of INR 16,547 crores. So just wanted to understand, I mean, which entity we have given loan to and when it is expected to be repaid.

So Amit, this is actually part of our deleveraging strategy. We've been prepaying our overseas loans. So what you see is essentially funding to repay or prepay the loan in the senior facilities agreement in Europe which we want to pay off. And that's been our focus as part of our deleveraging because India balance sheet doesn't have that significant loan and there are some bonds outstanding, et cetera. So we are essentially focusing on the overseas loan, and then we will come back and see what we can reduce in India. So that's the amount that you see as invested, as -- given as loan.

The next question is from the line of Prashanth KP Kota, Dolat Capital.

Sir, in terms of -- I have a couple of questions. Sir, in H1, we have about -- we have generated strong operating cash flow, out of which about INR 125 billion to INR 130 billion has gone into working capital increase. How much of that -- and what is the road map for that to unwind? Sir, what needs to happen for that to unwind?

So effectively, during the first half of this year, what you would see is that the working capital build up essentially on account of prices, which is both from -- finished goods prices and raw material prices; in India, on the coal increase, in Europe, on coal and iron ore and also the finished goods. The number of days is still contained within the range that we have. What has happened is the price effect which has come in. What we are trying now or what we will be focusing on is to reduce and optimize on the holding days, and that should start reversing from the third quarter onwards. We have a challenge that coal prices have increased even more. But I think we will be essentially focused on releasing working capital from the third quarter onwards so that it will not happen all in 1 quarter. It will take some time, but -- and there's a huge optimization on the holding days, the quantity because it's also important to ensure that we have sufficient inventory for running operations comfortably. So -- but you would see some reversal from third quarter.

Understood. Sir, second question. Sir, I just wanted to know your thought process broadly on the aspect of does anything, any covenant or does any regulation forbid us from doing a buyback?

No. There is no covenant or regulatory issue that stops us from doing buyback, if that's a general question...

Sir, my question is in the context that given the cost of [indiscernible] quite low, particularly in overseas and even in India now, so is it not a good idea to consider a buyback? I'm just thinking out loud.

So I'm sure at some point in time, the Board will look at it and look at options for better returns for shareholders. But at this point of time, I don't think we are yet in the zone of debt levels where we can not pursue the deleveraging. So I think we have some road map to go forward in repaying the debt. It's important for us to continue to be fitter from a balance sheet perspective. And I'm sure at some point in time, other options will certainly be looked at.

[Operator Instructions] The next question is from the line of Pinakin from JPMorgan.

Quick questions. First is if you look at the first half EBITDA, INR 16,000 crores broadly in each quarter, second quarter had a bunch of one-offs, which some of the royalty expenses will not recur in the second half. Now coking coal prices, the first iron ore, the smaller steel prices are broadly steady. Into the second half, how should we look at performance on a consolidated level? While margins could come off, volumes will be higher. So can the first half EBITDA run rate at a consol level be maintained in the second half given what visibility we have on steel prices, cost and volume?

So Pinakin, I think that's what we're chasing. There are a few things which look better in second half and few things which look worse. But overall, I think on the positive side, we expect demand in India to be better in second half than first half. Second thing is the iron ore prices coming down will help us certainly in Europe. The third thing is in Europe, because Section 232 issues have been sorted out with the U.S., there are options beyond Europe for our European business. And fourthly, we expect the semiconductor issues to be better in the second half than in the first half. And in India, we are already seeing improvement in commercial vehicles, et cetera. So there are a number of aspects which we are seeing as positive. What we are watchful about is increasing COVID cases in Europe and in China and whether that will have an economic impact. The second is, of course, we are watching what's happening in China, but I think what we've seen is China has cut production every month, month-on-month. And that's why exports from China has not been a disruptor so far, and we don't expect it to be a big disruptor going forward. So energy costs in Europe are also something we are watching. So that's why it's a bit of a mixed bag. But yes, as you said, the volumes should be better in the second half. And we'll have some opportunities to improve spread, particularly when the iron ore prices soften a bit, though we will have a little bit of an impact of coal bought last quarter flowing into this quarter, yes?

So just to clarify further, is it fair to say that second half Europe should be better than what the second quarter is, though India margins could be softer?

So second half Europe will be better than first half because as you know, first quarter, Europe was not good, right? So now we are seeing the spreads stabilize to the levels that we want it to be. We will also see some of the new contracts coming in for Q4 because a lot of the packaging and automotive contracts which have been renegotiated will start -- or being renegotiated will start kicking in, in Q4. So yes, Europe should not see a deterioration, and we think that things will improve a bit.

Understood. And lastly, consolidated interest came up very sharply. So what should we look at as a steady-state interest cost as the company keeps on repaying debt?

So Pinakin, I think during this quarter, we had a reversal of about INR 260 crores of interest provided for previously because the merger with TSBSL was not kind of approved. And therefore, we were taking in the tax impact of the same, the tax losses. But if you are not paying advanced tax, then you have to account for it as a penalty, which has got reversed in this quarter. So if you gross it up by INR 260 crores, then that is the -- broadly the level that we continue. And then once we are repaying progressively, it will step down uniformly across the next few quarters.

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

First question, just continuing on the Europe part. So first, if you could just give some more details first into pricing. I mean we've seen spot prices softening, but at the same time, we will benefit from the contract reset. So how should we see realizations within Europe in the coming quarters? And whether it peaked in 3Q or 4Q?

So I think, basically, Q3, we expect in Netherlands the prices to be about EUR 50 better than Q2, and in U.K. about GBP 45 better. So pretty much close to similar EUR 50 -- EUR 50, EUR 55 better in Q3 than in Q2. Q4, we are still in the process of negotiating some of the contracts, et cetera. So I won't give a Q4 guidance just now. But certainly, we are hopeful that we can keep improving on it because we also have this issue of energy prices in Europe that we need to keep an eye on. And many steel companies in Europe have already talked about the need to cover that through price increases.

Understood. And then with respect to costs, iron ore versus coking coal and versus energy, I mean, how do these 3 costs move in the next quarter or so in Europe?

So Europe, the coal costs will be up EUR 56 higher in -- EUR 55, EUR 56 higher in Q3 over Q2. Iron ore costs should be EUR 30 lower in Q3 over Q2.

Understand. Understand. My second question is with respect to a recent iron ore mine bid that we won at a very huge premium. I just want to understand if the change in stance, what we've been quite conservative in the past auctions. So given that we have a captive iron ore on a couple of years left, I mean, is it possible to share some rationale and thoughts on that?

Sure. As you rightly said, we've been very careful about what we bid for which mine. So there are a few things which attracted us to this mine. Firstly, it's a 350 million kind of reserves. So it's a big mine. We prefer big mines because it's much easier to drive efficiencies there. Secondly, it's a low alumina ore, which is very important in India because India nodes are typically high alumina, whereas this is 2.2% alumina. And this becomes even more critical when you're looking at lower carbon footprint because the higher the alumina, the carbon footprint in production is higher. So we have -- going forward, we feel low alumina ores will be even more valuable than any iron ore. So that was the second reason. The third reason is this is adjacent to the Kalamang mine, which we got through the Bhushan acquisition. And that also has about 100 million tons, and that is also available with us for the next 30, 50 years or so. So if you look at Kalamang and Gandhalpada together, again, we can extract a lot more value than anybody else because they are adjacent mines, and adjacent mines give significant benefit because you don't have to waste ore at the border of these 2 mines. Fourthly, this gives us a good, stable supply beyond 2030. And that allows us to invest in slurry pipelines and other infrastructure that is required, where for existing mines, we are constrained by the fact that we don't know the situation after 2030. And finally, this is a greenfield mine. So we have no obligation -- if you acquire an existing operating mine, you have to produce that same volume or around that volume. Otherwise, you end up paying penalties. Since this is a greenfield mine, we can develop it at a pace that works for us, that's convenient for us and time it well for our transition in 2030. And finally, having this -- having Kalamang, Vijay-II mines of TSLP and Gandhalpada, we are in a comfortable position to pick and choose what we want to bid for in any new options. So I think strategically, it sets us up very well, and that's why we built the premium we did.

That's very elaborate. If I may just squeeze in one last question. Now this royalty [ outflow ] because MMDR amendment for our subsidiaries, Tata Steel, Metaliks and Long Products, looks to be permanent, at least for the next couple of years, so is it -- I mean given that it is a very substantial portion of the profitability there, does it make sense now to run it as a separate company or we may evaluate combining everything [ at Tata Steel ]?

So we are exploring all options. This is a more recent development, so we are exploring all options. For TSLP, we also have an existing mine which is part of TSLP, which is the Vijay-II mines. So you have an option there to serve the requirements, so we cannot fully fulfill what is required. So we're exploring all options, and we will discuss at the Tata Steel Board and the Boards of those companies before we decide.

Thank you. The next question is from the line of Amit Murarka from Axis Capital.

Sir, just my question is on the carbon credits. Could you just explain the CY '22 CY '21 carbon credits position, like are we on track? Or will some further provisions need to be made?

So on the carbon credits, Amit, there is no movement on the credit. So all that has been done in the first quarter. We have also got our allocation, which is banked and kept with us, and there is no change at this point of time from an underlying perspective. Another allocation will come early part of '22, and we are -- we will be in compliance with the requirements. And I don't see anything going forward on that. There are certain hedges we had taken on which there are some noncash provisioning that has been taken. But beyond that, there is nothing on an underlying basis, and the credits will continue to be banked and used for compliance purposes. In Netherlands -- sorry. Yes. So that is where it stands from a TSUK perspective. And in Netherlands, we continue to get free allowances and comply with the same. So there is no -- so strategically and operationally, we are not essentially going to get into any trading position in the future.

Okay. Understood. And also just on the -- like a longer-term objective of reducing the emission footprint, and you've mentioned in your news release about the -- pursuing the hydrogen route in Netherlands. Could you just share some more details on that and by when you think you will move ahead on this project?

Yes. So Amit, basically, in Europe, as you are aware, EU has set itself some goals and the countries themselves have set themselves some goals. So there is a plan for the industry and not just us to transition to a greener future. But that means multiple things. Firstly, different governments are coming up with different structures to support this transition. So that's a conversation we are having both to the U.K. and the Dutch government. Secondly, to make sure that the industry in Europe is not penalized despite being efficient because our plant in IJmuiden is one of the most carbon efficient in the world. In fact, the second best in the world if you -- as per the recent World Steel Association numbers. So we are seeing the European Union propose a carbon border adjustment mechanism, which makes sure that the transition is supported. Thirdly, we are also seeing greater appetite for -- amongst customers in Europe to pay a premium for green steel. So all this and the fact that there is a carbon price which is already there, which is now at some EUR 60, EUR 65 a ton, so all this means that all of us -- I mean, the industry, including us, will have to make a plan for the future, which is what we've talked about. So -- while in Netherlands, we were looking at carbon capture and storage as possible solution, we've concluded that it's better to move towards a gas-based DRI and then hydrogen-based DRI as a solution rather than go for a CCS solution, which later we may anyway have to go for gas-based or hydrogen-based DRI. So that is what we have said. And over the next 10 years, we will transition at least one of the blast furnaces into this process route, and we will plan it and time it in a manner that is supported by policy as well as obviously supported by the financial viability of this transition.

And if I may ask what kind of state support you expect from this financially?

So as we said in our release yesterday, we are still working out the details of the cost of this transition, et cetera, because there are multiple process interventions that we need to plan for. And once we have that, then we will have a discussion with the government. The government was supportive of the CCS group because that was a preferred route to Netherlands. But given our announcement, the government is also exploring what they can do for this process route. So I think government has been supportive, but we've not had a specific conversation yet until we finalize our plans.

The next question is from the line of Satyadeep Jain from AMBIT Capital.

A couple of questions. On Europe, can you talk about your energy exposure given the rising energy prices and the upcoming winter? You also supply, I believe, the [indiscernible] outside the steel plant in U.K. also. So given we talk about energy surcharge that is going on in Europe, what -- when you look at the cost increase and the possible surcharge, what kind of impacts -- do you have to start energy prices there?

So typically, our energy costs are about EUR 30 million to EUR 40 million a quarter. And that's obviously expected to increase. And we are looking at it in the EUR 80 million to EUR 100 million range going forward. Now obviously, some of it will be recovered from the customers because it's not just us, everybody else is facing the same problem. I think we are in a better position in Netherlands where we are hedged quite a bit. U.K. is where we have a little bit more of a problem. But I think since it impacts everybody, as you've said, there will be a move to recover as much of it as possible from the market.

Okay. And there was talk about some auto customers also canceling some auto contracts. Is that still going on? Has the situation improved somewhat?

I've just heard that. I mean based on -- I know one of our peers mentioned that, but I -- we have not heard anything of that yet. But I must also say that the -- this is where the U.S. option opening up is a positive for Europe because auto has been taking less than they had planned because of the semiconductor issues. And the U.S. market has always been a good market for Tata Steel in Europe. We typically export about 1 million tons. We have brought it down by 50% over the last few years. But now that's also an opportunity available to us.

Sir, clarification question to the previous question on the transition, blast furnace to DRI at Netherlands. So basically, the blast furnace would be shut down when it reaches the end of life, and that could move to DRI. That would be the plan.

Yes. Generally, the transition being planned in Europe by multiple people is whenever the blast furnaces reach end of life, you then look at having a gas-based DRI, assuming gas is available. And then later, when hydrogen is available and plenty and at a reasonable cost, you substitute the gas with hydrogen.

I would now like to hand the conference over to Ms. Shah.

Yes. Thank you. So we have a few questions in the chat, which we will just take now. The first question, I think, is on steel price movement on the NR guidance in India given the surge in coking coal costs and also the fact that domestic steel prices are now more in line with import prices.

So I think here, the guidance we'd like to give as Q3 prices will be, on an average, about INR 2,500 per ton higher than Q2 in India, and us, I mean, the realizations.

Yes. Thank you. So the next question is in terms of the volume guidance for the rest of the year and whether we are on track to meet the 1 million tons more in India as well as in Europe, which we had said earlier.

So basically, if you look at Q3, I think India will be flat. Europe will be better than Q2. Europe will be closer to Q1. Overall, for the year, we are maybe between 1.5 million and 2 million on a consolidated basis. That's the way I look at it.

Thank you. The next question, I think a lot of questions around this, whether the iron ore and coal costs mentioned is per ton of ore or per ton of steel. Just to clarify, it is per ton of ore and not per ton of steel. Some more questions, and this one is on TSLP that with the change in the MMDR Act, going forward, what is the increased royalty payment at TSLP?

I think what we've said is roughly for the half year, it has been about INR 200 crores. I mean, again, this is dependent on the iron ore price. As the iron ore price drops, this will drop. So this obviously INR 200 crores factors in the high iron ore prices over the last 6 months for -- today's iron ore price, I don't know what the exact calculation will be, but that's probably the highest we would be paying.

Thank you. Next question, and Koushik, you might like to take this, that given the group's focus on deleveraging and Tata Steel's investment-grade status, would you also extend -- would you also refinance some of the existing U.S. dollar bonds and term them out further?

Well, these are all trading at a premium at this point of time. So I think it would be fairly costly to do so. And therefore, we are not looking at refinancing the bonds. We'll let it run past the maturity date.

Yes. So I think the question actually is more -- I know we've used the word refinancing, but I think the question is would you issue a fresh -- do a fresh issuance of U.S. dollar bonds.

Okay. I think at this point of time, which is planned, if we do it -- we are watching the market and seeing how the trades and deals are happening, but nothing at this point of time.

Thank you. And one last question, which we'll take from the chat before opening it back to the analysts, is in terms of the impact of China. China, with the kind of changes which we are seeing in steel demand and the production cuts shaping up, what impact do you see of that on steel prices generally and specifically for Tata Steel?

So I think, overall, we are seeing China is less of a disruptor through exports. Over the last 10 years, we were always watchful about Chinese exports coming and being dumped in multiple markets. We are less worried about that now because I think China has exercised great discipline in cutting production month-on-month. If you look at the World Steel Association forecast which was made last month, basically, World Steel Association has forecasted steel consumption will grow at 4.5% globally. And this assumes China has no growth of steel consumption. All this 4.5% is coming from the developing countries like India. So there is a shift in where the growth of steel consumption is happening going forward. It will be led by infrastructure investments in the developed countries, and in developing countries like India, also in regions like the Middle East, Southeast Asia and Africa will continue to grow in steel consumption. So given that, we are watching China more from a point of view its impact on iron ore prices and coal prices and less about them flooding markets with a lot of exports. And given China's ambition to become net zero by 2060, I think they've already stated that they want to discourage steel exports over the medium and long term. So less of an impact uncertainty for Tata Steel. We are more leveraging what's going to happen in the domestic market. We are less dependent on export markets. Last 2 quarters, we were at 16% exports. This quarter, we'll be at 12% export, which is close to our long-term average on export. So we are looking forward to the recovery in the Indian market.

Thank you. Janice, we'll go back to the analyst questions, please.

The next question is from the line of Ritesh Shah from Investec Capital.

I have 2 questions. First is on capital allocation and in Europe. Sir, we have given a medium-term target of 15% of ROCE. And if I remember, the same number is 12% for carbon-adjusted ROCE. Just wanted to put into perspective, you indicated the idea for exploring gas-based DRI eventually going into hydrogen. So will it make the threshold what we have taken over here? Or is it an option that we can actually deploy equivalent capital probably in India itself or some other regions globally? That's the first question.

So -- Naren, if I can take part of that...

Sure. Sure.

So fundamentally, this transition that is going to happen first in Europe and then much later in India is being looked at from a financing perspective, a blend between what the company's internal capital is, between green financing that will be raised for this purpose and then the government support on target funding because there are several funds and themes that are being floated in Europe. So if you take all of these 3 and then do the math, then -- and if you adjust it for the European cost of capital, I think we will certainly be in a good space. And I think that is our format at this point of time. That's why it's important to get the government schemes and government financing and government-backed green financing. So over the next couple of years, that is something which is going to be applied on. The 15% CIRR part that you saw or what we talked about in the Investor Day was essentially on deployment in India from the capital allocation for that. And I think we are fairly firm on that at this point of time because India transition is not happening in the next few years. It will take a long time. I think India has just announced the 2070 and the new NDCs will come into play for 2030, and for which we are ready and we have already announced that we will be -- our intensity will be 2 tons of -- per carbon per ton of crude steel by 2030. So we're sticking to that. So -- and we are also going to look forward at some point in time how green financing will help us in that transition even in India. So that's broadly the perspective. So it's -- if you look at it, the short and medium term of 15%, it certainly holds and our capital allocation certainly is measured against that.

Great. That's quite useful, sir. Sir, my second question is you indicated about the discipline on Chinese exports, which is encouraging. But sir, how should one look at Chinese export pricing which has been declining one way? What will you infer out of it for local pricing or when we look at import parity? And secondly, for our export shipments, pricing could again be under pressure just because of Chinese export pricing being lower and as the fringe shipments potentially impacting how we price our shipments. Sir, how should we look at that?

So it's only in the last maybe a week or so that some Chinese exporters have been a bit aggressive in Southeast Asia and Turkey, et cetera. But China is still buying coal at $550. So $600 coal has come down to $550. But at $550 coal, there's only that much you can drop prices by. So that's something which we need to keep in mind. Secondly, what we've seen even in the last 1 year is when exports goes up, the Chinese government changes the rebate structure to discourage exports because they are really not wanting China to import iron ore and coal, leave a carbon footprint behind an export steel. So we are seeing that, that is being tracked very closely. And normally, winter months, there are production cuts as well. So I think for multiple reasons, we are less concerned about Chinese exports now than we were, let's say, 3 years back or 5 years back.

The next question is from the line of Hitesh Arora from Unifi Capital.

Sir, just wanted to understand, what's the outlook on coking coal prices [indiscernible] speak to Australian miners and what's been happening around the world? What are your thoughts on coking coal prices? When do we see them normalizing and how?

So Hitesh, there are a couple of things happening, right? Firstly, China is not yet buying coking coal from Australia on a regular basis. I think they cleared some of the shipments which are stuck there, but largely they're not buying as they used to before. That's why China continues to buy coking coal at a higher price than is available to the rest of us. So they are buying largely from the U.S., Russia, Mongolia, et cetera. As far as India is concerned, India has now become the biggest importer of coking coal in the world or the buyer of coking coal -- importer of coking coal. I think that's more accurate. And we buy from Australia largely. Now Australia, there are not too many options on supply. So for the good-quality coal, there are a few suppliers. They've also had their own challenges. That's why the coking coal prices out of Australia has still been reasonably stable at $380 to $400. We don't see it dropping significantly. We see it more in the $350 to $400 range for some time because it's not a very liquid market. And any small interruption, any weather disturbance, et cetera, pushes up the prices. And with steel production growing in the rest of the world, including in India, the demand continues to be quite strong. So I expect coking coal prices to be in the $350 to $400 range at least for this quarter and next.

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

Sir, I have 2 questions. Firstly, your comment you just made on coking coal and given our guidance for 3Q, does it mean that 4Q onwards is another $100 impact is left to be reflected in our financials from a coking coal point of view?

No. I think we peaked as far as the buying price is concerned, and we'll be pretty much there. We don't see any further increase in Q4, unless coking coal prices again shoots up.

Okay. Okay. Got it. And sir, second thing, sir, if you can clarify on the carbon cost impact in Europe that we had in 2Q. I missed that comment. And what is the outlook for carbon costs in the second half in Europe?

Koushik?

Yes. So the -- what I mentioned is that there has been no trading of carbon emission rights in the second quarter. We had repaid our obligation or settled the obligation in the first quarter of what we sold in the previous year when the COVID crisis was at peak, and we liquidated some of our carbon rights. So all our intention is our -- going forward, our position is not to trade in, in the ordinary course of the business. We have banked what we have got as fee allowances. And those fee allowances are kept for compliance purposes. That was my point. And the last point is that there were some hedges on account of the CERs, and some noncash provisionings have been made in this quarter and which will ease out in the coming quarters.

Got it. Got it. So sir -- so Koushik, we still remain on track to levy carbon-related surcharges and all after the first EUR 12 number that we have put? And what's the feedback and acceptance of that? And is there a case to think that, that number can be raised further?

So that is what we had put in. We were the first to put in. Now the others are also doing something similar. So that sticks. And we have a formula by which we calculate that based on our allowances, the carbon price, et cetera. And just now, we've not felt the need to revise it, but if the carbon price will go up any more, then we will certainly revisit it.

Just to add, it's also linked to what our exposure is to external carbon purchase. And that's -- so it's a fairly transparent approach towards it.

The next question is from the line of Indrajit Agarwal from CLSA.

Congratulations on a good set of numbers. I just want to understand the Indian steel trade environment that you're seeing currently. We have seen the domestic market, the demand is slightly picking up, but export prices falling off the cliff. And along with that, our quota exports to Europe has been exhausting. So do you think more material gets diverted into India given that Indian prices are now at -- maybe in line with or at a slight premium to parity ? Does that put pressure on domestic steel prices?

So Indrajit, we -- from a Tata Steel point of view, we were exporting 16%, we'll export 12%. So it's not that we have to sell a lot more volume in the domestic market. I think we are comfortable selling what we need to. If you look at some of our peers, yes, they've been exporting more. They probably will sell more in the domestic market. But we expect H2 demand to more than offset this diversion. And as of now, there is no real imports coming in either. So to that extent, I think the Indian market in the second half should be able to absorb any diversion being done by the industry from exports to domestic markets. So that's the way we see the situation.

Sure. That's helpful. One follow-up actually on previous participants. Just to understand, after the $100 per ton increase that you are likely to see in coking coal in third quarter, we will be closer to market price or what is the current spot rate, sir? Or that's how we should...

No. So normally, we look at what is the price we buy and the consumption how it flows through. So what we are giving guidance is based on what is already contracted and in place. And normally, we have 2 to 3 months of inventory also in the system. So I think -- and there's also -- it's very difficult to correlate it exactly to the market price because all of us buy different blends. And one of the -- I think one of the virtues that we think we have is that we are able to make do with a good blend, the most optimal blend, and that's a very technical subject where we look at what is the most value optimal blend that we can use. So it won't be easy to correlate $400 in this. But when we tell you $100, this is factoring in the blends that we use, et cetera, et cetera.

The next question is from the line of Rajesh Majumdar from B&K Securities.

Sir, I just wanted to know, there is an increase of about INR 4,000 crores in the other expenses on a quarterly basis on the consolidated numbers, and you accounted for about INR 1,000 crores on account of royalties and about INR 1,192 crores on account of FX. What is the balance, INR 1,800 crores on account, sir?

Just give us a minute. Koushik, do you want to take it? Yes, I'm asking one of my colleagues, Sandip, to explain. Yes. Sandip?

From the 2 items that you explained about royalty and FX, there are other expenditures like -- because of -- there are around INR 300 crores higher expenditure in euro because of energy and repair and maintenance costs. Similarly, there is an increase in expenditure in spot consumption and [ deferred ] maintenance in Tata Steel also, which is mentioned in the point that you just elaborate 2 major points. And also in other subsidiaries like TSML, which was -- which is also having a higher expenditure this quarter, around INR 159 crores. So other than those 2, these are the 3, 4 major items, around INR 200 crores, INR 300 crores, which has contributed to that increase that you are seeing in the other expenditures.

Right. So some of these are basically going to be recurring, right? So we will see a higher other expense going forward?

Just to clarify, some of these are recurring, some of these are not. If you see sort of the bulk of the expenditure, so INR 1,100 crores, which is FX, really depends on the FX movement across currency, so you can't really say it's recurring. And as you track our results, you will see that sometimes there's a gain, sometimes there's a loss. So that's [indiscernible]. In terms of the increase in royalty, which we talked about, about INR 500 crores incurred this quarter on account of BSL will no longer be there because now with the merger, we don't have to pay that. So some of these are not recurring and some -- so I wouldn't say that they are all recurring.

Those 2 big expenditures what we mentioned, those are not -- they are nonrecurring. There is small [indiscernible] of around INR 400 crores, which was [indiscernible]. So broadly, there's a breakup that movement between last quarter and this quarter.

Okay. And my second question was the company is probably going for a maintenance shutdown in 3Q in the domestic operations. Is that correct?

I think somewhere we mentioned that hot strip mills have some shutdowns, but those are regular short shutdowns, nothing very major. That's why our Q3 volumes are similar to Q2.

Right. So there won't be any significant drop in production, definitely.

No, no, no.

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

Sir, you mentioned that Europe used to export 1 million ton to U.S., which was down by 50% earlier due to the tariffs imposed by the U.S., which is not there. So you're saying that Europe operations will have that opportunity to increase exports, one? And second is now since you were already exporting, there was some tariffs in U.S., which won't be there. So your profitability for exports to U.S. would improve going forward?

So a couple of things. We sell multiple steels to Europe -- I mean to U.S. from Europe. One is the packaging steel, which -- actually what we supply was not being made in the U.S. And so I think as far as I remember, there, the permissions were taken by the customers to allow us the exemptions and that's why we used to sell. What dropped is largely the exports that we used to do to the engineering segment in the U.S., which is what shrunk over the last 3 years because of this 232. So we have an opportunity to go back into those markets because, as you know, the prices in U.S. are higher than the prices in Europe, and we have some good equity with the customers there. So it allows us an opportunity to sell more into the U.S. in segments which we had vacated over the last couple of years.

The next question is from the line of Ashish Kejriwal from Centrum Broking.

Just 2 clarification in one of the questions. Koushik mentioned that we have done some hedges and noncash provisioning in divesting Europe in Q2, which will release in Q3. So is it possible to quantify and whether that is included in the EBITDa numbers which we have quoted?

Can you hear me?

Yes. Yes, yes. We can hear you.

So those noncash provisions are currently in the OCI and not in the main financials, and that's how it will remain. So it's not included in the Q2.

Okay. And secondly, sir, in terms of coking coal costs, which we mentioned that incremental costs will be $100 per ton. So is it possible to mention what could be the coking coal cost per ton of steel? Because we are using different lands, so product ratio could be different.

So again, it depends on the blend in different plants at different costs. We also have -- in some plants, we use more of our own domestic ore, which is at a very different cost. So it will be difficult to give you one single number. But typically, coal costs are 40% of the overall cost, just to give you a sense. But if you want a more precise number, I'll ask to Samita to...

Yes. So it's the math which you'll have to do because this is just the cost of purchased ore. And as you know, we have our own ore as well on the coal side. So there will be a combination of that. And it actually changes quarter-by-quarter depending on how much we use our purchased ore on coal, which is also a fact and an operating decision really.

Sure. So is it possible to share what it was in Q2 or first half, whatever number it is?

No. We don't really get into these details because it will change every quarter. But roughly, we are at about 20% -- at a very broad number, it's about 20% of our own ore and the balance is purchased in India.

Sure. And sir, lastly, are we seeing any risk of decrease in steel prices in India because now we are at -- higher than the import parity business?

So I think for now, I think the demand pickup is expected to be strong in H2. So that is one. Secondly, while just now we may be above import parity, but even if somebody decides to import today, it's going to take 2 to 3 months for it to come, right? Even some of the offers you're hearing about for Jan and Feb shipment in Southeast Asia and Turkey and places like that. So I don't think this is going to have an impact in India at least for the next -- this quarter and next quarter.

The next question is from the line of Pinakin from JPMorgan.

Sir, just trying to understand that while you have mentioned a lot on the European blast furnace to DRI and hydrogen, at this point of time, sir, what is the campaign? When does the campaign life [indiscernible] end over there? So I mean trying to understand the time frame at which the decision would have to be taken.

So there are 2 things to consider. One is the time frame of the blast furnaces life. And the other is a time frame in which you have gas and other facilities available to make the transition. So we'll have to find -- so there are 2 blast furnaces in the operation in Netherlands, one which is due for a relining in 3 years and another which is due for a relining maybe after a few more years. So we will time it -- just now, it doesn't look like the infrastructure, the supplies and everything else will be ready for us to time it with the immediate relining, but the subsequent relining is probably -- which is -- after 2025 is when we think the timing will be better.

Sure. And just to understand this point better, does Tata Steel take a decision independent of what others are doing in Europe? Because given what -- the experience with gas this year, if somebody was on a gas-based DRI in Europe versus a coking coal-based blast furnace, the cost structures could have been very different. Or would Tata Steel take a decision in Europe based on what the peer set is making?

Absolutely. I think, obviously, we will look at the economics of it. And that's why the conversation with the government is also important because this transmission cannot be done in isolation. There's no point making this transition if the costs are very different from existing process routes and it's not supported by the government because, ultimately, the business has to be viable through the transition and after the transition. So we will evaluate all that before we take the final call. I agree with you that today's gas prices don't suggest that even today's carbon price can bridge the gap. But things are evolving.

The next question is from the line of Ritesh Shah from Investec Capital.

Sir, I just wanted to check on the CapEx breakup which you indicated INR 10,000 to INR 12,000 crores. If you [ put ] broad numbers between India and Europe. And specifically for Europe, I just wanted to understand, there has been a new project which has been announced called road plus -- Roadmap Plus.

Roadmap Plus, yes.

Right. So is this something that you've already included? Or is it something over and above that?

Currently, that Roadmap Plus spend is not much. And the overall spend is about -- multiyear spend is about GBP 300 million. What you see currently is largely the sustained and critical CapEx in Europe, nothing of medially on any of the decarbonization CapEx. Over the next 3 years, it will -- 3 or 4 years, actually, it will be spent on the Roadmap Plus, which is essentially on reducing the environment load on multiple projects. Not one project, it's multiple projects.

And sir, second question was the loans which we have given to other overseas entity, how should we look at it? I'm just looking at in conjunction with our earlier commentary that you won't be lending or deploying much capital or we won't be deploying any capital into overseas assets, specifically in Europe. So if I had to put these 2 variables together, sir, how should I understand it?

So I think we -- and the point that was made is we don't want to put additional capital into the business of Europe. But the balance sheet is one, right? So the balance sheet -- whatever debt is in Europe or Singapore or India is all in the consolidated balance sheet. So if we are going to do deleveraging and derisking of the business as such, then it includes essentially taking off those loans from the balance sheet. So that is the point. So accounting-wise, it is -- it has to go through a certain route via the holding companies, et cetera. But fundamentally, it is money for deleveraging. So it's internal capital or return on equity being used to reduce external debt.

Okay. And sir, just one clarification. 15% ROCE, what you indicated, you stated is only for India, right?

Yes. Yes. I mean if you look at the European cost of capital and the return levels are very different. So that 15% CRR -- because incremental capital investment, the heavy lifting of that capital will largely be in India for growth.

Before we take the next question, I would now like to hand over the floor back to Ms. Shah.

Yes. Thank you. We have some more questions on chat. So we will just take a couple of questions before we end the call. The first question is on the recycling plant, which we have announced in India. It says, can you provide an update on the 5 million tonne recycling plant? So I don't think it's one plant, but...

Yes. So basically, the first plant is 0.5 million tonnes, which is already commissioned and operational in Rohtak and functioning, and I think it's working well. So we had basically said that over the next few years, we want to set up 5 million tonnes of recycling capacities. It will be multiple plants. We are looking at sites in Western India and Southern India. Basically, the thinking is in Northwest and South where there is scrap available, we will set up such facilities. So over the next few years, we will do more of these plants.

Thank you. There is a next question, which is about investments into renewables. Is it a cheaper CapEx option than your current power plants?

So in a steel plant, there are multiple points that we kept in mind. A lot of our power plants are run using gases which we generate from the process. So that's pretty much the best option available because otherwise, those gases would be [ flat ], right? So that is one. So there's only a smaller part of it which is using coal. And even that coal, a lot of it comes from the tailings and middlings, which are basically the lower-quality coal, which is generated when we mine metallurgical coal. So when we look at renewables, we look at supplementing what we have. And second point is to run a steel plant, you need a lot of fuel loading. Energy is not a steady load. So you need -- so renewables cannot fully substitute because then you need to have storage facilities which are not available today at scale to help with the fluctuations of requirement in a steel plant. So renewables will be a component of it but cannot replace this totally.

Thank you. There is one question which actually, I think, is more addressed to Tata Sons, but I would take it since multiple people have asked. Does Tata Sons plan to increase promoter stake in Tata Steel?

I think you'll have to ask Tata Sons that.

Yes. So with that, we will just take -- I think there are a couple of more analysts left, so we'll just take those questions before we close the call. Back to you, Janice.

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

My questions are answered.

The next question is from the line of Kirtan Mehta from BOB Capital.

On the recycling -- the plant that you had mentioned, could you tell us at what volume level it is operating and what is the sort of a cost of operation as well as the margin in that particular plant?

So currently -- I mean they've just started. They started in the sense they started part of the plant last year, but the commissioning engineers couldn't come for the shredder. They've just come and commissioned the shredder. I think, so far, in the last few months, we've done about 60,000 tonnes. I'm not -- it's positive margin, but I'm not remembering the exact number. And -- but basically, more than anything else, I think we are looking at scrap as being a strategic input as I know this over the next few decades, and that's why we're investing in this strategy.

Right, sir. And the second question was about the [ European ] business. What is the current [indiscernible] breakeven in the European business? And what is the progress on the cost initiatives? And how would that impact the breakeven cost going 1 year or 2 year down the line?

I think, basically, when you look at the breakeven cost, obviously, a lot of the costs are the input costs. So we have to look at it from that perspective. So the way we see it is the Netherlands business has always been EBITDA positive and 99% of the time, cash positive. So largely, the Netherlands business is pretty much able to stand on its own. The U.K. business is where we had a challenge, but the U.K. business has been either slightly negative EBITDA or positive EBITDA over the last few years and now moving more and more to positive territory. And hopefully, by the end of this year, we will be cash positive as well. So I think that's the way we are looking at it, and we manage it from that perspective.

Sir, just to understand this further, but [indiscernible] you mentioned around EUR 220 to EUR 250 is sort of a breakeven cost, and then you had outlined the initiatives of around taking out INR 3,000 crores of costs.

Yes.

So is there any change around this? Or is there any status update on this, sir?

No. So I think -- okay, what we said is when we look at the long-term viability of these businesses, we take a spread of GBP 225 per ton -- EUR 225 per tonne, right? So that's the long-term spread that we plan for. Obviously, spreads today are much higher. So when we look at the competitiveness of those businesses, we say that if we assume EUR 225 spread, do we -- are we cash neutral or cash positive, and all our transformation programs are looking at that. But today's rate is much higher. So if you look at it from that point of view, yes, EUR 225 would be the long-term spread on the basis of which we want to be viable.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to Ms. Shah for closing comments.

Yes. Thank you. Thank you, everyone, for your participation and your engagement. I look forward to being in touch, and we will meet again in this forum next quarter. Thank you.

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