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"Our margins could be depressed towards the year-end." - Views on News from Equitymaster
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  • Jul 27, 2001

    "Our margins could be depressed towards the year-end."

    Mr. R C Nandrajog is Vice President Finance at Tata Steel, where he has served for nearly 35 years. Mr. Nandrajog has been with Tisco since 1966, when he joined as a Graduate Trainee. Mr. Nandrajog’s interests include photography and golf. He also is a visiting professor at XLRI.

    In an interview with equitymaster.com, Mr. Nandrajog shared his views on the steel sector and the growth initiatives at Tata Steel.

    EQTM: What is the demand supply scenario in the domestic and world markets?

    Mr. Nandrajog: The installed capacity of steel in the world is over 1,000 m tonnes, while consumption was about 840 m tonnes last year. In other words there is an excess capacity in the global markets. So the prices are likely to remain under pressure unless the demand picks up. Another thing which is changing the whole scenario, is that the consumers are highly consolidated, where as the steel industry is mostly fragmented. This has resulted into the price pressure. There will be more and more pressure for consolidation or formation of alliances in order to keep the prices firm. In the world market the excess capacity is created to the extent of 20-25 m tonnes, which was earlier, consumed by the US markets. Over and above this, there is no growth in the world steel consumption.

    EQTM: How have the world markets been affected by the supply from CIS countries?

    Mr. Nandrajog: At one point of time CIS countries used to dump the steel in world markets at much cheaper prices. However, now they are not as desperate to dump the steel in the markets as you might have observed 3-4 years ago. Now they cannot afford dumping steel at lower prices with the increase in depreciation and interest costs. There was a quality difference between Europe and CIS countries steel earlier, which is now narrowing down.

    EQTM: What kind of growth rates do you see in the current year?

    Mr. Nandrajog: As far as the growth rates are concerned there will not be a major change in the current year. Earlier 4-5% increase in consumption was forecasted for the Indian steel markets. But with the current slowdown in the economy, this looks unlikely. However, in the current year monsoon has been good, which could help kick start the economy. So if we consider the monsoon effect, consumption should see some change and 4-5% growth rates then looks easily achievable. This is because of the fact that the growth rates will come not from the industrial sector but from the agriculture sector. As a result consumer durable sector will grow and the chain effect will start. But as of now both the automobile and the consumer durable segment, are showing sluggish growth. Infrastructure demand is also not picking up. As a result, steel demand is scant.

    EQTM: How important a role does the brand play in such difficult market conditions?

    Mr. Nandrajog: Steel is generally considered as a commodity. Brands in steel are outsourced and also have been developed. It requires some efforts. For example SAAB, a European company, which makes steel plates and 80% of the world markets uses their brand. You can develop a brand in a niche market. You can also develop a brand on service, which we are trying to do in Tata Steel (Tisco). Tata Shakti is one such brand under which we supply cold roll sheets and galvanized sheets. Consumption pattern of the steel depends on the customer. If the customer is quality conscious, he will go for the branded products, as he is sure of the quality. Although, due to fragmented nature of the steel industry prices are adversely affected, brands always command a premium.

    EQTM: Which industry is the largest consumer of steel?

    Mr. Nandrajog: Construction industry is always the largest consumer of steel industry. However, it is not very profitable. Generally, steel bodies are more profitable. But here the consumption is relatively low (200-300 kg per car). On the other hand a bridge, roads, shipyard will consume above 1,000 tonnes of steel.

    EQTM: What is the one biggest strength of steel, which is different from aluminium?

    Mr. Nandrajog: Steel has certain capabilities, which aluminium doesn’t have. At one point of time, beverages cans were being made out of aluminium. But in the US, now the trend is to go back to steel usage. Because in a short space if you wish to store more cans than you can put one can over another if it is made from steel. This is because the crushing strength of steel is higher than aluminium.

    EQTM: What is your view on steel prices (both HRC and CR)?

    Mr. Nandrajog: Steel prices in the world markets are substantially down. They are at their lowest cycle. Once the steel price goes down, many of the producers are not able to make both ends meet. If the price prevailing in the market is less than your variable cost than you are virtually making loss. This would lead to a shutdown of the plant. The prices in the US are however improving as the country is going for domestic production and has banned imports from other countries by imposing anti dumping duties. So the prices in the US are moving higher at the cost of other countries.

    EQTM: What is the contribution of US to total exports of Tisco and to the industry?

    Mr. Nandrajog: Tisco never supplied a large proportion of steel to the US markets. It was always in the range of 0.1 to 0.2 m tonnes. But the issue is, with the US banning the steel imports from India, over a million tonnes of steel is available in the Indian markets. Although, we were not supplying, but other companies do have a large exposure to the US steel markets. Excess capacity of steel in India has lowered the HR prices by Rs 2,000 – Rs 2,500 per tonne. So if you are selling 0.8 m tonnes, you are likely to make a direct loss of Rs 2 bn with a decline in prices.

    For Tisco, South East Asia was a good market but now it is again into doldrums. Apart from this we also supply steel to Middle East, Bangladesh, Nepal, Sri Lanka and Japan. We have supplied to China also and they are happy with quality of the steel. We are in further discussions with China for supplying more quantity.

    EQTM: What is the impact of steel imports on Indian steel demand and steel prices?

    Mr. Nandrajog: I don’t see any threat from imports so long as China keeps on consuming more than what it produces. Last year China produced 135 m tonnes and consumed 145 m tonnes. Although, steel has a long shelf life and it can be transported from anywhere in the world to any place, still I do not see imports flooding the markets. I am sure the government is alive to the problems, just like US imposing anti dumping duties to curb the imports from other countries.

    EQTM: Which factors contributed to a rise of 22% in raw material consumption in 1QFY02?

    Mr. Nandrajog: The cost of production has increased due to import of coal and coke and also increase in zinc cost. We have sold this coal and coke in the domestic markets. The quality of coke, which we produce, is little higher than what we need. So we import the same for our own consumption and sell the one produced by us to SAIL. Our margins could be depressed towards the year-end as realizations have come down.

    EQTM: Please throw some light on your ferro chrome project in Africa?

    Mr. Nandrajog: The project is currently under examination stage. Ferro chrome is used in making stainless steel. However, we plan to directly sell the ferro chrome instead of utilizing the same in making steel. Demand for the ferro chrome is slowing down and prices are at their lowest levels in the last 20 years. However, margins in ferro chrome project are definitely better than our current realisations. The ferro chrome project generally takes around one and a half years to take off. Payback period depends on which location of the cycle you start the project. If you catch the cycle at price of $75-$80, then you are at the comfort zone and payback period consequently will be less than a year. Currently, the prices are around $22, in which case payback period could be around 3-4 years.

    EQTM: How do you plan to utilize the free cash flow, as all the major capex of the company is over? Do you think diversifying out of steel is justified?

    Mr. Nandrajog: In steel plants capex is never over. This year we are planning to spend Rs 6 bn in improvement of blast furnaces, collieries and on other maintenance. Apart from this, we will retire our high cost debts to the extent of Rs 3 bn if cash flow is higher. We have 17% Tata Trust bonds worth Rs 5 bn. To repay the same, we would require about Rs 7 bn. I may repay Rs 4 bn from my cash flow and for the repayment of the balance amounts, I can raise funds at lower rates. We still have the potential to raise money. If the investment of these funds gives us the returns that are higher than the cost of the funds, we would not mind going for diversification.

    EQTM: Any personalities that have influenced you?

    Mr. Nandrajog: I was somehow lucky to work with Mr. J. J. Irani for five years under his personal assistance. I also admire Mr. Ishaat Hussain and his style of working.

    EQTM: A word on your favourite books…..

    Mr. Nandrajog: I don’t read many books. But recently I have read a book ‘Who moved by Cheese’. It’s a superb book and I was really impressed by it.



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