Tata Steel Limited (500470) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Tata Steel Analyst Call. Please note that this meeting is being recorded. [Operator Instructions] All the attendees; audio and video has been disabled from the back end and will be enabled subsequently. I would now like to hand the conference over to Ms. Samita Shah. Thank you, and over to you, ma'am.

Thank you, Kinshuk. Good afternoon, good evening, and good morning to all our participants joining us on this call today. On behalf of Tata Steel, I'm delighted to welcome you to this call, where we will discuss our results for the third quarter of FY '25. We have with us our CEO and Managing Director, Mr. T.V. Narendran; and our Executive Director and CFO, Mr. Koushik Chatterjee. And we will walk you through our results and answer any questions you may have over the next hour, hour and a half. I hope you've had a chance to go through our results, which were declared yesterday, and there's a detailed presentation, which has been uploaded on our website. Page 2 of that presentation has a disclaimer clause, which will cover the entire proceedings today. Thank you again. And I would request Naren to make a few opening comments. Thank you.

Thanks, Samita. Good morning, good afternoon to everyone. Good evening as well. During October-December quarter, the global steel prices were subdued across key regions. And in China, the steel prices stayed close to around $480, despite the stimulus measures. The construction market in China continued to be soft, leading to an export of more than 100 million tonnes during the calendar year. In fact, 111 million tonnes, to be precise. And that was amongst the highest that China have exported in the past. The Indian steel demand continued to grow, but the momentum has eased and domestic prices remained under pressure due to cheap imports. The DGTR, the Director General of Trade Remedies, has initiated investigation to consider safeguard duty. And in 2024, several nations relied on trade measures such as antidumping duty to combat the impact of steel imports, particularly from China. This, along with the new U.S. administration's inclination towards imposing tariffs, has a potential to regionalize steel trade flows with implications on prices. Moving to Tata Steel. Our performance has been aided by the progress on our strategic initiatives. And in India, we commissioned the 5 million tonne blast furnace at Kalinganagar and this has aided the volume growth. In U.K., the closure of the heavy end assets has begun to generate improvement in fixed costs and in emissions. India's crude steel production rose 6% year-on-year to 5.69 million tonnes for Tata Steel, and the new blast furnace at Kalinganagar produced around 0.56 million tonnes during the quarter. And presently, the Phase 2 with TSK2, the blast furnace, the second blast furnace is operating at around 8,500 tonnes per day, and the ramp-up to rated capacity is progressing well. India's deliveries increased 8% year-on-year to 5.29 million tonnes. And amongst business verticals, automotive and special products volumes were aided by the growth in high-end products. Our retail brand, Tata Tiscon, achieved the best ever quarterly sales and grew 20% -- over 20% year-on-year, while our Cold Roll brands for SMEs, Tata Steelium, was about 10% higher year-on-year. Customer centricity and value creation is paramount to us as we progress on achieving market leadership across chosen segments, and 75% of our steel sales to Automotive is processed or ready to use. We have service centers and stockyards close to most of the major auto hubs, enabling close partnerships with key OEMs that drives technical support and product development. Our e-commerce platform, Aashiyana, is designed for individual house builders, homebuilders, and we have more than 30 construction service centers across India to offer customized reinforcement products and solutions to the construction industry. At Kalinganagar, we have also commissioned the continuous annealing line of the cold rolling mill complex. And in Ludhiana, we started receiving the equipment delivery for the 0.85 tonne electric arc furnace-based operation and have also commenced on the civil works. Moving on to U.K., we reconfigured the supply chain upon closure of the heavy end assets in September, and we are now servicing our customers by processing purchase substrate. This has led to significant reduction in our Port Talbot emission footprint as well as the overall fixed cost base. Our fixed cost per tonne of deliveries has decreased by around GBP 80 per tonne quarter-on-quarter, which has helped improving performance. In Netherlands, a drop in prices weighed on the performance despite decline in costs. And as a result, the overall profitability was affected. Koushik will elaborate on the same. At the same time, in Netherlands, we have produced about 1.75 tonnes of hot metal, which is -- which means we're running at a 7 million tonne hot metal production rate. We are committed to responsible growth and multiple initiatives are underway across geographies to reduce emissions. Tata Steel became the first steel maker to introduce biochar in the blast furnace as a partial replacement for carbon-intensive fossil fuel like coal. Our ESG goals underpin broader focus areas, and we are committing to foster the equality, diversity and an inclusive workplace. We recently operationalized an all-women shift in one of our mines in India. And I'm happy to share that we've been recognized as a gold employer by the India Workplace Equality Index for the fourth consecutive year. With that, I hand over to Koushik for his comments. Thank you.

Thank you, Naren, and good afternoon, good evening to all who have joined in. Let me begin with the consolidated performance provided in Slide 24 of the presentation. The market conditions across geographies are similar to the conditions that existed in the year 2015, '16, when exports from China were at an elevated level of above 110 million tonnes, as you would have heard from Naren also. And these excessive exports obviously hurt the market structure of any of the other countries, which import steel. For instance, in the last 12 months, the U.S. and the EU steel prices have declined between 25% to 37%, and China steel prices have been hovering around $450 to $500 per tonne. All of this meant that there was a sustained pressure on spot spread, which declined to multiyear lows. However, our progress on internally focused strategic initiatives has been evident in our performance. The consolidated revenue stood at INR 53,648 crores, and the EBITDA was at INR 5,994 crores. There was an FX revaluation impact due to the sharp depreciation of the euro of around INR 1,100 crores on intercompany loans, which have been provided over time. Excluding the above, the EBITDA stood at about INR 7,155 crores, which translates to an EBITDA per tonne of INR 9,263 crores and an increase of 30% over the last quarter. As the markets continue to be subdued, we have renewed our focus on cost reduction and efficiency measures across all geographies. Some benefits have started being visible, and we hope to continue to demonstrate more of it in the coming quarters. Tata Steel stand-alone revenues for the quarter stood at INR 32,760 crores, and the EBITDA was INR 7,624 crores, which translates to an EBITDA margin of about 23% on a reported basis. As provided on Slide 30, the EBITDA on absolute basis improved by 13% or INR 1,227 per tonne on a quarter-on-quarter basis. Higher volumes and optimization of costs more than offset the drop in the realization. I would like to elaborate a little bit more on the costs. The material costs declined by about INR 1,300 per tonne due to decline in the coking coal consumption cost and also the inventory build of 156 Kt during the quarter. The fourth quarter is typically a seasonally strong quarter, and hence, there is usually a slight uptick in inventory at the end of the third quarter. And we also had a higher production upon commissioning of the second blast furnace in Kalinganagar. Conversion costs excluding the royalty, declined by about INR 1,678 per tonne, primarily on account of lower employee benefit, freight handling and other costs. Total costs have improved by about INR 2,700 per tonne, helping to more than offset the drop in realization to the tune of about INR 1,500 per tonne. I would like to now mention a few comments on our subsidiary, the Neelachal Ispat Nigam Limited. As you are aware, we had acquired NINL about 2.5 years in 2022. The plant was closed for 2 years at the time of the acquisition with some imbalance in the asset configuration. As part of our long product portfolio, NINL's operating performance has met all the operating targets in terms of cost and efficiencies. It is operating at rated capacity. And in October to December quarter, the EBITDA margin improved from 13% in second quarter to 20% in the third quarter on account of a rise in volumes of about 17% and an outcome of cost efficiency through reduction in conversion costs, which is reduced by about INR 3,000 per tonne quarter-on-quarter. The process of seeking the environment clearance for the expansion of NINL is currently underway. Coming to the European operations in the EU. As you are aware, the steel consuming sectors have been adversely impacted by subdued demand and high level of imports. In Netherlands, the raw material to steel price spreads have dipped to multiyear lows with spreads, including energy and carbon costs currently in the region of about EUR 170 per tonne. These spreads were last witnessed in 2016. The EBITDA for the quarter was neutral in third quarter compared to a GBP 22 million positive in the second quarter. The EBITDA per tonne declined by about GBP 15 per tonne on a quarter-on-quarter basis. The EU steel demand has contracted in 2024, and this has led to a sharp drop in revenue per tonne of around GBP 30 per tonne. And the NRV loss to the tune of about GBP 13 per tonne on a quarter-on-quarter basis. We had also higher emission rights costs of about GBP 15 per tonne on account of decline in the yearly allowances due to lower production in the previous years. While this was partly offset by the decline in the power and fuel expenses by around GBP 43 per tonne, the drop was less than the impact of realization, which has affected the margins. As mentioned during the quarter 2 earnings call, the transformation of the U.K. operations has begun. We have safely closed the heavy end assets while maintaining our footprint in the domestic market. Sourcing network has been established to successfully support our customers. Our fixed cost takeout programs are yielding results with a large part of the stated GBP 100 per tonne improvement achieved in quarter 3. On an absolute basis, there has been improvement in fixed cost by about GBP 70 million in quarter 3 compared to quarter 2. And for the 9-month period, the same was about GBP 140 million on a year-on-year basis. The improvement was majorly in relation to the maintenance costs, the employment cost and the operating charges. In quarter 3, the Tata Steel U.K. EBITDA loss improved from a negative GBP 147 million in Q2 to about GBP 67 million in Q3. While the market dynamics meant that revenue per tonne declined by GBP 31 per tonne, this was more than offset by improvement in cost by about GBP 146 per tonne, especially on the fixed cost side. There was also a drop of about GBP 63 per tonne in emission right cost and freight handling charges. We expect to continue the optimization of fixed costs, not only in the next quarter but in the year ahead, too. There has been a total redundancies or the people who have left the company since March '24 was about 1,900 people, and we expect that more to leave in the next quarters. I would like to now spend some time on our working capital management that has led to cash flow generation. We have taken a calibrated measure such as better inventory management, improved credit terms looking at the blends and so on. For example, in India and Netherlands, the raw material inventory has been reduced by about 3 to 5 days. All of this has resulted in cash flows released across all geographies and the net working capital of more than INR 4,000 crores in this quarter alone. Looking ahead, the ramp-up of Kalinganagar, as Naren mentioned, will help improve the India cost profile, driven by fixed cost absorption and efficiencies of a newer plant. In the U.K., we have placed equipment orders for about 3 million tonnes of furnace and are targeting to commence civil construction in the month of July. In Netherlands, we are engaged with the government on potential support for the decarbonization project. With this, I'll end my comments and open the floor for questions. Thank you.

[Operator Instructions] The first question is from Satyadeep Jain of AMBIT.

So Naren, first question on Europe, one of the largest players in the region has talked about delaying decarbonization investments. There's a laundry list of reasons, the onslaught of Chinese imports, CBAM not making sense in its current form, which is what Mario Draghi had also mentioned in his document. So in that context, given where margins are, given where imports are in the current form of CBAM and given the strategies adopted by some of the other players where they're waiting for allocation for decarbonation investments, what -- how are you evaluating your allocation for [ tariff ] in both U.K. and Netherlands? Are you going to go ahead with all this CapEx till you get more clarity on any support from the government?

Yes. So Satyadeep, on U.K., as you are aware, the journey is already on. And one of the reasons why we are on this journey is also that we believe that our cost position will improve once we switch from iron ore and coal to scrap. So there are advantages of lower CO2, CBAM, plus given that you're going to use local scrap available in the U.K., what we had said is we're expecting our cost position to improve by about GBP 100, GBP 150 per tonne. And a lot of it is to also do with the -- what is the input cost, but also to do with the fixed cost takeout, which Koushik referred to, which is happening with the restructuring. So I think as far as U.K. is concerned, the business case is clear, and we are sticking to the plan. As far as Netherlands is concerned, the conversation is currently going on with the government to see what is the support that we can get, what are the costs going forward? How is the policy going to evolve? And I think what you referred to is basically our peers in Europe who have signed up with governments in the past and in some cases, committed to the use of hydrogen are also concerned about the availability of hydrogen, the cost of hydrogen and things like that, whereas our plan was more gas-based production in Netherlands. So I think the conversations are going on with the government, we will wait for where we conclude on that and take forward. Of course, we are also waiting to see the reaction of Europe to the actions that may be taken in the U.S. Koushik, do you want to add to what I've said?

Yes, just to reinforce the point that many of the reactions that has come to people from companies who have got the grant or financial support from respective governments are deeply interconnected to the hydrogen and not as a choice, but as a core part of the transition plan. And given where the availability cost and the feasibility of hydrogen is concerned, they are obviously in a difficult position because hydrogen is not available at the assumptions that were made for granting the funds. So whereas in our case, we were very clear that hydrogen is an add-on at a much later point, and we are not working on that same premise. And our focus is the very fact that we are putting up a DRP and EAF is because we have a pellet plant. And therefore, we said we will be focused on a gas-based solutions at this point of time and any funding support will be based on gas-based solution. Hydrogen can be an add-on at a later point in time. So this is the premise. We have some distance to go because we will have to go through the entire approval process. We are in deep discussion and we're getting to the stage where we will get more clarity over the next 4 or 5 months. And at that point of time, the final investment decision will be taken. So I think it is some distance to get the full clarity. I know what you are saying in terms of what our peers have indicated, but it's not one reason. There are multiple reasons for doing that.

I want to follow up on that final investment decision. It's only 5, 6 months from now. Let's say, if the demand and pricing doesn't change, would you -- would that decision be contingent on how the demand is around that time, demand and pricing? Would you wait for...

So I think the...

Whenever we take that FID call, obviously, there has to be a business case for it, right? Not only from our side, the government before they put in taxpayers' money will also want to make sure that there's a business case for the money that they're putting in. So I think it will boil down to that. And obviously, we will look at how things are going to be going forward. We should also keep in mind that in Europe, there is likely to be some supply side changes as well, right? Because it's not everyone who can transition. It depends on your ability to fund the support that you get from the government. So it's not necessary that all the capacity that in Europe will make it to the other side. So we also need to look at what's going to happen on the supply side as much as what's going to happen on the demand side.

Just last question. What is the expectation for breakeven in U.K. by when do you expect to reach breakeven? And also what's your -- the clean industry deal is going to be announced sometime soon in February. What is your expectation? Is it more or less in line with what you've seen in U.K. in terms of concessions?

Koushik?

So as far as the breakeven is concerned, if you recall in the last quarter, we said we should be close to the breakeven number in the next few quarters. And I still think that given the pace of acceleration of our cost takeout that we are doing. Obviously, our understanding of the market, say, 3 months back was slightly different from where we stand today. But nonetheless, the breakeven is the target for the next couple of quarters, and we should be in that zone in the first 2 quarters of FY '26, certainly focusing on getting it by June. So there is a lot of market volatility at this point of time, but we are certainly focusing on the internal measures, which include essentially cost takeout, as I mentioned, a significant part of the labor redundancies are on the way and which has been approved in the past. And we are also looking at consolidation of sites, product mix, sourcing strategies in a more efficient manner. So a lot of activities are currently underway, and we expect that, as I mentioned, a significant cost takeout that has already happened, but will continue to happen over the next 3 quarters. Your second question, Satyadeep, was on clean deal?

Yes.

The next question that we have is from Amit Dixit of ICICI Securities. Amit, we are unable to hear you. We request you to please send in your questions via chat or rejoin the queue. We will now move on to the next question. The next question is from Sumangal Nevatia of Kotak Securities.

My first question is with respect to the notes of account, Note #6, there are a lot of details with respect to some environment-related noncompliance notices we've received for our Netherlands facility and also some penalties. Is it possible to share exactly what is this? What is the nature of penalties? And when do we expect to kind of get back on the right side?

Yes. So the Note #6 that you see, obviously elaborate on the ongoing situation as far as the coke ovens in Netherlands is concerned. This primarily relates to the Coking Gas Plant 2, but also has now included Coking Gas Plant 1. The whole issue started. This is at the provincial level and the provincial authorities. And this initially started as a green push from the coke ovens beyond a certain permitted numbers. Green push technically exists in all coke ovens across all geographies, all facilities. We have taken very significant steps in mitigating those green push. In fact, the last push was somewhere in October '23. But the provincial government has now come back and is basically talking about stack emission standards and levels and also treatment of benzene, et cetera. And they have actually come about and talked about some kind of maybe opinions on maintenance, et cetera, which has been significantly high in Tata Steel Netherlands for years together. So we have some time to respond and what -- which we are doing. We have also gone in litigation on the green push and the court has given orders to the provincial authorities to rework the basis. This is also something which may go into litigation. Our basic point is the Coking Gas Plant 2 as part of the deorganization would be voluntarily be closed sometimes more towards 2029. And anything which happens before that will have its impact on the decarbonization project. That's been our conversation. So as Naren mentioned, we are in deep conversations with the government at all levels, be it provincial or at the central level and [ The Hague ]. And we expect that we will resolve this in one way or the other, either through the dialogs and explaining the technical basis of the performance of the coking gas plants 1 and 2, or on the basis of the appeals and objections that we have already filed and soon to be filed at the appropriate legal recourse. So it's a comprehensive approach, because this is part of the solution for the decarbonization also. And the standards that were expected are higher than the regulatory standards. And therefore, these are beyond the regulatory norms that exist and therefore -- but even then, in the interest of the inclusive way of managing the business along with the community, we have set standards to improve them, and these require the investments that we are planning for the decarbonization.

Got it. Got it. Koushik, in case we don't reach to these levels, I mean, what sort of financial impact are we looking at for the next 3, 4 years on an annual basis?

So I think it's still early days to talk about it. Sumangal, I think there are many recourses. So it can't be switched off on the fly. It has -- there has to be an appropriate notice period, and I think that notice period will stretch out the period that we are also talking about up to 2029. But there are other recourses, including the legal recourse that we will opt for in case we don't have a bilateral solution to this. And we are improving our own standards beyond -- as I said, these are all beyond the minimum regulatory standards that are set. So this is additional to that. Some of it is also technically feasible and some of it which we are exploring options and ways in which we can manage.

Understood. Understood. My second question is on overall prices and cost movement guidance, which we usually give. So if maybe Naren can help us with that, with respect to India, Netherlands, U.K. all 3 on the realization, NSR and then on cost.

Sure. So Sumangal, on the realizations, we are seeing in India, it quarter-on-quarter should be flat, unless there's something very significant in the budget or on safeguards, which comes immediately, then there should be an upside. But otherwise, at the minimum, we see it should be flat. In terms of costs, as far as India is concerned, the coking coal costs are expected to be about $10 per tonne lower in Q4 compared to Q3. In terms of U.K., the realizations in U.K., Netherlands, there will be a drop simply because there are annual contracts which come up for renewal at the end of the calendar year. So we've got an increase in packaging, steel supplies to packaging and there's a reduction in steel supplies to automotive. So the net impact in U.K. quarter-on-quarter is expected to be about GBP 60 less per tonne. And in Netherlands, also a similar level, Q4 lower than Q3. While at the same time, in terms of costs, we expect coking coal cost in Netherlands to be about $20 per tonne lower in Q4 compared to Q3. In U.K., that's not relevant because we've stopped the coke ovens and using the blast furnaces. In Netherlands, iron ore consumption cost is expected to be about $3, $4 lower Q4 compared to Q3.

Understood. Just one follow-up on Netherlands. I mean, over the next, say, 1 year, is there any specific cost reduction self-help measures should we expect to reflect in results? Or from here on, the profitability margins, et cetera, will be largely a matter of market factors?

No, there are huge cost takeout plans in Netherlands. There's a lot of restructuring, which is being planned along with teams there because, obviously, the spreads have been pretty low. In fact, last quarter, it was around EUR 160, EUR 170 per tonne, which is lower than we've seen in a very, very long time. So we are not relying on the market to demonstrate improvements. I think we're going to focus on cost takeouts both in terms of people costs as well as maintenance costs. There are opportunities there to improve. We've also done quite a bit of work on the blends that use there in terms of coke ovens, et cetera. So there are lots of opportunities, which there's a team working. There's a transformation team in place in Netherlands to do a lot of this. So you will start seeing the impact of that going forward. I think some of it has already happened, but you will see impact of that going forward. So we are assuming -- even if we assume fixed spreads, we are trying to see what is it that we can do to improve the performance, and we're expecting next year to have a better performance than this for sure. Koushik, do you want to add to that?

Yes. No, just to say that the transformation program is focused on the productivity, on cost takeouts, both fixed and variable efficiency, including availability of the mills in terms of benchmarks and also optimizing the product mix. So it's not one magic bullet, but there are multiple of them. And I think it is also not a 1-year cost takeout program. It will be multiyear. So -- but we will want to take as much advantage of that in the next year, and it will run into EUR 200 million for sure.

I think we -- I want to add here that our first focus this year was to get the operations back on track. We had been around 6 million tonnes for the last few years. Of course, last year was even lower because of the blast furnace shutdown, whereas 7 million is what we think is the optimal level. So last quarter, we were at 1.75 million tonnes, which means we are at 7 million rate. So that's one lever which is in our control, which is the operating performance. And then as Koushik said, managing the availability of the mills and things like that, in addition to all the other things that we talked about. So there's a lot of work going on there, and hopefully, you'll start seeing the impact of that from next year or other [indiscernible].

The next question is from Amit Murarka of Axis Capital.

So the first question I had was on India. So on the last call, you had guided for INR 2,000 drop. And actually, after that, prices slid even further. I was just wondering like in the reported numbers, at least the fall was looking much lower. So like was the NSR decline lower than what you had thought? Or what was the reason for a better realization than guided?

I think at the hot rolled coil level, it dropped by about INR 2,400 compared to the INR 2,000 guidance. But I think based on various other pluses and minuses, I think we've ended up where we are. Samita or Koushik, you want to?

Yes. So the revenue is actually a combination of steel revenues, we have [ F&B ] revenues, other revenues, et cetera. So what we actually give a guidance on is the steel NRs, and that's typically what we share with all of you. So we had said around INR 2,000. It's been a little steeper than that, around INR 2,400. But the overall number changes based on other revenues as well.

All right, understood. And also on the TS U.K., I thought you just mentioned the GBP 60 drop that you're expecting on the NSRs for Q4. So are you guiding for breakeven in TS U.K., including this decline? Or how is it?

No. I think what Koushik said is you will start -- we will start reaching the breakeven in the next couple of quarters. We had originally thought we will reach a breakeven sooner, but steel prices ended up much lower than we thought in the second half of the year. So that's why we're taking longer to hit the breakeven. But if you see the fixed cost takeouts quarter-on-quarter, there's a significant takeout on fixed cost. So hence, the EBITDA -- this -- the EBITDA loss in Q3 was much less than the EBITDA loss in Q2, and we are expecting things to improve in Q4. But we will not reach breakeven levels yet unless steel prices improve. But we're working on the assumption that steel prices stay where they are and looking at cost takeouts to come to the EBITDA -- come to the breakeven. So as Koushik guided, it will be closer to the July quarter than this quarter.

Sure. And I had a slightly longer-term question as well. Like iron ore leases come up for expiry in 2030. So when you're evaluating growing the India capacities to 35 million to 40 million tonnes, how are you kind of looking at the IRRs for these projects? Like do you include the iron ore cash flows in your assessment? How do you kind of look at it?

So there are a few things here. One is, of course, we do have roughly about 500 million to 600 million tonnes of iron ore available to us beyond 2030 based on the leases that we've got from the acquisitions of Neelachal, Bhushan, Usha Martin plus the Gandhalpada lease that we bid for, right? And the costs are different depending on the premiums that we paid for each of those or the value at which we've got it when we acquired those companies. So that's one part of it. The second part of it is how can we participate in any more auctions between now whether it's in Jharkhand, Odisha, which are going to be our 2 focus states. And we also evaluate Chhattisgarh as and when it comes up because geographically closer to our production sites. The third is to really look at how much of iron ore do we want to have as captive and how much can we buy from the market because if the bidding premiums are very high, then it really doesn't make sense to have 100% captive because you can get it cheaper from the market. You have OMC, you have NMDC and the others also producing iron ore for sales. So it's going to be a multipronged approach. We have gone through it in the coal similarly. 20 years back 65%, 70% of Tata Steel's coal was captive. Today, only 15%, 16% of Tata Steel's coal is captive, right? So we made the transition in coal, and we are planning the transition in iron ore so that we mitigate the cost impact as much as possible. That is on the input cost of iron ore. The other part is the conversion cost. So there's a lot of work going on across our sites in India to reduce the conversion cost. And also, as we expand in Kalinganagar, which is actually going to be our lowest cost production site in India, that also helps mitigate the cost. Because in Jamshedpur, we have some legacy costs. In Kalinganagar, we don't have those legacy costs. So when we look at Kalinganagar site being expanded, when you look at the Neelachal site being expanded, and when you look at the Meramandali site being expanded, all of them may not have some of the costs that we have in Jamshedpur, because of the way the plant is structured, some of the legacy costs that we have because it's an older plant. Also, as we expand more capacities in Kalinganagar, Neelachal, et cetera, we are coming closer to the ports, so the cost of getting coal to our sites becomes less. So there are a number of advantages also that we are working on. There is a structured program within Tata Steel to see how can we protect our margins at 2030 through the various initiatives that we take, not only in iron ore sourcing, but also in managing our costs, the conversion costs, et cetera. So that's our plan, and I think we will manage the transition well.

If I can just add to that, Naren, since the specific question was on project IRRs. So just to help you understand, Amit, we obviously don't take the price of our captive iron ore in post 2030. So in all our iron ore calculations, we take it at market price and obviously, projects IRR are higher than our cost of capital. That is what we clear. So just for you to understand, we do consider post 2030 that it will be market price.

The next question is from Vikash Singh of PhillipCapital.

Sir, just wanted to understand our capital allocation policy. We are already spending in U.K. We have big plants in India. And at some time in between Netherlands would come into play also. Given our current high debt levels, so what would be our priorities? And can we delay the Netherlands CapEx considering we have some carbon credit left? And how does it affect the Netherlands' cost of production?

Yes. Koushik, do you want to go for it?

Yes. So the capital allocation policy, Vikash, is primarily based on the attractiveness of the project. So as far as the U.K. is concerned, the level of [ bleed ] that we were having, plus the support of the government made the case for post the -- if you take the grant along with it, the project itself has a very significantly high IRR. So therefore, we have gone ahead with that, and this will get completed in the next 3 years, well before 2030. As far as the India CapEx is concerned, which is also a very high IRR and attractive, not only just volume, but also in downstream. And we are -- currently, as we are speaking, apart from Kalinganagar, there are certain downstream projects, which are also getting completed like Long Products, the Combi mill project and so on. We will continue to focus on high IRR projects, both from a volume perspective as well as from a product mix perspective. If we take all of that into account, as we have said in the past, and I think both Naren and I have said that the decarbonization project does not move forward without significant support from the government. And that is the basic premise, which we have worked in the U.K., and we are working with the Netherlands. There is also an issue in relation to the permitting times that comes for any of these projects, which takes some time. So we are going to, as I said, the FID is still some time away, the negotiations with the government are currently on multiple things. So the exact time of actual cash outflow will depend based on the timing that we have to do. But it will be something we will take into account in our overall capital policy. And our debt levels, which are debt to EBITDA -- net debt to EBITDA, if you see it this quarter is about 3.3. It did increase. And with more and more volumes coming in out of India and going -- U.K. going towards breakeven, and as Naren mentioned, a huge structural program being taken out of Netherlands, our intent is certainly to bring the debt level below 3. The range at which we should be comfortable with is somewhere around 2.75 for the growth, including the growth that we are talking about. So -- but we live in a very cyclical word. So therefore, in great times, it looks to be almost like under 2. But in [ stress ] time, when the EBITDA gets affected because of the prices or spreads, it tips over 3. So we are more focused around between -- around 2.75 level and on a steady-state basis. And that has been our focus. So our capital allocation is very clear that we will not want to have the growth at the cost of debt. The growth will be and the balance between our own internal capital as well as deleveraging as soon as we can start doing that. Given the prices at this point of time and the cash flow that comes in, it becomes very difficult to do that, especially since we are finishing up Kalinganagar. We have another couple of thousand crores to be spent in completing it in the next year. And by September of 2026, we would have completed Kalinganagar and then the full benefit will start coming in. And these CapEx, whether it is the U.K. CapEx or Netherlands CapEx, does have its own timeframe to consume, especially Netherlands, I think, is clearly about 1.5 years behind because the permitting time will also be built in before any CapEx is spent. So I think we calibrate the movements of growth and CapEx between India, Netherlands, U.K. in a manner where we can keep the priority on the balance sheet appropriately correct. And of course, the internal measures on cost takeout or working capital efficiencies are only supplementary limits.

Understood, sir. And sir, carbon credit benefit [indiscernible] how should we look at the cost of production post CBAM implementation in the Netherlands?

So you see, the carbon credit continues -- the free allowances will keep coming down over the years. But we had an issue of our blast furnace 6 delay in start-up and therefore, loss of production in '23, '24, which is the reason there is a pickup time, which will happen over the next year or so, when the carbon credit will -- the allowances will start coming back. But there is also a cost implication that we have to factor in. So I think it is balanced and we typically have to buy a certain amount of credit, a certain amount of EU-ETS. And I think the cost of production once we get the allowances back will come down, except for the net of effect on the free allowances. So there's an arithmetic behind it. Happy to do that off-line with you. But effectively, there is arithmetic based on which the free allowances keep coming and the offsetting impact that is happening. On CBAM, CBAM is very simple. CBAM is the cost that the local players in Europe pay for the carbon is levelized or actualized for any imports that come in. So if, for example, the carbon cost is, say, EUR 70 per tonne. I'm just taking an example of a company which produces 2 tonnes of carbon per tonne of crude steel, so the impact is about EUR 140. So anybody who's coming in from outside, there is a differential of the 2 tonnes in Europe versus whatever is the importing carbon coming in. So somebody who comes in at, say, 2.5. So there is a 0.5 into the carbon cost at that time. So that's the level at which the prices are expected to improve to be neutral to the higher carbon steel that is coming in. So that's the mechanism that will happen from 2026 onwards. We've already started the reporting process of any imported steel, but the tax will come in from 2026. So the general understanding or the view is that to the extent of people who pay the carbon tax, the domestic prices will improve or increase by that. It's an arithmetic, but that arithmetic shows that there is an increase in steel prices in EU that will happen.

Understood, sir. And sir, is the full benefit of Pellet and CRM has been realized in the EBITDA in 3Q or some spending, which should come into 4Q onwards?

The Pellet benefit should have come through. The cold rolling mill -- while the cold rolling mill itself was commissioned, the continuous annealing line has just got commissioned in December. So the product mix will improve going forward. And in the next few months, a galvanizing line will also get commissioned, which is an auto galvanized, one of the very high-end lines in India, and that will also help the product mix. So the CRM product mix will keep improving. It has improved from HR to CR. But now from CR, it will go to anneal and galvanize. So you'll see the product mix impact flowing in over the next few months and year.

The next question is from Ritesh Shah of Investec.

Couple of questions. First, sir, what we pull out from the last DGTR application surprisingly didn't mention Tata Steel in it. So I don't know what is the underlying reason. So wanted your take on that because the application went from India Steel Alliance, and we are a part of it. So was it something I missed in the press release or something else to read from it? And secondly, what are the expectations on tariff, non-tariff measures we do hear about tweaks on import duty safeguards. How should we look into this and time lines?

Yes. So I think on the DGTR, we've submitted the data that they required. So I'm not really clear. Maybe we can address it offline is why we were mentioned or not mentioned. But we were one of the companies as part of ISA who had submitted the data for them to consider. What will be the actions they will take? We don't know. I think let's see what happens. The larger point we are making is that we, as a country, need to have a strategy to deal with products being sold in our country at prices at which the supplier is losing money. Today, it's for steel, tomorrow it can be for anything else. In fact, it's already started happening in other goods. So while other countries are able to deal with it, have safeguard duties, antidumping duties, we also need to move fast because otherwise the damage is already done. So I think we've had good patient listening from the government. They've initiated the process, and we are expecting anytime soon, it should come through. We were expecting it to happen in Jan. Let's see if maybe something will happen in the budget. But let's see what happens. But the larger point is if the private sector investment needs to be protected in India, particularly in manufacturing and particularly in steel, then it's not just demand growth, but it needs to be profitable demand growth for the steel industry to invest the cash flows that are required. So I think that's been our submission and let's -- I think in the next few weeks, we will get more guidance from the government.

Sure. That's helpful. Two questions for Koushik. Sir, how much is the quantum of capitalized cost as a percentage of EBITDA for Q3 and 9 months, if you can help us with that number? The reason to ask this question is, if you look at our last year's balance sheet, capitalized cost was nearly 20% of EBITDA. It was quite a significant number. If you can help with the Q3 and 9-month number, or probably I can take it later, whatever works.

Yes, I'll give it to you off-line because I don't have it at this time.

Sure. And the second one was how should we look at the debt and cash flow profile into Q4 and next fiscal specifically factoring working capital release potentially into Q4? And are we still looking at one consolidated balance sheet? Or basically, are we okay to give out numbers on the debt on books currently at U.K. and Netherlands, which I think the last time what you had given was around [ GBP 500 million, GBP 600 million ] at both the regions.

Yes. So that is -- so end of the day, it is one balance sheet effectively, and we are progressing more and more in ensuring that whatever debt we will have, it will be more reflected on Tata Steel India because that's the strongest end of the balance sheet for many reasons, including economic reasons. The working capital debt will be more focused in the future on U.K. and in the Netherlands. And if there are any project-related debt, for example, in future, if the decarbonization project has debt coming on to the -- for the project, that will be reflected more on Netherlands balance sheet, which will be serviced by the Netherlands cash flows. So we have a method of looking at the allocation of the debt. And as you saw that this quarter because of the way in which we could tightly manage the working capital, we have been able to release a significant part. And therefore, the net debt has decreased by about INR 3,000 crores. Our intention is to ensure that we keep holding it and decrease it as and when we move forward. But there are sometimes apart from market issues, for example, this quarter, we have a blast furnace relining starting in Jamshedpur, the G blast furnace, which will run its campaign for about 160 days or so, and it will come back in July. So during that time, the working capital does need to be adhered to the loss of production out of G furnace. There is a lot more of scrap and DRI being used to maintain the production level on the other furnaces, for example. As you heard from Naren, the ramping up of the Kalinganagar is happening. So some of these are kind of competing pressures that happens on working capital. So there are -- whenever we get the opportunity, we push for taking out not only working capital, but also cost. We're also looking at a significant amount of commercial levers in terms of the contracts, et cetera. So our sense is that we'll be hovering around that region. We'll continue to strive to move it down. But at least in the next quarter, once the G furnace comes up, Kalinganagar, by that time, by end of first quarter would have been even more ramped up. And therefore, we would be good to go to drive cost and the working capital down as far as India is concerned. The situation in Netherlands is different. There, it is running at full capacity. So we are looking at taking down working capital even more. There has been a pricing impact of that in terms of NRVs in this quarter, which if prices continue to improve or does improve in the fourth quarter, there will be a certain amount of reversal on that and also, which will have its impact. Similarly, in U.K., we are trying to drive working capital down. Because the one step-up that has happened is once we close the blast furnaces, we are now buying a higher value of working capital, which is the slabs and coils than before, which was iron ore and coal. But that step-up has happened. Now we are moving to drive the supply chain effectiveness to ensure that our working capital is lower. So a lot of efforts around all the sites and all the businesses in all geographies. So our intention is to keep it tight and keep it going on this basis.

Sir, possible to quantify the net debt number for Netherlands and U.K. on December end basis?

I don't again have it upfront, but I can certainly send it to you. But it is effectively, the Netherlands is around -- the gross rate is around EUR 500 million. And the U.K. gross debt will be slightly higher than that, maybe around GBP 700 million to GBP 800 million.

Sure. That's helpful. Can I squeeze in one?

Go ahead.

Yes. Sir, specifically for Netherlands, in the last call, you had indicated that you've already started for the preparatory CapEx. And I think over the last 4 to 5 quarters, we have been engaging with the government, but nothing firm as yet. So how are we looking at it specifically, say, hypothetically, there is a CapEx of $3 billion to $4 billion and we have to take potentially one furnace down, which will be 3.5 million tonnes. Then how are we looking at the managing the cash flows for Netherlands? And is there a sort of assurance that you can give to investors that there won't be a fungibility of cash from India to, say, Singapore to Netherlands?

So let me articulate this a little bit differently. First is we don't shut down the blast furnace like in the U.K. See, U.K. blast furnaces have come to end of life. We had to -- it was bleeding and therefore had increased our costs and therefore, we shut down, and that's a kind of clean slate project that is going on. In Netherlands, both the blast furnaces will run as we will be building the project. So cash flows are not going to be impacted from that point of view. Secondly, while you mentioned that it's been -- we've been talking to the government, the government conversations do take a long period of time because it's a multi-stakeholder conversation even within the government. And in this case, there is a European commission angle, which has to agree and approve on the mandate to the Dutch government before they approve. So we are at a very high intensity conversation at this point of time. And it is just not a conversation. They also see our model, they see our viability because mind you, they would -- no government will give money for a failing business. All governments will give money -- whenever they give money, they want a successful business on the other side of the project. So I think there's a huge amount of due diligence that goes on, which happened in the U.K., which is happening in Netherlands. And that happens for any company which has got it. So they want -- so therefore, you, as somebody questioned earlier that people are going slow. The people are going slow because some of the assumptions may -- are not fructifying or in the line of sight, like hydrogen, for example, which is why we said we are slightly different because we've not gone path the hydrogen route, we are on the natural gas path. So there's a lot of conversation, diligence, [ legally ], vetting that goes on as part of this conversation before the government says that, yes, we can give you and what quantum we can give you and what is your project delivery timelines. What it will mean, what will be the outcome and how the company will perform post the project? All this is part of one. And therefore, it will not be the one certain morning either Naren or I will stand up and say [ $1 billion ] will go from next month onwards. That's not how it works. And then when the project is done, there is a permitting process. There's certain approval process on the ground. There is a preparatory time. And then the spend starts. And typically, the spend starts in a tandem manner. One gives INR 1, the other person will also give his share of their spend. So it is a calibrated spend that is happening even in the U.K., just started to happen because our spend was not there till about the start of this month. As we are going to spend, this is the first quarter where the spend will be net of the grant. So it will -- the grants will typically come in the U.K. at 1 quarter lag. So it is -- as you build, you will get the money as it comes. So these are elements which will happen. And I can assure you that, that cash flow certainty comes up along with the grant, and we will -- we have time and position and decision-making to decide on when that CapEx will happen.

The next question is from Indrajit Agarwal of CLSA.

Most of my questions are answered. I just want to understand, can you quantify what would be the conversion cost differential between the Kalinganagar Phase 2 versus what we have currently over there? What kind of cost savings we can be looking forward when Phase 2 is fully ramped up?

I think last time we had given some numbers, I'm not remembering exactly what. But basically, when you look at 3 million going to 8 million, there is certainly cost takeout because you're not adding -- doubling the number of people. I think the number of people will be maybe 10%, 15% more in Phase 2 than it was in Phase 1, and you're getting 5 million additional facility. Secondly, you're making better use of assets, which are already built. Like you have one steel melt shop, which is to produce 4 million, it will produce 8 million. So things like that. One hot strip mill, which is to produce 3 million, will produce 6 million. So you have that kind of scaling up. I'm not remembering the number we gave last time, but we had -- Samita, do you remember?

Yes. So Indrajit, as you know, we're really looking at it as a company, really wouldn't want to give site-wise. But I think broadly, you can sort of see the benefits which are coming and sort of factor that or adjust that. But we'd rather not actually give specific site-wise details.

Even the coke rates will be better because you have 2 big blast furnaces as compared to Jamshedpur, which has some smaller blast furnaces and bigger blast furnaces. So there are lots of operating advantages. And of course, like I said, no legacy costs, which you carry in Jamshedpur. So in terms of the conversion rate in Kalinganagar will be the lowest amongst all our sites. That's for sure. But as Samita said, we normally are not giving site-wise numbers.

The next question is from Ashish Kejriwal of Nuvama.

A couple of questions. Just a bookkeeping question. One, in our notes to accounts, it was mentioned around INR 1,410 crores of excess liability, which we have written back. So what was that liability? And I assume it is included in your adjusted EBITDA of INR 7,500 crores in stand-alone also?

Ashish, that liability was related to past claims. Those are no longer required. We continue to have a process whereby we continue to assess based on independent judicial basis. And once we no longer require it, we do an accounting release or the reverse, we top it up. So that's part of the ongoing process given the size and complexity of a company like Tata Steel.

And if I can just clarify, to answer your question. Adjusted is just adjusted for FX, the FX impact, not for any other items. So it has actually included. It includes the impact of the reversal.

[indiscernible]

We can't hear you very well, Ashish.

I think Ashish was saying you're not audible. I think probably the connection is an issue.

Okay. Ashish, if you can hear me, I said when we talk about adjusted EBITDA, it is adjusted for the FX impact, which we have on intercompany borrowings. So that's the only adjustment which is made in the EBITDA, not for any other items.

Sure, sure. That means this INR 1,400 crores is a net cash item, which was -- which reduced our other expenditure in this quarter?

Noncash.

It is noncash, noncash items, which reduced our other expense.

And second question is, we are looking at the depreciation also. We have commissioned or capitalized our 5 million tonne steel plant. But depreciation for, I don't know what happens, but for last 4, 5 quarters, remains almost same. So how to look into it?

So the capitalization, you will see it more in March because initial period when you ramp up till you reach a certain stage, you don't capitalize. So therefore, you don't see that kicker in the depreciation. From the first quarter of next year, you will see the impact of that depreciation.

Okay. Okay. Sir, second question is on post completion of our KPO expansion. When can we go ahead with NINL expansion? And will CapEx be much lower in FY '26 compared to FY '25?

Go ahead, Koushik.

So Neelachal, as I mentioned in my commentary that we are going through a process on the environment and regulatory clearances. Once that is done, we will also -- we normally do the FEL study, which is the front-end loading study for determining the CapEx. Once -- and these 2 getting done, then we go towards an investment case or investment decision for this. So that's something that we will bring to the Board for the consideration in a few months from now. Once the first stage gate is actually the EC because the EC is the longest lead item in this particular case. As far as CapEx for next year is concerned, the elements that will be there is certainly some part of the KPO expenses, the Kalinganagar expansion, which will -- about INR 3,000 crores of that will be there, along with the ancillary spend on that expansion. There is the blast furnace reline that is currently going on. So you will see that in the Q1, in particular, both Q4 and Q1, Q4 of this year and Q1 next year. There's another relining that will happen towards the end of quarter 4 and then there are more on the improvement sustenance CapEx that will be there and the European spend on U.K. which will also start kicking in, not in its peak form, but at least start kicking in because one has to start giving the advances and start getting the mobilization on site, et cetera. So 9-month spend on the U.K. will also be there. On the other hand, there will be a lot more rationalized cost on Netherlands to the sustenance level that is currently there.

Koushik, also Ludhiana.

Yes. Sorry, my point. Ludhiana project, which is actually picking up quite fast. And we will be spending -- the bulk of the spend will be in FY '26. So from today to December of '25, we will see a big part of the spend. It will -- it is something that we are optimizing, not the Ludhiana, but the rest of the profile on the CapEx is optimizing. And we hope to ensure that whatever we do, we will be looking at putting towards the asset growth in the portfolio that we have.

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

Yes. Thank you, Kinshuk. The first few questions, I think, are for you, Naren. There is a broad question on how do we see steel prices, while you've shared the guidance, I think just to get a flavor of what's happening in the steel markets.

Yes. So I think a couple of things here. One is if I look at domestic markets, the long product prices have been kind of what we had forecasted because it's less dependent on what happens in the international markets. In fact, if at all, the impact on coking coal imports will have an impact -- will add to the pressure on some long product prices because the secondary sector is getting impacted by that. Flat product prices in India will depend largely on safeguard duties or any other action taken by the government, which you'll know in the next few weeks. When I look at the international prices, I'm not expecting too much of a pickup because nothing is changing very significantly in China from an economic point of view. Though the last 2 weeks, we've seen iron ore prices and steel futures go up by about $10, $20. But I don't have as yet a feeling that it's going to spike up. But let's see what happens unless China is able to turn the tap off on exports, I don't see international prices improving very significantly at least in the next 1 or 2 quarters. But if something happens in China, and they're able to reduce their exports to the $60 million level, which they've been doing for most of the last few years, then you will see steel prices going to the $550 to $600 levels compared to the $480, $500 levels now. But I don't see that action just yet. So I would -- so that's why most of our actions are assuming that steel prices stay around the levels that they are. And hence, any improvements that we show will be more from additional volume or cost takeouts, right? And if there's a steel prices move up, that's an upside to whatever we say. So not broadly stable, maybe we've reached the bottom. That's what I would say.

The second question, I think, comes from some of the comments I think we made earlier on the Kalinganagar ramp-up. I think we had mentioned in the second quarter call that there were some issues to be resolved in the oxygen supply. So there are many questions about whether that has got resolved and whether that constraint is still there or Kalinganagar is ramping up post that?

Yes. So oxygen was an issue. The oxygen plant, which was to get commissioned in October, November, there were issues, and it has now got commissioned. So in the first week of January, we pretty much come to the levels that we wanted to. So the oxygen issue is behind us. I think now we are waiting for the steel melt shop facilities to get commissioned. So that will happen in March. One of it will happen in March and the other in September. So normally, when you do commissioning activities in a large steel plant, there's a moving bottleneck. And so we need to deal with these bottlenecks because it could be logistics, it could be oxygen, it could be the downstream facilities, what have you. So that's where we are. But I think the blast furnace is doing fine. It's producing very stable at 8,500 tonnes a day, and we will ramp it up now to 10,000, 11,000 and then take it to 13,000, which is the level at which we want to be. So I think we are going okay there. The oxygen issue is behind us.

Thank you. The next question is on Sukinda, and this is saying that with the surrender of the mines, what do we plan to do with the furnaces and what's our thinking actually about Sukinda or [indiscernible]?

Yes. So the work is going on on the surrender of the mine. We have got some of the permissions that we needed from the state government, but we are still going through the procedures. Once we surrender the mines, at least we won't have the MDPA pressures that we had, and there will be a better balance between our ability to produce chrome ore and the ability to convert them. So that brings business to a better level of stability than we've had, and we won't have the pressures of MDPA and the penalty if you don't produce more that is required. So that's where it is. And we will continue to revisit this business and further optimize it going forward. But basically, we are trying to make sure that we don't have the losses that we had because of high MDPA production.

Thank you. There is a question or a few questions actually on our CapEx growth in India. I think we've talked about it earlier as well, various projects, but just to have a sense of what is our thinking on that? And are we still on the same lines?

Yes. So as Koushik said, the focus in the next 12 months will be more to complete Kalinganagar in all that -- and when I say Kalinganagar, it's not just Kalinganagar, there's money being spent on the raw materials. We have increased iron ore production to 45 million tonnes. So all that is there. In addition to that, we will complete the Ludhiana project. I mean at least a lot of the CapEx to the Ludhiana project will go on. So that will be the focus in India. We will, in the next few months, go to the Board with Neelachal proposal. We've just had the public hearing a couple of months back. We are progressing on the EC. Similarly, we did -- we will do the Kalinganagar expansion plants also from 8 to 13; and the Bhushan plants, which is Meramandali plant expansion from 5 to 6.5. So these are the 3 things we're working on, of which the first one. So in terms of adding capacity, Kalinganagar, which is getting completed now; Ludhiana, then Neelachal, then Kalinganagar and the Meramandali plants. It will be in that order. So Neelachal is what will be ahead of the others after Ludhiana.

The next few questions are in Europe. So I think we answered about outlook on steel prices. There is a question on what is the cash burn currently going on at Netherlands and U.K. And when do we see the breakeven. So I think we've answered a bit of it, but maybe if you want to give some color.

Go ahead.

No, I think at this point of time, this quarter, in particular, Netherlands generated positive cash flow, that in spite of the negative or neutral EBITDA that it had, the cash flows are positive on account of a very stringent working capital management. Next quarter also, we want to continue to do the same. I think the impact of the transformation program will start flowing in from the first quarter of next year. And we are -- for the full year next year, we will certainly try to ensure that we are cash flow positive. So the burn is in this particular, the question is about quarter 3, the burn is actually [ none then ].

The next question is on CapEx and debt reduction plans. What is our CapEx for FY '26 and '27? I think it's a bit early to give guidance on that. But in light of all of this, what is our CapEx thinking and debt reduction plans?

I thought I explained fairly on that as far as the CapEx priorities for the next 12 months is concerned. The exact phasing and number we can do so in our May meeting. As far as debt is also concerned, I think we've given the framework within which we are working.

Yes. I think that is really covering most of the questions. There are some questions in terms of additional breakup, et cetera. So we'll see what we can do about that in terms of broad disclosures. But I think that ends. There were a lot of questions on the reversal, which I think we've addressed. So we will not take them. With that, I think we end the Q&A. And thank you again for all your questions and we hope the clarifications help you understand our numbers better. Thank you, and we will connect again next time.

Thank you.

Thank you, everyone.