How would you rate performance this year?
Operationally we could have done better both in Europe and in India. In Europe, we have had some struggles in the UK because our facilities there need greater support in terms of maintenance and the equipment is a bit old. Ijmuiden, which is our Netherlands unit has typically been a top class performer, also had a difficult year for various reasons.
We need to operate at a better level than we did last year because if you lose volumes, it impacts costs and if you are down for maintenance and shutdowns more often then you need to, then again it adds to the cost. These are factors which affected work for us because market conditions were favourable and the spreads were good. This year, we are looking to improve the operational performance.
So, it is more internal problems as opposed to external issues like iron ore, coking coal etc?
Absolutely, it is more internal.
Then it would be safe to say as these things pass, your margins would improve..
We have to do our job.
Even if the US does impose all the protection measures that it wants to, there are still no concerns in relation to supply demand?
I would say that not as much concerns but Tata Steel is one of the lowest cost producers of steel in the world and so irrespective of what the steel prices we should be profitable.
You have got the green signal for Bhushan Steel acquisition from the tribunals. More than enough is being said about the legal processes and the hurdles that you have faced — with bids from Liberty House etc. According to back-of-the envelope calculations, the acquisition cost is a bit lower than what most expected. How would you like to compare it with your Brownfield expansion in Kalinganagar? Would you say that you are being able to get Bhushan Steel asset at an attractive valuation?
We look at it in a slightly longer term basis. Brownfield expansions will always be cheaper than Greenfield expansion but Bhushan Steel was probably the best asset on sale. It is a good facility with well-built facilities, identical to the blast furnace we have in Jamshedpur.
Here you do not need to spend much capital to operate at rated capacity. Second. we know that it takes a long time to build a Greenfield site. So, having ready access to 5 million-tonnes capacity is great.
And it produces long products…
Bhushan Steel produces a small amount of Bhushan Power long products. So Bhushan Steel provides us with a ready access to a 5 million tonne site. It has taken us almost 10 years in Kalinganagar and we are not even at 5 million tonnes capacity. Look at the time value. It is only 150 kilometres away from our Kalinganagar site. The pluses are more than the minuses.
So how long before you can finally go in and start?
We wanted to go in tomorrow but today the appeal has gone to NCLAT. So, let us see what happens in the course of day today. The teams are ready to move in tomorrow if we get the clearance.
My other concern is over debt. You recently had the rights issue and you were able to cut down debt significantly at least as on March 2018. Now of course you are going to be shelling out about Rs 35,000 odd crore for Bhushan Steel. You also have some ICD so it is going you to give you a good capture of the economic value in Bhushan Steel. What about debt, should investors be concerned about your debt levels elevating?
The net debt is about Rs 69,000 crore on EBITDA of about Rs 22,000 crore. That is not too bad. Of course, we want to come to three and go below three over a period of time. Obviously the Bhushan Steel acquisition will push the numbers up a bit but it will also bring us EBITDA and that is why it is important for us to get the EBITDA very quickly.
The advantage of an inorganic growth is it immediately get cashed unlike organic growth where you spend money for three-four years and then start getting the money out of it. The other thing we need to complete this year is the joint venture. Once we do that JV, about 2.5 billion euros of debt is supposed to move from the Tata Steel balance sheet to the JV balance sheet. So, that will also help us.
We are very conscious of debt levels. We know what it means to operate at high debt levels. We have done it for most of the last 10 years. If you look at it structurally, what is happening in Tata Steel is most of the debt over the last 10 years had gone into the European operation whereas now most of the debt is going into the Indian operations which is generally a far healthier operation. This is because India is a growth market and it is a great place to produce steel because there are some structural advantages of having raw materials in India and a growing market. So, money is being put in the right place, in the right geography and to support the right ambitions for growth in India. We are far more comfortable with the leverage that we have today than we had may be five or ten years back.
The fruit of the restructuring has clearly paid off when it comes to the pension scheme. From having a deficit, now you have a surplus which was even accounted for in your books. Going forward, how will the pension expense which is essentially debited to your P&L or the contribution that you are making to the scheme, change in the new BSPS versus the old BSPS.
The new BSPS is a different structure. About 30% of the pensioners have shifted to the PPF which is the British Fund and 70% decided to stay on with the BSPS as we call it. Secondly, the BSPS is in some sense limited in its potential liability than the original pension scheme because in terms of the inflationary impact, there is a limit to how much it can grow, what is the liability and thus it limits the exposure that we have. We start with 120% kind of situation, which means we have a surplus. So, it is a good position to be in and it is more limited liability kind of structure than it was in the past.