Tata Steel Limited (500470) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Tata Steel Analyst Call. Please note that this meeting is being recorded. [Operator Instructions] And now I would like to hand the conference over to Mr. Samita Shah. Thank you, and over to you ma'am.

Good afternoon, good morning, and good evening to all of you joining us today. Welcome to this call, and thank you for dialing in. We have with us our CEO and MD, Mr. T. Narendran, and we have with us our ED and CFO, Mr. Chatterjee who will discuss the results and walk you through any questions you may have. Our presentation, which describes the results has been uploaded on our website, do go through it, if you haven't already. And we will take questions in audio mode as well as chat mode. Before I hand it over to them, I would just like to draw your attention to the clause, on Page 2 of the presentation, which has safe harbor clause which essentially will cover the entire discussion today.

Thanks, Samita. Good day, everyone. A bit of a narrative on the way we see the situation. The global operating environment has continued to be volatile during the quarter, amidst inflationary pressures, tightening financial conditions and the covid overhang. And among the key economies, the U.S. and EU witnessed a quarter-on-quarter decline in industrial [indiscernible], while the Chinese GDP grew at its slowest pace since 1976. Given this backdrop, global steel prices continue to remain under pressure for most of the quarter and resulted in subdued steel spreads. Stainless steel, the steel spot spread, including energy and emission-related cost went close to $200. And in India, economic activity remained resilient, however, depressed international prices [indiscernible] on the sentiment. Moving to our performance. Tata Steel India delivery stood at 4.74 million tonnes and were up 7% year-on-year, primarily driven by the 11% growth in domestic deliveries. Our domestic deliveries grew at a faster pace than the Indian steel apparent consumption, which was about 8% year-on-year. And it reflects a strong market rate across segments and agile business model. Some of the highlights are value-added segments like the oil and gas infrastructure, solar and retail housing grew by about 17% on a year-on-year basis, in part due to the expanding product range and innovative solutions. Tata Tiscon which is largely sold to retail customers registered a best of our quarterly sales, and we continue to expand our digital reach via new dealers and virtual reach to Tata Steel Aashiyana, our e-commerce platform to individual homebuilders, and sales through Tata Steel Aashiyana have consistently grown over 50% in the last 2 years. Our sales to the MSME sector has grown by 25% to 30% year-on-year over in the last 2 quarters and we have moved from tracking 6 segments to 80 micro segments, which has helped us understand customers better and enhance our ability to move material across micro segments based on demand. Looking ahead, we expect Indian steel prices to move higher based on improved expectations above the Chinese demand and the sustained government spending on infrastructure in India. The raw material costs are likely to remain range bound and fourth quarter is also seasonally a stronger quarter in terms of deliveries, and we're looking to leverage the momentum. We continue to progress on expanding our capacity across multiple sites in India as we look to grow to 40 million tonnes in India. And [indiscernible] in terms of delivery FY '24 should fully reflect the 1 million tonne per annum in [indiscernible] volumes while subsequent years in FY '25 and '26, will reflect the 5 million tonne expansion in Kalinganagar Phase 2 and the 0.75 million tonne setting up of electric arc furnace in Ludhiana. We are parallelly expanding our downstream operations at tin plates, wires and tubes. The ongoing expansion in tin plate is from 0.38 million tonnes per annum to 0.68 million tonnes per annum. The wire capacity is being expanded from 0.47 million to 0.55 million tonnes per annum and the tube capacity from 1.2 million tonnes per annum to 1.5 million tonnes per annum. Separately, fees commissioning of the 6 million tonne pellet plant at Kalinganagar sign and we should storing pellets from the second quarter of FY '24, which will reduce our costs. We are also looking to commission the PLTC, which is a pickling line in the Tandem Cold Mill, which is part of the 2.2 million tonne per annum CRM complex during this quarter. On Slide 19, we have provided some domestic detailed financial deliveries across sectors. And over the years, while we have sold the volumes in automotive, the share has also moved to around 15% of our total sales, and this is seized the commissioning of the CRM complex contrast and incremental capacity, the growth in long products will drive an increase in the high-margin retail housing business for us. Moving to Europe, the steel deliveries stood at about 2 million tonnes in the third quarter. Though the volumes were higher by 6% quarter-on-quarter basis, the sharp drop in realizations on subdued demand and elevated costs, including energy, averaging on all the steel spreads. Looking ahead, uncertainty persists about supply-demand fundamentals despite the recent pickup in the prices, driven by the hopes of a milder and shorter downcycle. Our steel realizations will remain subdued in the fourth quarter given the lag effect of some of the contracts. We continue to make progress on our sustainability journey to achieve net zero by 2045 via multiple pathways. We have already started initiatives such as charging more scrap into our furnaces. Our products like to build construction blocks in [indiscernible] has as one of the input centers solid-based utilization as well as address customer needs for eco-friendly solutions. Before I hand over to Koushik, I'm also happy to share that Tata Steel is the only company in India to be recognized by the World Economic Forum as a global diversity, equity and inclusion lighthouse and we've also been awarded a Great Place to Work certification for this [indiscernible]. Over to you, Koushik.

Thank you, Naren. Good morning, good afternoon, and good evening to all those who have joined in. So let me give you a deeper sent the financial performance. Our consolidated revenues for the quarter stood at about INR 57,084 crores, while EBITDA stood at INR 4,151 crores which translates to a margin of about 7%. So standalone EBITDA margin was higher at about 18%. Overall, the profitability was affected by a sharp drop in the realizations and spreads in Europe during the quarter. So first is standalone. At Tata Steel standalone India, the EBITDA stood at INR 5,334 crores, which translates to an EBITDA per tonne of about INR 11,623, excluding the ForEx impact, and EBITDA stood at about INR 4,763 crores and was up by about 15% quarter-on-quarter. India steel prices remain subdued for most part of the quarter. The fall in long prices -- long product prices were higher than in the flat products due to extended monsoon and the stoppage of construction in Delhi, in the NCR region as per the ruling of the National Green Tribunal. However, the raw material prices were also lower as coking coal prices declined by around $82 per tonne on a consumption basis. The royalty has also declined by about 14% quarter-on-quarter to INR 775 crores. Overall, the drop in cost more than offset the greater-than-expected decline in net realization, and that's led to the margin expansion. At Tata Steel Europe, the EBITDA loss stood at about GBP 166 million. As Naren mentioned, deliveries were up 6% quarter-on-quarter, but there was a sharp drop in realization within the quarter with revenue per tonne being down by about GBP 159 pounds per tonne. The sharp drop in realizations were in part due to the higher spot sales and subdued demand given the macro conditions in Europe and high stock of inventories with the customers. Costs were higher by about GBP 31 per tonne, while the coking coal consumption costs were down by about $95 per tonne quarter-on-quarter. There was a NRV markdown loss of about EUR 55 million on the slab stocks being carried due to the forthcoming [indiscernible] in Tata Steel Netherlands. Energy costs remain broadly stable on a quarter-on-quarter basis. The currency markets have also been very volatile, and there has been sharp movement between the USD/INR and the euro/INR to name a few. This has led to an FX impact on the intercompany loans provided over time and the result -- and this resulted in a ForEx gain of INR 1,427 crores at the consolidated level. Taxes for the quarter stood at about INR 2,905 crores and are fundamentally made of 2 parts, A, recurring tax in line with the profitability in India, largely; and B, the noncash deferred tax charge primarily due to the reduction in the surplus in British Steel Pension Scheme as a part of the derisking, and I'm coming to that point soon. And we made further progress during the quarter on derisking the British steel pension scheme and expanded the insurance coverage from 30% to 60% now. This buy-in transaction and the actual movement during the quarter have led to the reduction of the surplus, but it still continues to be material in surplus. As mentioned in the previous quarter, the surplus reduction results in a reduction in the deferred tax liabilities in the OCI. But given the large amount of accumulated losses and the deferred tax assets in Tata Steel U.K., we have to limit the movement by recording an offsetting deferred tax expense in the profit and loss account, which is why you see a nontax deferred charge in the profit and loss. Depending on market conditions, the residual insurance of about 40% liabilities will be completed in the first half of the calendar year 2023, and there will be commensurate noncash deferred tax expenses depending on the size of the previous scheme that we do. Moving to cash flows. The operating cash flow for the quarter stood at about INR 5,000 crores versus INR 1,700 crores in the previous quarter and primarily was driven by favorable working capital movement. The working capital release was due to reduction in inventory at Tata Steel U.K. and Tata Steel India on account of low commodity prices or lower inventory levels, but this was partially offset by increase in the snap stocks in Tata Steel Netherlands, as I mentioned earlier. Our slab stock gets consumed over the next 2 quarters, we expect working capital release at Tata Steel Netherlands also over the next -- over the relining period, which will be starting in April. We continue to invest in growth in Kalinganagar and in Angul, taking our capital expenditures to about INR 3,632 crores for the quarter. The 9 months CapEx has been about INR 9,746 crores, and we will be targeting to spend around INR 3,000 crores in quarter 4 to ensure that we accelerate the completion of the Tata Steel Kalinganagar expansion project. Our net debt has remained broadly stable at about INR 71,706 crores, and the liquidity remained strong at over INR 15,000 crores. We are not able to deleverage in this particular year due to very high volatility in the earnings and working capital. Our focus on completing the Tata Steel Kalinganagar project, Neelachal, which was about INR 10,000 crores this year and the best ever dividends that we paid over INR 6,000 crores. Even after this, our net debt to EBITDA is within the long-term target levels of about 2x. Our long-term target for deleveraging continues to be the same. We will continue to restart the deleveraging in financial year '23-'24 and we continue to ensure that our target of $1 billion is fulfilled and met during the next year and going forward. Looking ahead, the next few quarters are likely to be weaker for Tata Steel in Europe as markets continue to be subdued. The realization for the fourth quarter are forecast to be weaker and drop will be higher than the drop expected in the coal and iron ore prices. Furthermore, Tata Steel Netherlands is undertaking the blast furnace reline in quarter 4 of FY '24. We are working on minimizing the impact on all of these aspects, including the working capital and margins. Moreover, there are a few specific asset challenges, which we are investing. Some of the heavy end assets in Tata Steel U.K. are reaching the end of their useful life. Any long-term solution in the U.K. also is to address the rising cost of carbon and the local emission reduction goals. The U.K. government has provided us a framework of support for the proposed transition of Tata Steel U.K. to a low or own configuration. This framework consists of potential partial capital expenditure grant, policy on electricity pricing and regulatory intent to ensure a level playing field for green steel manufacturers. We are currently evaluating this offer of support. We're developing the options, investment options, which will be -- which has to be capital-efficient, economically viable, bankable and value accretive, which will be reviewed internally over the next couple of months and determine the way forward. In the interim, we will continue to run Tata Steel U.K. optimally for cash with minimal support from Tata Steel in India. With that, I conclude my comments, and we'll open the floor for questions and answers. Thank you.

[Operator Instructions] The first question is from Pinakin Parekh of JPMorgan.

[indiscernible] where the company had effectively guided to a certain set of numbers for the India operations and for the Europe operations. Clearly, the earnings are far weaker than that. But it seems that the profitability is lower than peers as well. Can you walk us through as to what happened in the India business, in particular, if the cost reduction is lower than what we have seen in peers? And how this will trend over the coming quarters?

So Pinakin, in terms of cost reduction, I don't know if you can be more specific. But generally, 1 area where we had a slightly different issue in India as we were ramping up Neelachal. So if you look at it on a consolidated basis, you had the Neelachal business, which was incurring costs but not yet earning much revenue that will get settled during this quarter because the production is coming up to peak and we'll be selling that certainly 1 area. But otherwise, I don't know any specific area where our costs have trended differently. I don't know if you can be more specific, maybe I can try and answer.

Sure. I mean we had -- just given that the December quarter, and the coking coal cost benefit that was supposed to be done, the margin expansion was probably -- markets thought that it could be higher than what we have seen. So just trying to understand was there any particular realization of contract sales volume issue or where other than coking coal costs, some of the other expenditure did end up being higher than what was earlier thought in November.

No, when we had met in November, I think the guidance on the realizations were not as pessimistic as it turned out to be, right? I mean if you really look at, we went into that quarter, we thought the prices will -- have reached its bottom and will start moving up or if not moving up, stay stable. But Q3 in India has been about INR 2,000 less than Q2, right? Certainly. So the margin expansion in Q3 was largely supposed to come from the drop in coal cost, consumption cost. The coal consumption -- by $90 a tonne, which is what we have guided in November. We had said $90, I think we ended up close to that. But in terms of [indiscernible], we had expected -- we didn't expect the prices to drop as much as it did, right? And by the way, it was already towards the end of December. And secondly, we're also hoping to get the relief of export duty earlier than when it came. It came only in the middle of November, whereas we have been hoping that it would have come earlier because the steel prices in the domestic markets were still quite low. We actually had a pretty good quarter as far as production is concerned. And I think, at least in India, we didn't have any issues.

Sure. Fair enough. My second question is just going back to Neelachal, you said that it was -- it has been ramping up during this quarter. Now if you look at the medium-term ROIC target of 15% on a INR 12,000 crore investment, it effectively implies a steady state through-cycle EBITDA of INR 2,000 crores from that acquisition. So when can we see that kind of earnings come through from Neelachal because clearly, at this point of time, it is a material drag on consolidated earnings.

So Pinakin, basically in Neelachal, we were EBITDA negative in the last quarter and that changed obviously because 1 is, we are today producing at least 50,000, 60,000 tonnes a month and we hope to take it to 80,000 tonnes a month of steel. I'm not talking of hot metal, the blast furnace is already at 80,000, 90,000 tonnes a month, okay? So we see that the billet production is there and they're selling the product to Tata Tiscon. So next year, for instance, you will see 1 million tonnes of products in out of Neelachal, right? So if the return on investment on Neelachal also based on the expansion of Neelachal beyond the 1 million tonne, then the INR 12,000 crore valuation was not for a 1 million tonne capacity, but both for the opportunity for us to increase the size. Because if you look at capacity, we would have been closer to what we paid for [indiscernible] market or something like that, right, because they have -- INR 5,000 crores. Well we paid extra for the iron ore, which comes at a premium, and we've paid for the land, which is 2,500 acres of plant. That's what we've paid the premium for. So that -- to monetize that, we obviously need to expand Neelachal to about 4 million to 5 million at least, which we will do. We'll go to [indiscernible] once we ramp up to 1 million tonnes. We were waiting for 1 million tonne operating rate to be reached before we go and -- more capital to expand Neelachal.

The next question from Amit Dixit from ICICI Securities.

I have 2 questions. The first 1 is essentially on the noncash deferred tax payment or provision in the consolidated numbers. So is it possible that theoretically if there is profit in Tata Steel Europe, then this can be offset at a later date? So theoretically, we can get a lower tax rate? Or is it that the profits have to be in Tata U.K. for the offset there to take place?

Yes, Amit, the offset has to be in the entity, which is carrying this, which is Tata Steel U.K.

Okay, okay. Second question relates to the spreads in BSE. Now while in the prepared remarks, you have mentioned that the drop in realization would be higher than the benefits of coking coal and stroke iron ore over escalation whatever is there. Now will there be any NRV provisions in this quarter as well given that prices have moved up in Europe, EUR 55 million was reported in last quarter. Will there be something in this quarter also? And will we have EBITDA -- more EBITDA competition or will we end up with a number lower than what we have in this quarter, on a per quarter basis?

So I think to answer that question, first is, we've kind of taken all the NRVs that we could estimate. As you know, the NRV is point to point driven at the end of the quarter. So we had stocked up slabs in Netherlands in anticipation of the last financial line. And as the last financial line will take about 120 days, you have to have enough stock to fund the business and service the customers. So this stock, which has been accumulated over the last 6 months almost, was on account of the fact that at that point of time, the coal prices were about 450 -- north of 450, iron ore prices were also high, which is why this NRV testing happened, and that's clean -- the write-down of the mark-to-market is what we have taken in this quarter. If the prices don't fall very sharply or significantly from here, I don't see any material NRVs. I can't rule out small changes in NRVs, but not nothing material in that nature. And we are just now actually -- the other thing is, as I mentioned in my remarks, both in U.K. and Netherlands, we don't want to go -- run flat out for cash. And therefore, if that is the case, then we are also targeting significant stock level reductions from as far as practical to run the business. And therefore, the end March inventory number should also look much lower the risk of the NRV comes down.

Great. And 1 associated question of that is that annual contracts that are going to be depreciated maybe from CY '23, the expectation is that they would be negotiated at a significantly lower level, given that what we had in CY '22. And the quarterly contract that possibly entered with in March and would again be at a significantly lower level because at that time, Russia-Ukraine war was there last time and prices simply went over the moon. So did you expect that contracts -- monthly contracts or quarterly contracts maybe negotiated lower and therefore we can have the overhang of lower realization extending right into the first 6 months, let us say, offer [indiscernible].

So Amit, let me put it this way. The annual contracts that we had for last year, most of them were in excess of EUR 1,000 per tonne, okay? So this year, while the annual contracts are at a lower level, depending on which sector, which industry maybe 100 to 150 or maximum of 200, but they're still higher than the spot prices. That's 1 point I wanted to make. Secondly, the spot prices are what is going up now, if you've seen it in Europe also, it's gone up by about EUR 50 a tonne. We -- if you look at last quarter's and this is an extension of Koushik's number, the cost of Q3 is higher than the cost of Q2 because of these NRV provisions. So despite the coal being $90 per tonne cheaper and iron ore being $20 per tonne cheaper, our cost was 31 per tonne higher in Q3 compared to Q2 only because of this NRV provision. So when you look at Q4, we expect that the realizations in Europe will be about GBP 70 per tonne lower than Q3, but we expect cost to be at least GBP 100 per tonne lower on a Q3 to Q4 basis. So we see a margin expansion per tonne this quarter. Of course, we are still looking at gas prices and many other moving parts just now. But at least from a margin per tonne or EBITDA per tonne point of view, hopefully, the worst is behind us as far as Q3 is concerned. Now going forward, the stocks that Koushik said, basically, we had to build about 700,000 stock, that will start getting converted into cash. While the blast furnace will be down, the sales will not be down to the extent of production is down, and that's what these slab stocks are going to do. So -- and since the NRV projection -- NRV correction has been done for the slab stocks, if the spot prices and the steel prices keep going up, we shouldn't have a problem.

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

Can you hear me?

Yes, yes.

Okay. I have 2 questions. First, if you can give us some indication as to what would be the relining CapEx and how long is the shutdown be? And in view of that, what is our cash fixed cost per tonne in Europe? So at what EBITDA levels will not meet support from India? That is my first question.

So, I think, the blast furnace shutdown is planned at about 120 days. And the cash part of it is already to the new cash flow will also come in, but it's a question of also ordering has also been done over the last 1 year. So some part of the cash has already gone up, and there will be some spend obviously as the relining happens because that's the period and it is in the ballpark of about EUR 250 million to EUR 275 million, and that is the -- of which, some of it has already been spent and some will be spent. And I think if I can put it the reverse way, the Tata Steel Netherlands actually sitting on EUR 600 million of cash, so we don't require any money from India.

And U.K. still needs the cash infusion...

So that's why I said that in my comments that we would look at running it on for cash. And we will minimize as much as we can. We're looking at driving it. And including in this quarter, there is almost about INR 1,000 crores of working capital release. So we will continue to push that very hard.

My second question on coking coal. While we understand your fourth quarter guidance, but given the news flows around the U.S., Australia, China trade opening up, how do you see coking coal prices trended on a more like 6, 9-month basis from here?

So I think taking is obviously not as liquid a market as one would like it to be and is very vulnerable to these fluctuations. But generally, we do see, your [indiscernible] what do you call it, an odd event like the Russia-Ukraine situation. Otherwise we see coking coal prices between $250 and $350, it may fluctuate in that range. There would be some weather event in Australia for which it may spike up or something else. But we are not seeing coking coal prices drop much below $250 in the short term or medium term because, honestly, there are not so many investments being made in coking coal because generally, coal is seen as a bad basket to invest in. So this is where the challenge is, but I think this is the range at which we see coking coal prices. Today, it's gone up closer to $350. Your question on China buying coking coal well, I think 1 thing which China has done well is they managed for the last few years, without were buying Australian coking coal. So they managed to get the quality they wanted out of the facilities that they have. They've also been buying out of Russia. So I'm not sure it will make such a material difference as it could have done 3, 4 years back because they have developed alternate sources over the last few years.

The next question is from Satyadeep Jain of AMBIT Capital.

A couple of questions on Europe. First on the profitability, a couple of years ago, the company was embarking about transformation program and that time the thought was that these trades of about EUR 240 per tonne, the company was looking at cash breakeven. Given the current spreads is also EUR 200 per tonne, not too far from there, at these levels, the company should have been possibly be at least EBITDA breakeven. Is there something maybe the U.K. plants reaching end-of-life or is there anything else going on that is leading to the deviation from the targeted transformation planned savings? That's the first question.

Yes. So Satyadeep, I think 2 things. One is, of course, our traditional view of spreads now needs to get corrected for energy costs and gas costs. Because traditionally, energy and gas was hardly and carbon together was less than 10% of the raw material costs, whereas it went up last year to almost 40%, right? So it played a very material role. Now it is coming back to around 10% to 20%. So it's at a more reasonable level. So that is one thing that's why what we have traditionally seen is EUR 225 and EUR 250 spreads, we're assuming that gas and energy prices would be as high as it is today. So that is 1 change. Second point is, if you really split the U.K. and Netherlands, the Nederland business has traditionally been EBITDA positive, cash positive, for sure, every year and pretty much all quarters. So it's -- last quarter is one of those quarters where it was EBITDA negative, but largely because of the NRV provisions that we had to make on the slab stock, which itself was unusual situation as a build up to the blast furnace shutdown. U.K. is where we have a challenge because energy costs have always been higher and it's become even higher. We have some challenges on end-of-life. So what happens in the end-of-life situation is the production levels are also not as stable as we would like it to be, and that leads to unplanned outages. So that's something that we are dealing with. So a lot of the underperformance has been in U.K. for the last quarter. Netherlands also has not had as good a quarter as they would normally have. So we expect in Netherlands, at least, obviously, operationally, this quarter was fine, but next quarter, we have this blast furnace relining, after that things should come back to a steady state in Netherlands. The U.K. situation is slightly different. Cost situation is improving in both these places because energy prices have come back close to pre-Ukraine business. So that's the way we see it. I mean Netherlands should continue to be cash positive and EBITDA positive, and it should not need support from India. U.K. is what Koushik said, we will take a call going forward, what best to do. Sorry to come back to that. Yes, it has -- it has given us the numbers that we were chasing. You should also keep in mind that Europe is today in a high inflation environment. So the inflation is much higher than what we had thought to 3 years back, and that also has an impact on cost. So even if you have taken out a lot of costs, some of the costs because the inflationary pressures have gone up more than we had planned 3 years back.

Understood. The second question is on CapEx. The $250 million to $375 million for relining, I think I have a little -- that this is going to be a partial remarrying given the eventual transition to DRI sometime in future. Is this [indiscernible] partial relining seems somewhat high. And secondly, the media networks indicate possibly a $1 billion last requirement for conversion for U.K. plant. If I'm understanding correctly, the idea is to convert it into standalone EOF, given the scrap supplies there. The CapEx required for a standalone EOF should I believe, much lower than those media headlines. Is there a thought behind maybe not just looking at standalone EOF, but possibly loading other options [indiscernible] so that's the other question on CapEx.

So on the relining, it depends on -- if you're comparing to a realizing cost in India, something obviously, $275 million looks high. But if you compare to what relining costs are in Europe, it's comparable. Having said that, this last furnace is expected to run at least till 2035, even in our transition plan. So that's why this is being relined for that kind of a life. The blast furnace, which will go down first will be the blast furnace, which is coming up for relining in 2026 or 2027. So we have 2 blast furnaces in Netherlands. So this is being planned to be run until 2035, even in our transition plan, okay. That's1 point. As far as U.K. is concerned, the media reports on the numbers are speculative. So I don't want to comment on that. But having said that, the proposal to the government was not just about an EOF, but it was also about the Hot Strip mill, which is also coming to end-of-life and some of the other assets, which were important to keep the site sustainable. So that's why the amount of more than what we would spend typically on a EOF. But given what we've got from the government, we are looking at what then would be the next best thing? What is the best that we can do with that kind of money that may be available to us and the policy support that we will get from the government. So I think this is what we are working out based on the recent inputs that we had from the government.

Next question is from Ashish Jain of Macquarie. Ashish, we are unable to hear you. We request you to please send in your questions via chat. We will take it up in the chat question section. We will now move on to the next question. The next question is from Ritesh Shah of Investec.

Am I audible?

Yes, yes.

A couple of questions. Sir, first is, can you broadly give us some color on the assets that we have in Europe, I think in the prior question, you indicated that there are 2 furnaces in Netherlands. 1 what is due for relining, it will be till 2035. The other blast furnace, it has a relining due by 2026. Is that right?

Yes, that's right. 2027 around that time. Correct.

Sir, how should we understand the same aspect for the U.K. operations, whether in you indicate there are manning assets reaching end of useful life? And if you could please put in perspective what you indicated that the framework that you are engaging with the U.K. government on practical grant level playing field. I don't know whether it refers to CBAM or something else. If you could marry both those verticals together, it would be great, sir.

Sure. So in U.K., if you look at -- so 1 of the blast furnaces in the U.K. got relined about 5, 6 years back, okay, or maybe 10 years' time in 2012, I think it was. So typically, a blast furnace once it's relined, will run for anything from 15 years to 20 years. So there is 1 blast furnace which can go on for slightly longer, the other is due sooner. But more than the blast furnaces in U.K., so Coke Ovens, steel mill shops there are many parts in the U.K. business, which -- where the assets are a bit old and need support. And that's where our proposal to the government was to say that instead of spending capital on assets, which anyway don't have a very long-term future, why don't we use that opportunity to transition into a greener process foot, particularly given that the U.K. has a lot of scrap, which it is exporting. But the challenge there was the energy cost in the U.K. even before Ukraine, was twice the energy costs in Europe. So our ask of the government was 50% -- at least 50% of the CapEx that we need to spend should be supported and there should be policy support on energy cost so that we are not disadvantaged compared to Europe. And thirdly, of course, the policy support that Europe and steel companies are getting in terms of carbon border adjustment mechanism, et cetera. The ask, in general, in Europe, by steel companies of government is typically on these principles that at least 50% of the CapEx that is required should be supported as grants because the industry -- its cash flows cannot justify spending out the CapEx that it needs for this transition. And secondly, OpEx support because when you transition from coal to gas to hydrogen, your input costs are less dependent on steel prices. When you're looking at metallurgical coal, there's a correlation between the metallurgical coal price and the steel price. But when you're starting to use gas in hydrogen, there correlation is not there because gas and nitrogen are used for other applications as well. So the ask of the government is to also say that how do you protect the industry, if it's changing from on consumable to another, which is more vulnerable to other industries. The third point, of course, in Europe is about the carbon border adjustment mechanism. So the last point is that we are also seeing that there should be a level playing field, not only in terms of carbon border adjustment mechanism, but if there are some countries in Europe supporting their steel industry with let's say, 15% of CapEx, then the other countries also need to consider that because otherwise, at the end of the transition, some of the steel companies in Europe will be disadvantaged compared to somebody else who's got more support from the government. So that has also been an ask on the principle of support, and this is what has actually been discussed by us and our peers to the multiple governments that we -- in the countries that we operate in.

Right. Sir, if I had to conclude another point, what is the aspirational ROI in the presentation, we indicate 15%. So for standalone, whatever we do for U.K. operations, even factoring 50% hypothetically the government does contribute to the CapEx. What is the ROI that we are looking at a corresponding cost of capital? Just trying to make sense of the incremental ROC?

So on Ritesh it's more linked to the cost of capital. So what works for in India, for example, like hurdles are more around 12%. But in Europe, it will be around 10% -- 9%, 10%. That's the IRR hurdle for approval of CapEx. But the ROIC that we are looking for is always at about 15%.

Sure. That's very useful. And I had a couple of questions for India operations. First is, do we see leeway to increase local steel prices, I'm more referring to from an import parity mark standpoint. Second is volume guidance, if it's possible on FY '25 basis given I think the Street will start to look at the company on '25 basis? And third is basically iron ore merchant sales, is there an optionality that the company has over here, if at all, if you could detail any plans on this particular aspect?

Yes. So I think steel prices is -- in India is also reflecting the trends in international prices. If you look at prices in Southeast Asia, they got up $100 in the last 4 weeks, and steel prices in India, we expect it to go up by that amount over January, February and certainly by March. So that's something which is revealing what's happening in the international markets. The demand in India has been strong. There was in between a few shipments of imports which came from Russia, et cetera, but I don't see imports as such a big threat just yet. In between Japan, we're exporting a lot because the yen has gone to 145, the yen has also strengthened. So I think we are in a much better situation today as far as import prices and then we were 2, 3 months back. And I also think, in any case, the steel prices in India, we need to find a better balance than we've seen in the last 3, 4 months. I think that's reflected in the financials of the steel companies over the last 2 quarters, right? And particularly, if the industry needs to invest for growth, we need better cash flow than we've got in the last 2 quarters. So that's as far as steel prices are concerned. Sorry, what was the...

I think there was a question on volumes. So Ritesh, as you know, we don't give annual volumes in the -- at this time. We will do that once we finalize our annual plan. So maybe just walk him through the broad sense what we expect.

So in terms of volumes next year, we will see Neelachal at full $1 billion. We've not seen much of Neelachal this year because we started the plant within 3 months of acquiring it, but pretty much the steelmaking started in November. And we have today, in fact, yesterday was the highest ever production that Neelachal has ever had. We produce 3,200 tonnes of steel yesterday in Neelachal. So that means the going rate is already at the capacity, right? So that is the incremental volume, which really come next year. We will also get some incremental volume out of the Kalinganagar, we have a new caster coming in that should be up. And Kalinganagar also today is actually producing at over 300,000 tonnes a month, which is like 3.6 million rate. So we'll get some additional volumes on the caster. We'll give guidance when you do the annual results. These are -- and through some debottlenecking we'll get some volumes out. But how much more we will guide you in the next call. In 2 years, we will have the Ludhiana plant also up, which is 0.75 million. And by which time, the Kalinganagar blast furnace should have also started.

The next question is from Kirtan Mehta of BOB Capital.

Just continuing the previous question, you've given some color on FY '24 numbers, could get some more color on FY '25, which is likely to be the valuation base for this [indiscernible] Could you walk us through the ramp-up of Kalinganagar expansion -- post-expansion? How long would it take to ramp up to a full capacity?

So next year, what we will see is, firstly, the pellet plant would have ramped up by the end of the first quarter, which means we don't need to buy pellets, which means that the cost savings for Tata Steel. Secondly, the Cold Rolling mill, not the galvanizing line, but the Cold Rolling mill will be ready. So we will have what we call full hub CR, which can be sold. So basically, the hot-rolled coil gets converted into cold roll. So there's no incremental volume, but there's incremental value which is coming from that. Like I said, if we have the new caster in by the middle of next year, we will get some additional volumes from steel mill because today, we make more hot metal than the steel mill shops can consume. So these are the areas where you will see the ramp-up. The blast furnace of Kalinganagar should come up only in FY '25, and that's where you will see the ramp up, typically blast furnaces ramp up fast unless you have a problem. The Hot Strip mill and the steel mill shop would also be ready. And once you have the steel -- once you have the blast furnace making hot metal, ramping up the steel mill shop and the Hot Strip mill is not an issue. If you remember the Kalinganagar Phase 1 ramp-up was one of the fastest for any greenfield site. I think we did it in about 16 months, the full ramp-up. So that's typically what it would take. We should keep in mind that it's going to be one of the biggest blast furnaces in India. So we will obviously ramp up keeping the complexity of large blast furnaces in line.

1 more question from my side. If you look at the Tata Steel and its subsidiaries, there is a spread, which has opened up to around 12% to 15%, if we take the conversion ratios in account. So in fact, if at all we bifurcate from this perspective, it would be -- market is pricing something around 1 to 1.5 years for a merger to consume it from this angle. Do you think that, that's a fair estimate by the market or do you see the merger progressing a bit faster than that?

So Kirtan, I think we are at a stage where we have done the filing to the SEBI regulators, and we will be looking at getting the clearances. And since some of them are listed companies, I think a year is the -- course of business of the NCLT, we should be able to do that. I don't see at 1.5 years. In Bhushan, we got delayed because of multiple reasons, but these are subsidiaries which has been in our fold for long. So we are hoping that we can close it before 1 year.

We would now like to end hand over the conference to Ms. Samita Shah for the chat questions. Over to you ma'am.

Thank you [indiscernible]. I'll start with other questions on India. we have a question on auto. You had said that auto sector is about 15% of our volumes. What would be the growth trajectory going forward for the company as an average? And what is our targeted mix in the auto sector for FY '24?

So obviously, our growth in auto will depend largely on the pace of which auto grows because we already have a 50% market share and normally auto companies like to buy from at least 2 suppliers, if not more. So we are not looking at a much higher market share than we have today. So our growth in volumes will largely depend on the growth of auto sector. Having said that, once the cold rolling mill makes its galvanizing line and the [indiscernible] line comes in, what is coming up just now is the -- what we call the PLTCM, which is basically the cold rolling mill. But the -- galvanizing facilities will be commissioned over the next 12 to 14 months. Once that comes in, then you will have a lot more to add to your product mix. So while we have a very high market share, let's say, in hot-rolled coils, which is over 55%, 60% in some cases, in auto -- in cold rolled and galvanized, we are in the 30% to 40% range. So there is a room for us to increase our market share in the galvanized high and galvanized cold rolled products, which will be over the next 3, 4 years. But overall, if you look at it, auto will always account for 15% to 20% of our overall volumes. The other sector, which is quality conscious, accrual base which we are pursuing in a big way is oil and gas. And I think the Kalinganagar plant is ideally suited for the oil and gas segment, and we are making a lot of headway there. So we expect that also to account for a big chunk of our value-added sales going forward.

There are few questions on the volume guidance rightly the answer [indiscernible] in that regard. There's a question on iron ore merchant sales. Why do we not have -- why do we not do some merchant sales and the optionality is [indiscernible]

Yes. That optionality is available with the requisite permissions that we need to take, which we've taken. We are doing some minute sales, but largely our iron ore are meant for captive use because what we are producing, we are consuming. Once the pellet plant is starting, we will be using more iron ore for the pellets because we don't have to buy pellets. But having said that, whenever there is an opportunity to auction iron ore that we can't use because of the grades or because of there's fines or whatever, then we do that. And we -- I think a lot of the challenge is today is not so much about auctioning it, but about the logistics of it. And I think we have done quite a few rakes of iron ore in the last 2, 3 months, not yet so material, but yes, it has started.

There is then a question on [indiscernible] investment. Given our deleveraging target for '24 and ahead, can we confirm that we are not going to let go these assets?

So I always say that our existing sites allow us the runway to grow to 40 million tonnes, right? So I think our growth ambitions can be fulfilled from our existing sites. But it will be premature for us to emphatically say yes or no because there's a competitive environment and why should we announce what we want to do or won't do ahead of when you need to do it.

And then the other question on India, which says can you -- as 16,000 tonnes EBITDA per tonne for Q4. So as we all know, we don't give a quarterly guidance. So we will not comment on that. Just moving to Europe, there's a question that do we expect steel prices in Europe to benefit if the combined proposal are implemented?

Yes, certainly, because we should keep in mind that in Europe today, we pay ER 20 per tonne for CO2. I mean, obviously, we get 3 allowances. So even despite that, I think we paid something like EUR 100 million a year -- so the 3 allowances we get are not -- doesn't cover our needs fully, right? So that's a cost and we are paying and everyone else in Europe is paying today. And as those allowances go down, we will pay more. So that's why there is a CBAM because if somebody can make steel, which is more carbon inefficient and should [indiscernible] without the cost that's very unfair on the European steel industry. If you look at Tata Steel in Netherlands, it is the second most carbon-efficient blast furnace in the world. It emits about 1.8 tonnes of carbon per tonne of steel. So for blast furnace emitting that kind of carbon to pay EUR 80 per tonne carbon cost than somebody who is, let's say, 2.5 tonnes, not saying that cost is certainly unfair. So we expect that CBAM will come in, we expect that steel prices in Europe will reflect the cost in Europe because some of those costs are unique to Europe and the industry will need that support.

There is a question around the energy costs, so given that there have been -- our margins have been affected by core costs and gas costs. Could the company please report that line separately under expenses for both Europe and India? So request you [indiscernible] but I would just say all of you know that we give a lot more information than any other steel company in the world actually any company in terms of the profit and loss details, but that is the question.

It will get covered in the MD&A when you look at the annual numbers.

The next question is commentative. Are we regretting not considering divesting our international business when the situation was favorable when we revisit this in the next upcycle.

It's a hypothetical question.

More of a comment. I think a question around debt reduction, do you expect the debt reduction in Q4 FY '22.

So we've -- actually, in this third quarter itself, we paid about INR 300 crores, but it got offset by the currency valuation. So my principle that I can articulate as a company is we will look for all opportunities to reduce our debt. As I said in my comments that completion of Kalinganagar is a priority, but deleveraging is also a very important priority. And therefore, whenever we get opportunity, we'll do so. We do have some scheduled repayments ahead in '23-'24 coming up. So there will be a natural deleveraging itself and then whatever we get from a surplus cash generation, we would look to prepaid our leverage.

There is a question of profitability of Europe for 4Q. It says that your commentary suggest that EBITDA per tonne would further weakened over third quarter? Can you please clarify?