Tata Steel Executive Director & CFO Koushik Chatterjee sees no change to the company's consolidated debt picture after merging seven of its subsidiary companies with itself.
In a conversation with CNBC TV18's Nigel D'Souza, Sonia Shenoy, Anuj Singhal and Prashant Nair, Chatterjee spoke of the potential synergies from the merger, volatility in the European business and a lot of other aspects.
Here are edited excerpts from the conversation:
Sonia: Explain to us, what are the synergies that come through, post the amalgamation.
Koushik Chatterjee: Let me start with the strategic rationale first and then it will be easier to talk about the synergies. First, after successfully merging and integrating Bhushan Steel, it was logical for us to look at the other subsidiaries, which are of strategic relevance. All of these companies , the businesses have a great future going forward. So, it will be a simplification and we have taken out about 120 companies within the Tata Steel Group over the last 4-5 years.
The businesses are strong, whether it is the packaging business in Tinplate, ductile iron business in Tata Metaliks. We have already seen Tata (Steel) Long Products double down on the acquisition of Neelachal Ispat Nigam. All of these businesses are very strategic and will have a path in the future to grow and create value. From procurement synergies, technology synergies, financing synergies, and all the operating synergies associated, it made the most logical sense to do this.
Prashant: Is there a number to the synergies you can put out, annually?
Koushik Chatterjee: These are synergies which are pretty significant. I would not put a number to it. We are working on those synergies, but it is pretty significant from an NPV and also from a value leakage perspective. When we possibly talk post the Q2 results, I would be in a better position to articulate that and it would be more relevant at that point in time because I need to tell the entire market about it.
Anuj: How will the merged balance sheet look like and what would be your plans to deleverage from here?
Koushik Chatterjee: All of these are EPS accretive for Tata Steel standalone. On the other hand, all of these were anyway consolidated because these are all subsidiaries. That is less of a point. The more important point is to drive the business in the future and that is what will reflect clearly on the Tata Steel balance sheet. And when I say Tata Steel, I am always looking at the consolidated balance sheet because that's the most relevant one.
Nigel: If you could give us a sense, in quarter one, what was the additional royalty that was paid by both Tata Metaliks and Tata Steel Long Products because they source iron ore from the parent that is 22.5 percent. So, for April-June how much was it, the additional royalty?
Koushik Chatterjee: The annual number is close to Rs 700 crore to Rs 800 crore across all the entities. It will obviously be part of the synergies, but there are others which are also pretty significant. So, that is why I said it is a value leakage which will also be important.
Nigel: So, that is the bulk of the savings, the Rs 700 crore - 800 crore?
Koushik Chatterjee: Not all, there are other synergies also. The procurement synergies apart from the royalty are also very significant. Also, each of these entities have a high reliance on Tata Steel as a supplier or customer. For example, we supply almost entirely the auto coil substrate for Tinplate. So all of that will get a part of the synergy.
Nigel: If you want to put a percentage number to it, royalty as a percentage of the total savings will be how much, roughly, 50 percent or more?
Koushik Chatterjee: Not that high, I am talking about an NPV basis and it will be less than that.
Nigel: So less than 50 percent of the benefits will be coming in because of this royalty savings, is that correct?
Koushik Chatterjee: Yes, part of that. Royalty was effectively paid by Tata Steel.
Nigel: So, I am assuming that if this was a benefit of Rs 700-800 crore and if that is less than 50 percent of the benefit then overall the synergy benefits will be in excess of around Rs 1,500 crore?
Koushik Chatterjee: On an NPV basis.
Nigel: There were revised guidelines that came out, effective April 1, on related party transactions. Was that the reasoning or was it more because of the simplification of the group structure? Just want to clear that point?
Koushik Chatterjee: No, we would have done this anyway, because we have been driving simplification across Tata Steel for some time. So, as I said that after successfully integrating Bhushan Steel, which was much larger, and more complex, this was the next natural step. We also had an impending merger of Tata Metaliks, and with Tata Steel Long Products (TSLP). But, with the Neelachal Ispat Nigam (NINL) acquisition, the shape of the businesses of TSLP changed very significantly. So it made sense for us to then integrate all of it in Tata Steel, make the verticals within the company rather than outside.
Anuj: You said this is EPS accretive. How much would EPS go up?
Koushik Chatterjee: I will talk about it after the Q2 results.
Nigel: Earlier we were wondering whether or not you will consolidate this and that has happened. So, the simplification has happened, but the street would have been wondering now whether going ahead you are going to simplify things even more. The overseas business has been volatile, and India businesses are more stable. Possibly you can simplify things even more? Separate the India business, get a lot of value for it and let the overseas business be separate? At some point in time, will you think of demerging these entities?
Koushik Chatterjee: From a legal entity point of view, they are separate entities.
Nigel: I am asking from a shareholder’s perspective because the problem is in Europe. It's volatile - sometimes it gives very good profitability, sometimes it's a big drag and now it's going through turbulent times yet again. So that is the reason I asked you, could that be a logical practical step at some point in time?
Koushik Chatterjee: If our board considers it, it is all up to them. It is important for us to understand that if you have seen the results in the last few quarters, Europe did give very strong results. This is a space, especially in matured geographies, where the volatility is high but we have also learned to manage this volatility. So, we will have to manage these businesses to ensure that we can continue to grow in India and decarbonize in Europe.
Nigel: You will not demerge both the two entities as that will be big value unlocking?
Koushik Chatterjee: But what will you demerge? These are separate entities.
Nigel: List both entities separately?
Koushik Chatterjee: You have to list it at a very different level because the commodity markets and metals are different. So that's not on the table at this point in time.
Sonia: Overall for the business, how are things shaping up? Steel prices have been under pressure, and demand has also not been too great globally? How do you see things over the next 6-12 months?
Koushik Chatterjee: The last few months have been very poor - June, July and also in August. But things are shaping up better. Things are more stable in Europe compared to the last two months. Let us see where we finish the year.
Prashant: This may be the wrong question to put to you. But, I was looking at the TRF stock price, it's up 110 percent in the last one week. It looks like the market had a whiff of it. Any thoughts?
Koushik Chatterjee: I have no knowledge. The only thing I know is that TRF was under the Graded Surveillance Measure (GSM) for many years because of its financial results. In the first quarter results, which came out, it demonstrated profits. They have also changed the business model of TRF, in the sense that it caters more to Tata Steel’s engineering and project requirements. I believe after the GSM was taken out, the prices have increased. Beyond that, I have no other knowledge.
Prashant: On the royalty bit, you said this was paid by Tata Steel to who and how? You are saying that this is part of the synergy benefits. Will Tata Steel retain this amount?
Koushik Chatterjee: No. This is part of the royalty as far as the new amendments that happened in the mining bill. It is to be paid to the government for every tonne of ore which is sold. And we had permission to sell it to some of our subsidiaries because they are historically been captive to Tata Steel’s ore. That is the additional cost that had come.
Sonia: I wanted one figure on the debt. Post amalgamation what will the consolidated debt be that you are taking on board and how much could you perhaps take it down over the next 12 months?
Koushik Chatterjee: This does not change because all these companies, as I mentioned earlier, have been consolidated with Tata Steel. So there is no change in the consolidated debt. This has been a challenging year so we will continue to focus on it.
Anuj: You can correct me if I am wrong, what happened Tayo Rolls, that is another company in which Tata Steel has a majority stake and that is insolvent, I guess. But the share still trades.
Koushik Chatterjee: That is in National Company Law Tribunal (NCLT).
Anuj: Is that the reason why that was not considered?
Koushik Chatterjee: That is in NCLT. It is not an operating company any longer and has no future value for Tata Steel.
Nigel: We have seen that you have announced this merger with Tata Metaliks, I recall close to around maybe 10 years or so ago. This time it is happening, right? This is going through, no "reconsidered" after this?
Koushik Chatterjee: No reconsideration after this.
Prashant: Have you been in discussion at the Tata Group level where we could see this kind of consolidation at the IT services business etc. as well? Is this a group thinking to kind of consolidate businesses into one large entity, where you have separate listed entities?
Koushik Chatterjee: I would not have the ability to talk about other Tata companies. I can only talk about Tata Steel and that's what we are doing just now.
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