TV Narendran decodes the multiplier effect of auto sector comeback, commodity supercycle & more

Can I pin you down to a number, can you tell me what is the sustainable EBITDA per tonne for TSC because it is a staggering jump from $269 per tonne in Q4 to now 374?

Again, I would give you a specific number, but I will tell you this, even today the spreads based on spot prices in Europe are in the region of around 400 to 450 pounds and about 550 euros, which is higher than what you normally see in Europe which is around 225-230 euros.

Obviously, the spreads are higher than what we have seen in the past but having said that we should also account for the fact that gas prices today are much higher, energy costs are higher.

There is inflation so there will be some cost eating away into the spreads but still spreads are higher than historical levels so we expect to see good performance in Europe at least for the next few quarters, may not be as good as Q1 but certainly better than the past.

Let me talk about net debt now because that also has increased in this quarter and this is without considering the NINL acquisition, coupled with that as I see cash flow generation for the next couple of quarters will also not be as strong. Given this is your deleveraging going to continue and what is the debt reduction roadmap then?

We are still sticking to our guidance of a $1 billion reduction of net debt by the end of the year because a lot of money today is stuck in working capital and we expect that to get released over the next few quarters for two reasons.

One is as coal prices come down there will be a value release from the working capital and two is as volumes which have been built up in this quarter start getting sold you will again see the benefit because this quarter since the steel prices for instance in India drop by about Rs 15,000 during the quarter lot of customers postponed purchases.

We are seeing that postponement coming back because now people are no longer deferring buying because they see prices close to the bottom and we expect a very strong Q3 and Q4 because infrastructure led activity is going to pick up after the monsoons.

I want to understand how the margins are going to pan out in the next few quarters considering the volatility that one has seen in both coking coal as well as other input costs?

This quarter in Q2 we will see a margin compression but a volume expansion because volumes in Q2 are expected to be higher than Q1. Q3 onwards we are expecting to see margin expansion simply because of benefits of today’s coal prices will start flowing through the system from September.

If steel prices start going up in the second half as we expect it to because of economic activity, you will see prices going up whereas the benefit of cost accruing to us because coal prices have already dropped 230 odd dollars.

What can you tell me about the Indian specific business, what kind of volumes, what kind of EBITDA per tonne guidance and what kind of spreads do you foresee?

In India obviously the volume expansion is not so significant because we are running at full capacity across all our sites. We will get some benefit of volumes from Neelachal which we have just acquired, and we hope to start production in September, but it is going to be another few months before we reach the rated capacity of 100,000 tonnes a month, but we expect to reach that level by the end of the year.

Overall volumes in India will be marginally higher compared to last year largely driven by debottlenecking activity, etc. I do not see much change there and same in Europe where also we are running pretty much full out.

The volume benefits will start accruing more from next year when Neelachal will be running full out and the Kalinganagar expansion would have started completing.

As far as EBITDAs are concerned, again I do not give specific guidance but obviously like I said I expect a strong H2, Q1 has been good, Q2 will be tough, Q3 and Q4 should be strong but obviously last year we had the benefit of lower coal prices and higher steel prices, this year we are dealing with a more volatile environment.

What I want to understand is whether you are sticking by with your capex, you had lined up about Rs 12,000 crore worth of capex for the full financial year but now with the current situation, high inflation, fears of recession, etc, across the globe wanted to understand whether you are reconsidering your capex plans and I also asked because just yesterday I was speaking with Mr Seshagiri Rao from

and they are already lowering their capex.

We guided 12,000 crores; we stick by that because apart from the sustenance capex the growth capex is largely for Kalinganagar which we want to complete. We are also spending money on expanding our iron ore which is again important for us to support the steel growth so we are sticking by that in addition to the 12,000 crores which is on the existing sites, we have also spent 12,000 crores on Neelachal acquiring the company so we will stick by that, and we are confident that we will continue to deleverage despite this.

At the start of this commodity bull cycle one thought that this is going to be a multiyear cycle that we are stepping into, 18 months into it and things have already reversed, I just wanted to understand whether there is more steam left according to you in this commodity super cycle if you will and are you as optimistic as some of the street watchers are?

I think what I have always said is that the steel price on an average this decade will be higher than the last decade. And I think I stand by that because even today when we are talking almost as if it is doomsday steel prices are around 600 dollars in the international markets which is to me the average of the last 10 years so 600 is not a bad price.

It is a bad price as coking coal is 400 dollars or 500 dollars but otherwise 600 is not a bad steel price. I think I stand by my guidance that steel prices will be higher than the average of the last 10 years because China is no longer an aggressive exporter, Chinese companies are losing money at today’s steel prices, so they are not expanding capacities, in fact they are going to cut production over the next few months.

The big players in the international markets Japan, Korea are all wanting to export less because of the carbon footprint that they leave behind. Russia and Ukraine are the other two big exporters. They are in all sorts of trouble.

If you really look at five countries who used to export 150 million tons of steel are not so sure they want to export that kind of volume or whether they can export that kind of volume so that has a huge impact on the steel trade globally.

I think in India given the focus on infrastructure, infrastructure led growth will mean that the steel consumption will grow faster than the GDP growth rate so I continue to be very optimistic about the cycle, particularly for India and globally we will see a much more balanced trade than we have seen in the last decade or two so prices will be volatile but in a higher range than we have seen in the past.

If you could talk a little bit more in depth about it and when you hedge bets as a business what is the worst case scenario that you are pencilling in, are you also factoring a Chinese slowdown, probable recession in some of the western countries as a real threat over the next two to three years and how does then that equate to steel prices what could the worse be because we have already fallen from 75,000 per tonne to 60,000 odd?

Yes, it is about that level but again, a couple of things; so, we kind of have de-risked ourselves by deleveraging. We are in a better position to deal with the increasing interest rate kind of regime, our balance sheet is in a much better shape than it was in the past.

Second point is most of our expansion going forward is going to be through brown-field expansion that means you can decide the pace of expansion. When you do inorganic growth, you must seize the opportunity that comes your way, when you are doing organic growth particularly brown-field expansion you can pace it depending on demand and depending on the cash flows and your appetite and things like that.

I think we are well positioned to pace ourselves for the India growth story, in Europe we have done a lot of heavy lifting yes, the good spreads are helping us but even before the spreads were so good our performance had started improving and by separating the business into UK and Netherlands, we have brought a lot more focus.

The Netherlands business has always been a strong business for us, the UK business which has been fragile but that is also in a much better shape than in the past.

I think overall we are well positioned, and we can pace ourselves, we can grow much faster if we want to, we can grow more slowly if we want to so that is the advantage we have and that is how we will play all the scenarios.

But yes, economic activity in China is always a concern because it has multiple impacts. Inflationary concerns are there but I do believe that Europe specifically is going to invest a lot in transitioning into a greener future so they are going to invest in LNG terminals, they were so far dependent on gas pipelines from Russia, they are going to invest in hydrogen infrastructure for that so you will see money flowing into parts of the economy which is going to consumer steel.

I think the US has always been a strong and resilient economy, so I think there are scenarios that we always plan for, but I think we have seen much worse in the past.

Tell me where is the maximum demand coming in from and would I be wrong in saying that autos I guess are posting a big revival?

Absolutely, you know auto has come back strongly and that has a multiplier effect because the auto value chain is long, and several SMEs depend on the auto value chain. But even today commercial vehicles are coming back to the levels that they last saw in 2018 so there is a long way to go, they are just catching up on the last four years. Passenger is quite strong and is growing well.

They seem to be coming out of the semiconductor issues so actually Q1 was very strong for auto, Q2 we are seeing some slowdown in the medium and heavy commercial vehicles because monsoon time infrastructure activity slows down, mining activity has slowed down a bit because of the export duty but light commercial vehicles are strong, passenger cars are strong, two wheelers are coming back so if auto is a bellwether.

I see a lot of activity there and construction will certainly pick up very strongly because the government is wanting to execute on all the infrastructure projects that they have announced, and they are funded. So that is why I am bullish about H2.

What can you tell me about the rollback of export duty because as we understand deliberations are being made? Is it wrong to assume that something could move in the right direction soon?

Well, that is what we hope because honestly if the export duty was imposed to put pressure on steel prices, I think that has happened because of that export duty or otherwise steel prices today are much lower than it was also because of international pricing dynamic.

In the medium to long term, we should encourage exports of steel in India because India has the iron ore, the steel investments are happening in some of the poorest parts of the country, there is no reason why countries like Japan, China and Korea who are importing raw material should be exporting steel.

I can understand Ukraine and Russia who have raw materials exporting steel, India is a country which has the raw materials, which needs the jobs, which needs the investments and I think we should encourage exports.

Why should India not be a 100-million-ton exporter of steel and if we want to produce 300 million tons of steel, we cannot keep waiting for the domestic market to take us to that level, we need to look at the export markets as well.