Tata Steel has put plans for divesting European business aside as those businesses are able to stand on their own. TV Narendran, CEO and MD, Tata Steel, told Shubhra Tandon that these businesses have not needed any financial support so far. Also, with deleveraging plans on track, the company is not under any compulsion to divest those assets. However, Neelachal Ispat Nigam Limited (NINL) acquisition could increase debt levels for the next few quarters. Edited excerpts:

Q. What explains the drop in volumes in the third quarter?

A. Coking coal and iron ore prices went down during the quarter, along with some concerns about the economic activity in China. In India too, the activity did not pick up, as was expected after the festive season, so steel prices softened in November and December. With steel prices softening, many customers try to postpone their purchases in hopes of buying it cheaper next month. Now, that has changed because from January second week we have started seeing steel prices go back up. So volume drop was more impacted by lower sales than production, which was flat compared to the previous quarter. However, the downward sales trend should correct from the running quarter and fourth quarter volumes will be much better than Q3 volumes.

Q. What is the plan on the Europe business, are you looking at further capital allocation there?

A. No, we have not had to put any further capital. With all the actions that we have taken and, of course helped by the spreads, UK and Dutch businesses have been able to stand on their own. Going forward, at least the Dutch business can take care of itself, while the UK business is bit more fragile, but they are in a much better place than a few years back.

Q. So, have the sale of the European assets behind you now?

A. Businesses are able to take care of themselves from the financial and capital requirements point of view. Secondly, we have been able to deleverage significantly without the divestment. So, the motive for divestment was that we were required to send capital there and second because we had to deleverage. Since both these issues are pretty much addressed we are under no compulsion to divest.

Q. How does the company plan to fund the `12,000-crore NINL acquisition and the timelines of completing the same?

A. The government wants us to close the deal as soon as possible and we are working with them on that to know the different steps that we need to take. As far as funding is concerned, I think, 50% of that will be equity and 50% of that will be a bridge loan. We have enough liquidity and cash. So, while it may slowdown our deleveraging story for a couple of quarters, but we are confident that the cash we are generating can take care of this bump in the net debt and address it over the next few quarters.

Q. What is the level of net debt that Tata Steel will close FY23 with?

We are already below one on net debt to Ebitda ratio, and would have gone down further if not for Neelachal. So, now we have to plan for that Rs 12,000 crore as well, which we will factor in. Our guidance is that we want to operate in the net debt to Ebitda range of one to two, which allows us to have a healthy balance sheet, meet all the requirements of the rating agencies as well as not inhibit the growth plans that we need to have to leverage growth opportunities that are there in India.

Q. What is the outlook on demand both from urban and rural markets?

A. Demand outlook is largely going to be driven by construction due to focus on infrastructure spends and continued recovery in the automobile sector. I think the semiconductor issue is getting sorted out slowly, and the other thing is that because of the focus on construction the commercial vehicle business is also starting to pick up. In terms of rural markets, normally we look at motorcycle sales etc to see rural demand which has been weak. Hopefully, with good monsoons and strong MNREGA allocations and with spend on rural infrastructure there will be jobs created and we expect the consumption to come back, and rural markets also to pick up and follow the urban markets.

Q. The off take from the auto sector has been good despite the chip shortage issue. Could you give some colour which segments are doing well and how do you see this sector going forward in terms of steel demand?

A. We see the demand for steel from passenger cars to come back as the semi-conductor issue eases out. The commercial vehicles segment has seen a poor run for the last three to four years, which is starting to change, and that is good for the steel industry. Also, the demand from tractors, which dropped in the last 5-6 months, is also coming back. Tractors were at their highest level in June or July.

Q. Have you revised your contracts upwards with the OEMs and how much has been the increase?

We negotiated price increases roughly in the range of Rs 8,000-10,000 depending on the product and is all valid till April. For Europe we have negotiated contracts in November and December, which will run from January to December, and they are at significant increases to the old contract, which was lower than spot prices. The newer contracts are higher than spot prices.

Q. What is the outlook on steel prices?

Long product prices have been stronger than flat products over the last four weeks. This is not surprising because with focus on infrastructure, long demands should pick up, and in some sense we are happy with that with our Neelachal acquisition. Flat products have also started moving up since the middle of January, and Asian prices are expected to go up. China has just come back after the Chinese New Year, so we will know the sentiment in the next couple of days. However, the futures markets are strong and we expect flat products also to start trending up. We lost in flat products maybe Rs 6,000 per tonne between November and December in terms of price drops. So, efforts will be to try and get back most of it, if not all of it over the next few months. Normally January-June is the strongest period for steel demand.