When Tata Steel Ltd’s Kalinganagar factory in Odisha starts operations in March, it may somewhat offset its bleeding European operations although short-term pains will still hurt.
“Near term, the company will continue to see low capacity utilization owing to lack of demand at the ground level. We do not see the starting of the plant to be any game changer in the short term, but surely things will change in the medium- and long-term,” said Piyush Jain, equity research analyst at Morningstar Investment Advisor Pvt. Ltd, an investment research firm.
The new unit will “help cushion the impact of European operations as India operations will be cash flow positive” in the long term, according to Rakesh Arora, head of research at Macquarie Capital Securities India, a brokerage.
India’s second-largest private steel producer has investedRs.25,000 crore in the three million tonne steel mill.
“The planning and start of the commissioning sequence of the integrated steel plant commenced early in the current financial year. We have already started the commissioning process of the coke plant and the hot strip mill as per plan and the next in line is the blast furnace, sinter plant and Steel melting shop,” a spokesperson for Tata Steel said in an emailed response.
At full capacity, Tata Steel’s local steel production is expected to touch 13 million tonnes, close to its current steel capacity of about 13.5 million in Europe. Of this, it is likely to achieve one million tonnes of steel production from Kalinganagar in the first year of operations.
However, the steel producer will need to sell its product in a market that is facing modest domestic demand growth and higher cheap steel imports.
“There are new capacities coming up from JSW Steel and SAIL (Steel Authority of India Ltd). Even if the steel prices go up from what they are, there is possibility the smaller manufacturers who are currently running at lower utilisation may increase production. This may continue to remain an overhang,” said Goutam Chakraborty, research analyst, Emkay Global Financial Services Ltd, another brokerage.
In 2014-15, India’s steel consumption grew 3.1% but domestic production rose 3.3%. However, local production declined 0.4% in the April-October period while consumption rose 4.5%, largely met by imports.
Not all analysts see this as a major challenge. “I don’t expect the company to face major issues in selling the one million tonnes of steel produced from Kalinganagar in the first year of operations,” Arora said.
Meanwhile, as the Kalinganagar unit starts production, the company will also need to factor in the increase in depreciation and interest costs. Production cost is also likely to remain on high in the initial stages.
“Initially for two to three quarters there may be some pressure as capacity utilisation will be low. Once the operations stabilise we could see the average cost of production of India operations to remain the same as now or even reduce marginally. The reduction would be due to higher plant efficiency, captive iron ore and coal and given coal prices have softened,” said Arora.
For the September quarter, Tata Steel’s standalone total expenses was at Rs.8,150 crore.
For the first few quarters, the rise in costs could be challenging due to pressure on steel prices in India.
The stress at the consolidated level is greater, as Tata Steel Europe’s operations failed to contribute to the profits, reporting an underlying operating loss of Rs.139 crore in the September quarter.
“If the margins contract with this rise in costs, it may not work well for the company in the short term,” said Chakraborty.
To be sure, scope for higher margins from Kalinganagar may be limited. “The new plant does not allow as much value addition as the Jamshedpur plant does. I expect margins for this new plant to be equal or marginally lower than the existing plant,” Arora said,
The incremental 3 MTPA steel capacity in India is also expected to help Tata Steel retain its marketshare. On 31 March, it held about 12% of the market.
Tata Steel has a more ambitious plan for Kalinganagar.
“Now that we have the land we have acquired, we can build a capacity of 15-16 million tonnes of steel a year, up from the 3 million tonnes planned for now, and we have the money and desire to do so. Kalinganagar has the potential to be bigger than Jamshedpur,” Narendran said in a interview in Tata Review, an in-house magazine of the Tata Group.
“If we are to retain our market share, we need to add at least a million tonnes in capacity every year.”
Tata Steel lost 0.02% to Rs.224.35 on Tuesday on the BSE while the benchmark Sensex fell 0.17% to 25,775.74 points. The BSE Metals Index lost 0.15% to 7,015.98 points. Since the beginning of 2015, Tata Steel has shed 43.82% while the Sensex slumped 6.27% and BSE Metals index fell 34.75%.
Source: www.livemin.com