Tata Steel’s $1-Billion Debt Reduction Plan Hits A Bump

Tata Steel Ltd. said it may not be able to achieve its target of reducing debt by $1 billion in the ongoing fiscal on the back of weak demand.

“In a good year, $1 billion looks feasible. In a year which has seen an unprecedented reduction in market conditions—arithmetically we may not reach that,” Koushik Chatterjee, executive director and chief financial officer of Tata Steel, said during a post-earnings press conference in Mumbai today. “But we'll look at all opportunities to reduce debt.”

In an interview to BloombergQuint earlier this year, Chatterjee had said that a combination of free cash flows along with the sale of non-core assets would be enough to service the debt target of nearly $1 billion. However, now after an increase in gross debt during the quarter ended September, the steelmaker will have to “recalibrate” that target, he said on Wednesday.

The company aimed to reduce debt this fiscal after its failed European venture. But it has not happened in the first six months. Tata Steel's consolidated debt stood at Rs 1.1 lakh crore—a 10.6 percent increase since March. It's net debt was at Rs 1.06 lakh crore, as of September.

“We have repaid about $370 million (in debt). Another repayment of a similar number will happen, early part of the next calendar year,” Chatterjee said. “Our intent is to repay all the scheduled debt as it is coming and not to increase short-term debt for working capital purposes.”

How the steelmaker uses its capital expenditure and working capital will be key to keeping debt in check, Chatterjee said. “We'll look to rein in whatever increase has happened by managing the working capital and capital expenditure more effectively.”

The steelmaker, which reduced its capital expenditure by nearly a third a quarter ago, had hinted in August that capex could be further cut in the next quarter depending on market conditions.

The steelmaker has reduced its capex guidance to Rs 8,300 crore from Rs 11,000 crore, slowing economic growth, coupled with auto sales dropping to a two decade-low and a prolonged monsoon. The company's capex for the quarter ended September and the first half of the current financial year stood at Rs 2,325 crore and Rs 4,985 crore, respectively.

The company aims limit its capex by focusing on specific plants.

“We're looking at Kalinganagar project and seeing what can give us maximum value,” Chief Executive Officer TV Narendran said. “We have narrowed down on the pellet plant and the coal rolling mine. Those help us build down the costs and unlock value. Depending on how markets behave, we can always prioritise the rest.”