Operator: Ladies and gentlemen, good day and welcome to the Tata Steel Earnings Call. Please note that this meeting is being recorded. All the attendees' audio and video has been disabled from the backend and will be enabled subsequently. I would now like to hand the conference over to Ms. Samita Shah. Thank you, and over to you, ma'am.
Samita Shah: Thanks, Shom. Good afternoon, everyone. Wishing you all a very happy Diwali, and thank you for joining us today on this call to discuss our results for Q2 FY 2027. We have with us Mr. T.V. Narendran, CEO and Managing Director, and Mr. Koushik Chatterjee, ED and CFO. The results have been sent to the stock exchanges, as well as a presentation which gives you a little bit of the background. To answer any questions you may have, we will do it on this call. I would just like to remind all our participants that the entire proceedings of this call will be governed by the safe disclosure clause, which is on page two of the presentation. I will now request Narendran to make a few opening comments, and then we will move on to Koushik as well. Thank you, and over to you, Narendran.
Samita Shah: You are on mute, Narendran.
T.V. Narendran: Hi, good afternoon, everyone. Happy Diwali to all of you, and sorry to drag you out on a weekend, but that is what it is. A commentary on the results, Tata Steel delivered an improved performance in a seasonally softer quarter, despite significant cost inflation across the value chain due to the ongoing conflict in West Asia. Since the conflict has started, the oil and freight rates have risen by about 40%, and spot coking coal prices have also moved from over $235 to $280, though it has come down a bit in the last few days. While key inputs used in value-added and downstream products such as zinc have also gone up. The disruption has also resulted in higher logistics cost through elevated vessel charter rates, demurrage charges, and insurance premium across key shipping routes, while currency movements in India has also added to the cost pressures.
T.V. Narendran: At the same time, Chinese steel exports continues to be over 10 million tons a month, and that has an impact on global trade flows. However, we were able to successfully navigate this higher cost environment and generate close to 90 bps improvement in EBITDA margin from 15% in Q1 to 16% in Q2 on a consolidated basis. Let me now take you through each geography. In India, we focused on maximizing volumes to offset the pressures, and India's deliveries grew 16%, outpacing production growth of 7% on a quarter-on-quarter basis. Higher deliveries reflect healthy demand and our ability to translate market opportunities into performance despite the seasonal headwinds of the monsoons. Our extensive market reach, combined with a sustained focus on product mix and customer centricity, have enabled us to maintain strong market traction across chosen segments.
T.V. Narendran: Our automotive and special products vertical continues to deepen presence in advanced applications, with high-end sales growing 26% year-on-year. We secured approval for CR IFHS340 grade for automotive skin panels, developed a chrome-free galvannealed product for two-wheeler fuel tanks, and progressed on customer approvals for specialized suspension and transmission applications. These developments reflect our ability to co-create solutions with our customers. Our flagship retail brand, Tata Tiscon, grew 13% year-on-year, supported by a distribution network that reaches nearly 97% of India's districts. In the last 12 months, Tata Tiscon sold 2.7 million tons to around 500,000 customers. Embedded within Tata Steel, we now have a Tata Tiscon retail franchise of about $1.8 billion. The recently commenced 4.8 million ton per annum Neelachal expansion will support further growth of our retail business.
T.V. Narendran: Our digital platforms help us improve market access from districts of India to pin codes across the country. We have also focused on strengthening our presence in solution-oriented and value-added businesses, moving beyond steel supply to provide next-gen construction solutions that address customer pain points and create mutual value. Our expanding portfolio, including SmartFAB, ReadyBuild, which is a cut and bend and pile cages, and plate fabricated sections, all of which are seeing strong market acceptance. Overall, ready-to-use construction solutions grew 32% year-on-year in the Q2, and we launched India's first CBRI-certified mesh masonry reinforcement as an alternative to conventional RCC bond beams. We also secured the first order for low-carbon steel at a green premium from our Ludhiana facility.
T.V. Narendran: In addition, tinplate and Tata Steel Colors grew 17% and 49% respectively, and we are making good progress in sectors such as oil and gas, shipbuilding, including supplies for Sagar Manthan, the ocean research vessel being built under the Government of India's Deep Ocean Mission. Moving to the UK, deliveries were about 0.38 million tons, and while prices remained firm, volumes were impacted by elevated imports under the transitional safeguard arrangements. Orders booked before 14 March 2026 were exempt from quota utilization, and during July to September 2026. This led to a surge in imports and inventory accumulation across the supply chain, which is taking some time to be flushed out. In addition, UK exports to the EU are now subject to quota restrictions, creating a further constraint on market access. We remain engaged with authorities on a trade framework, including CBAM, that better reflects product-level demand and market dynamics.
T.V. Narendran: In Netherlands, liquid steel production was 1.52 million tons, while deliveries were 1.3 million tons. The Direct Sheet Plant restarted in early August under the terms agreed with the regulator, and the technical measures implemented are delivering the intended outcomes, with chromium-6 emissions reduced materially and currently remaining below prescribed limits. We continue to closely monitor developments regarding the EU ETS, CBAM, and other regulatory matters that could influence the operating environment. With this, I will hand over to Koushik for his comments. Thank you.
Koushik Chatterjee: Thank you, Naren. Good afternoon to all who have joined in. Before we begin, I would like to wish you all a very happy Diwali. The H1 of this financial year was characterized by significant external volatility. The conflict in West Asia continued to disrupt the global trade flows, with vessels rerouted around the Cape of Good Hope, extending transit times by about 10 to 14 days, increasing fuel consumption by almost 40%, and keeping war risk insurance costs materially above pre-conflict levels. Freight rates remained elevated, and the European gas prices were more than twice the January 2026 levels. Meanwhile, the Chinese exports in steel remained persistently high at 86 million tons year-to-date, and are expected to again exceed 100 million tons this calendar year.
Koushik Chatterjee: Against this backdrop, we in Tata Steel, our focus has been the same, strengthening the earnings, maintaining operational agility, and cost efficiency to improve the cash generation. Our performance in the H1 of this financial year is best assessed through this lens. Consolidated revenues stood at about INR 126,231 crores, and EBITDA was INR 20,035 crores, which translates to a consolidated EBITDA margin of 16%. Consolidated EBITDA improved by 21% or INR 2,160 crores per ton on a YoY basis. These results reflect the strength of our India business, supported by disciplined cost management and capital allocation. I would like to now elaborate on three themes. Firstly, the quality of our India earnings and plans to grow both volume and product portfolio. Second, our assessment on evolving situation in the Netherlands and the UK.
Koushik Chatterjee: Finally, our focus on cash generation and continued cost transformation with the launch of a multi-year program to drive efficiencies, operating model resets, and cost takeout to sustain competitiveness. Let me start with India, which continues to be the anchor of our performance and accounts for nearly three-fourths of our crude steel production. In a quarter that is traditionally impacted by monsoons and weaker construction activity, as Naren mentioned, we delivered our strongest-ever Q2 performance. Healthy demand enabled growth of 16% quarter-on-quarter in deliveries and outpaced the highest-ever Q2 production. At the same time, raw materials and logistics costs increased meaningfully during this quarter. The total raw material costs were higher by about INR 2,400 crores, while the benchmark coking coal prices increased by 12% between July and September.
Koushik Chatterjee: The impact on our imported coal consumption cost was limited to around 3%, or approximately INR 250 crores, reflecting the benefits of our coal blending strategy and our increased focus on leaner coal. The balance of the increase was primarily driven by higher inbound logistics costs, reflecting elevated freight rates, demurrage, and vessel charter expenses, as well as higher purchases of coke and scrap. Inventory drawdown of around 68 KT in the Q2, compared with a buildup of the Q1, led to a further increase of INR 2,000 crores. Overall, material costs were up by about INR 4,475 crores, or INR 4,128 per ton on a quarter-on-quarter basis. However, this was partly offset by improvement in the conversion costs to the extent of INR 3,300 per ton, driven by operating leverage on account of higher volumes and cost takeouts.
Koushik Chatterjee: As a result of the above, the standalone EBITDA per ton moderated to about INR 17,256 per ton, while the absolute EBITDA increased 10% quarter-on-quarter to INR 10,315 crores. NINL recorded an EBITDA of INR 318 crores at a margin of 21%. The 4.8 million ton expansion project has entered the execution phase and remains on track for commissioning in FY 2027. Site development work, including road and area grading, are underway while ordering of key equipments such as the blast furnace package, et cetera, continues to advance. The project comprises of four long products rolling mills, including rebar and wire rod facilities. Although the overall ramp-up will be aligned with the commissioning of the steel-making complex, one rebar mill is expected to come on stream earlier, enabling an initial production ramp-up ahead of the upstream facilities.
Koushik Chatterjee: The amalgamation of NINL with Tata Steel remains on track for completion in this financial year, subject to the final NCLT approval, which is scheduled for hearing later in November. Volume growth remains important for us, but equally so increasing the value intensity of our portfolio. Our downstream projects are progressing well. The 0.7 million ton HRPGL project has entered the construction phase, with structural erection and piping work underway. This first-of-its-kind facility in India will serve the energy, automotive, and construction segments and introduce galvannealed products, enabling Tata Steel to address customer segments and support import substitution. The doubling of the tinplate capacity is also advancing with civil and structural works and will aid the market consolidation in the packaging segment. Along with this, we recently launched Colorcoat, our globally recognized pre-painted steel brand in India, bringing proven European technology to the country's growing construction sector.
Koushik Chatterjee: We also continue to expand our tubes business and ready-to-use construction solutions to address evolving customer needs. Our downstream growth will continue to get priority as we move forward. Let me now turn to Netherlands. The key development during the quarter was the restart of the Direct Sheet Plant. In the Q1, we effectively lost almost the entire output of this facility, which represents around 1.4 million tons of annual processing capacity, and it is about 18% of the total volumes in Netherlands. The plant successfully restarted in early August against the terms of agreement with the regulator and is presently operating at rated capacity, subject to periodic review. Importantly, the technical measures implemented are delivering the intended outcomes, with chromium-6 emission reducing materially and currently remaining below prescribed limits. The significance of the restart extends really beyond volumes.
Koushik Chatterjee: It strengthens our product mix, improves the efficiency of the integrated production, and lowers the conversion costs. As a result, the EBITDA increased from EUR 4 million in the Q1 to EUR 72 million in the Q2, both in euro terms. As a result, the EBITDA increase was about translates to about EUR 56 per ton. Turning to broader situation in Netherlands, since the signing of the Joint Letter of Intent in September 2025, we have completed engineering and technical work on the integrated health and decarbonization project. While this work has further matured the DRI-EAF pathway, it has also reinforced our view that the long-term competitiveness of the IJmuiden site will be determined with the resolution of number of critical external factors, rather than the project design alone.
Koushik Chatterjee: First, the discussion with the regulator and the province of North Holland regarding the timing and sequence of the proposed closure of the coke and gas plants 2 and 1. Our position remains unchanged. Any closure process must be executed in a safe, responsible, and operationally controlled manner. We have provided detailed technical assessment and continue to engage constructively with all stakeholders to support an orderly transition. However, the timing and outcome of the process remains uncertain at this point. Secondly, we remain engaged on the evolving framework governing the steel slag management. Temporary disruptions to the slag offtake has resulted in additional stockpiling at site. A range of mitigation measures are being pursued, including technical assessment, alternative storage and disposal solutions, and ongoing stakeholder engagement.
Koushik Chatterjee: More broadly, the economics of both the existing business and any future decarbonization pathway will depend on the resolution of these matters, together with greater visibility on the long-term energy affordability, capital requirements, permitting timelines, and broader investment framework. Many of these factors are external to the company, and their timing and outcome remains difficult to predict. Against this background, Tata Steel, the Government of Netherlands, and the province of North Holland have agreed to extend the Joint Letter of Intent by five months to March 2027. The extension provides additional time for the parties to work towards a more comprehensive framework that supports both the decarbonization and long-term competitiveness of the site. Importantly, while the DRI-EAF pathway remains the reference case under the JLoI, we continue to assess a range of strategic alternatives and sequencing options.
Koushik Chatterjee: The optimal pathway will ultimately depend on how various external factors evolve and the implications they have for future cash flows and competitiveness. Given the extent of uncertainties, it is difficult to form a reliable view on the range of potential outcomes or assign probabilities to them. The board and the management therefore believes currently realizing any change in the carrying value of the business would not faithfully represent the company's position, given the uncertainty of the outcomes. We continue to monitor the development closely and reassess the position as key uncertainties are resolved. We expect greater clarity by the 1 March 2027, the revised maturity date of the Joint Letter of Intent. The extension is intended to provide time to conclude discussions on critical issues, establish a clear direction, and enable more definitive assessment of the long term. Moving to the UK, the market has become very challenging.
Koushik Chatterjee: While the Q2 net realization improved by about 72 pounds on quarter-on-quarter, deliveries declined to about 0.4 million tons. The key point is that the effective market available to UK producers has essentially become smaller. Domestic demand remains weak, with automotive and construction activity expected to decline by 2% to 4% in the current financial year, sorry, the calendar year, while import pressures remain elevated. Between April and July 2026, imports averaged around 738 KT per month, about 22% above the 2025 levels. This has resulted in flat steel inventories in the UK rising roughly 865 KT by September, nearly 60% above normal levels, and equivalent to almost three months of demand. With the change in quotas, the market is rebalancing, but it is taking longer than what we had initially estimated to liquidate the old inventories.
Koushik Chatterjee: Having said that, it is important to view the UK business through a lens of a broader Tata Steel system rather than a standalone operations. While the UK continues to report EBITDA losses during this transition period, its downstream assets provide strategic access to customers and end markets, and in many respects, operate as an extension of Tata Steel India's value chain. As India's steel production continues to grow, these assets effectively represent the fifth hot shipment for the Tata Steel group, enabling Tata Steel to convert its substrate into high-value products closer to customers. Consequently, while Tata Steel UK is currently loss-making on a standalone basis, the wider system economics and the value creation for Tata Steel remain materially more positive than what is reflected in UK's standalone performance.
Koushik Chatterjee: Further, the export from the UK into the EU are now subject to quota restrictions, creating an additional constraint on the market access. We continue to engage closely with the Government of UK and the trade authorities on measures that improve market balancing and ensure that the trade framework better reflects the prevailing market conditions. Turning to the transition project, the execution remain on track. The Llanwern pickle line is fully ramped up, and the 3.2 million ton EAF project continues to progress in line with the plan. Major enabling works have been completed, and the key contracts have been awarded. As project activity ramps up, our engagement with the UK government and other stakeholders is increasingly focused on ensuring an appropriate investment framework, trade quotas, competitive energy prices, and timely grid connectivity, all of which are important to the long-term competitiveness of the site.
Koushik Chatterjee: Overall, the operating cash flows before CapEx was INR 5,160 crores for the quarter. Capital expenditure was about INR 3,280 crores in this quarter, taking the H1 spend to about INR 6,800 crores. During the quarter, the company also paid a dividend of about INR 5,000 crores. Consistent with the capital allocation framework, the cash flows continues to be prioritized towards growth opportunities in India. This is reflected in the strong returns generated by the business, with the return on invested capital of the India operations at about 27% and the consolidated return on invested capital at about 14%. The net debt stands at about INR 91,423 crores. Part of the rise in the debt of about INR 2,200 crores was on account of increase in the leases post the acquisition or consolidation of TMILL in the transaction.
Koushik Chatterjee: Net debt to EBITDA remains stable at 2.4x, well within the stated threshold, and the group liquidity remains strong at about INR 40,000 crores. Before I conclude, a brief update on the cost transformation. During the H1, the crisis in West Asia, the plant shutdown in India, the Direct Sheet Plant outage in Netherlands, and the unfortunate fire in Tata Steel UK has distorted some of the cost takeout profile. As a result, the benefits of our cost transformation were not fully visible on the reported numbers. Our FY 2027 target remains unchanged at about INR 7,000 crores of savings, primarily across India and Netherlands. in the H1, we have delivered about INR 1,800 crores. The program is generally weighed on the H2. The specific levers such as coal blend, procurement optimization, energy and logistics, inland waterways, amongst others, are progressing.
Koushik Chatterjee: With that, I will end my commentary and open the floor to questions. Thank you so much.
Operator: We will now begin with the question-and-answer session. We will be taking questions on audio and chat. To join the audio questions queue, please mention your full name and email ID in the chat box. Kindly stick to a maximum of two questions per participant and rejoin the queue should you have a follow-up question. We will unmute your mic so that you can ask your question. To ask questions on chat, please type in your question along with your full name and email ID in the chat box. To use the chat box, if you have logged in from your desktop, kindly click on Direct and then Chat with all panelists. If you have logged in from mobile devices, you have to select All Panelists from the dropdown. We will wait for a moment as the queue assembles. The first question is from Ashish Kejriwal of Nomura.
Operator: Ashish, please go ahead.
Ashish Kejriwal: Yeah. Hi. Good afternoon, everyone. Happy Diwali, guys. Two questions from me. One is from India. If you look at in India, we have been talking about that post-30, we want to maintain our competitiveness and margins on that front. In that regard, before that, are we going to increase our sales volume in iron ore also for next 3 years? What kind of value addition, at least in pipes and tubes segment, we are trying to do? Are we open for inorganic expansion also over there? That is my first question on India. Sir, you are not audible. Okay, sir.
T.V. Narendran: I am sorry. No, I said iron ore sales, yes, is very much
Ashish Kejriwal: Yes
T.V. Narendran: part of our plan. I think this year, Koushik, if I remember, we will be doing about 8 million tons or something like that.
Koushik Chatterjee: More than that.
T.V. Narendran: Yeah.
Koushik Chatterjee: Plus 10 million tons.
T.V. Narendran: Yeah, about 10 million tons of iron ore sales. Last year, I think we did about 2 million tons or something. So, that is very much part of our plan, and we optimize on the qualities of ore that are available for our use as well as what is available for sale, and we will continue to grow that side of the business going forward. As far as growth in downstream is concerned, yeah, we are always looking at growth opportunities. Today, a lot of our growth has come from what we call conversion partners, who convert the steel for us, and that has been the capital light way of growing for us for both tubes and wires. Otherwise, yeah, we will constantly look at opportunities that there are. Koushik Chatterjee, you want to add anything? Yeah.
Koushik Chatterjee: No, I think I just gave the commentary on the downstream growth, which also includes what we have done in tubes growth in the last couple of years through the tube partners. In the other areas, some of them are organic currently on the way, so I gave a commentary on that and do not want to add anything to that.
T.V. Narendran: Great.
Ashish Kejriwal: Sir, second question, the way we have done in our Indian business, in fact, in this quarter also, INR 17,000 plus EBITDA per ton is really, really worthy. My question is, one, whether we are going to sustain and if you can guide for Q2 also the way you guided. In case of Netherlands, when we have done EUR 60 plus ton EBITDA, do we see a further increase in that till the time we go for next phase of expansion in Netherlands? Lastly, any sense on UK operation, whether we are going to be breakeven ever?
T.V. Narendran: Let me talk of India. I think last quarter, I think you are probably asking for Q3, right? I mean, Q2 behind us.
Koushik Chatterjee: H2.
T.V. Narendran: H2, sorry. Okay.
Ashish Kejriwal: Q3 is fine, sir.
T.V. Narendran: Yeah. I think H2, we expect H2 to be stronger than H1 for 2, 3 reasons. One is, from a Tata Steel point of view, we will have a bit more volumes in H2 than we had in H1. Secondly, even in H1, prices went up in April, May, then dropped in June, July, August, and then again started going up in September. We have come into this quarter at a reasonably high level of prices. Normally, January to June is always the best period for the steel business because monsoons, festivals, everything is behind us, and the activity is at its peak. For many reasons, we expect H2 to be better than H1. As far as Netherlands is concerned, we expect a better Q3 and Q4 than Q1 and Q2.
T.V. Narendran: Again, H2 will be much better than H1. As far as UK is concerned, yes, I know this is something. We have been struggling with for multiple reasons. Well, we have taken a lot of action internally. Currently, the problem, as Koushik said, is we are selling only about 400,000 tons a quarter as against 600,000 tons a quarter that we want to be selling in the UK. That is largely because the imported material lying in the UK market is quite high, and we will see through this quarter and next quarter before most of that gets flushed out.
T.V. Narendran: While the prices are good, the spreads are good, but the volumes are not good, and hence, that has a negative impact on our costs because despite taking out almost GBP 400 million of fixed costs, we still are a business which has reasonably high fixed costs. We cannot afford volumes to be at two-thirds of where it should be, right? Our own expectation is we come close to break-even in Q4 when most of this stocks would have got flushed out of the system. But yeah, we have had a few setbacks in the UK, and obviously till we are there, it does not look like our promises are happening. I think we are expecting that by Q4, we will be close to break-even.
Koushik Chatterjee: If I can just add, Anand.
T.V. Narendran: Yeah.
Koushik Chatterjee: We also see the reason why the Netherlands and the UK improvement is forecasted is because the prices are increasing, especially due to the contract renegotiation in both geographies, and therefore the spread impact is more positive than where we are today. That will be the key reason why we expect certainly much better Netherlands and also lower losses as far as UK is concerned. If by the Q4 the inventory is washed out, then I think the volumes will also start coming back.
Operator: Thank you, sir. The next question is from Vibhav Zutshi of JP Morgan. Vibhav, please go ahead.
Vibhav Zutshi: Yes. Hi. Thanks for the opportunity. Just wanted to follow up on the inventory situation in Europe. Any sense that you can give on Europe volumes for H2, both in Netherlands and the UK? Obviously, pricing has improved a little bit, but some of the peers have tried to take pricing as far as EUR 780, EUR 800 per ton, but that has not really come in through. With the contract negotiations happening in November, how is the environment looking like? Thank you.
T.V. Narendran: I think the inventory issue that we described is for UK, not for Europe. Europe has already implemented quotas, so the imports have come down. CBAM is coming in. So, the prices in Europe are strong. The inventory of imports which we are dealing with in UK is not there in Europe. That is why you see a better flow-through not only of the prices, but the volumes in Netherlands. The inventory issue that we described is mainly for UK, where the imports orders which were booked before, I think 14 or 15 March, was allowed to be imported till in the July-September quarter, and that brought in a lot of material.
T.V. Narendran: That's the material which we think some of it is getting flushed out now, but it will be March by which most of it will get flushed out, and in some categories till June 2025. The prices there, in fact, the UK prices are actually higher than European prices just now, but the problem is more of volumes. We need to get to 500,000 or 600,000 tons a quarter of volumes to really come to that break-even level that we've been discussing. As far as Netherlands and UK is concerned, this is the time when we do the price negotiation for next year, so the packaging contracts, auto contracts, et cetera. This negotiation is currently being done in market conditions which are quite strong.
T.V. Narendran: We expect a good outcome out of that, and that will get reflected in the Q1 realization, I mean, Q4 realizations, and that's why we said Q4 for both UK and Netherlands should be better than the previous quarters. As far as specific prices are concerned, the price levels that you indicated are around the levels at which it is in Europe just now.
Vibhav Zutshi: Okay, got it. Second question is on India. Two quick questions. Firstly, if you can highlight if there are any auto contract positive price revisions which have come in or can come in this quarter. Just secondly, construction and infrastructure sales volumes have declined in Q1 on a year-on-year basis from 1.4 to 1.2. Any reasons behind the same? Thank you.
T.V. Narendran: Auto contracts, actually we saw a lot of the benefit in Q2 because a lot of the contracts which were negotiated for Q1 also, we got the realizations in Q2. So Q2 got a bump up. While there are negotiations going on for Q3, Q4, I'm not seeing, while there may be price increases, but the bump up in Q2 of Q1 and Q2 coming together in Q2 may offset some of those increases. Auto contracts per se, volumes for us, more importantly, the auto volumes are very strong, and which is reflected in the release that we gave, and that helps us. Within auto also, the product mix is very good. We have a 50% share which we continue to maintain.
T.V. Narendran: As far as construction is concerned, I would assume that is because we have sold more in retail, because that is always our preferred segment. Samita Shah can later clarify the numbers.
Vibhav Zutshi: Yeah
T.V. Narendran: We are now selling, I think last month, we sold 270,000 tons of Tata Tiscon in the retail segment. That eats into what we typically sell to the bigger construction companies because we get a far better price when we sell in the retail than we do when we sell to big construction companies. That is the only reason I can think of.
Samita Shah: Yeah
T.V. Narendran: Of us optimizing the market. Yeah, Samita Shah?
Samita Shah: Yeah. Vibhav Zutshi, if you look at our segments, there is retail shown separately from construction. When you think of construction, I mean, retail is essentially construction, so you might want to clump those together and see.
Operator: Thank you. The next question is from Rahul Gupta of Morgan Stanley.
Rahul Gupta: Yeah, hi. Thank you for taking my question. Two questions. One, on Netherlands, we saw sharp moderation in volumes quarter-on-quarter. Can you help us understand what drove that? Also, with the capacity now running at full operations and with inventory build-up quarter-on-quarter, how should we look at the overall volumes in Netherlands in the H2? That is my first question.
T.V. Narendran: Yeah. In Q1, we lost most of Q1 as far as the DSP is concerned. The DSP is about 20%, 20%, 25%, 20% of our production. That was closed because of some of the regulatory issues we are dealing with. That started coming back in August. So we got most of August and all of September, the DSP production, and that is why the volumes got better in Q2. H2 of the year, hopefully the DSP is going to be running all the time, and we are also looking to drive better stability in the rest of the plant. I do not think we give a quarter-wise volume guidance, but like I said, overall, we expect H2 to be better than the H1. Koushik Chatterjee, do you want to add anything?
Koushik Chatterjee: No, I think that is fine. I think overall, we should be, from a production point of view, for the full year, we should target more around 6.5 and deliveries around 6. So that effectively would mean that the next 2 quarters will go back to an average of what we normally do, around 1.7.
Rahul Gupta: I got it. So what I wanted to understand was that your volumes are materially lower than production in Q2 as well. I understand production got impacted because of DSP shutdown, but what impacted sales volume during the quarter?
Koushik Chatterjee: Well, because we don't keep so much inventory. There is a correlation between the production and the deliveries, Rahul. So if we aren't able, if the production numbers are lower, so we had this quarter also issues on production on the hot metal side. The DSP was shut for 1.5 months, and in the March end, we had inventories which got liquidated in Q1, which is why the sales volume was not correlated to so much with the volume production. So if you look at the flushing of the inventories did happen in Q1, not out of the production of Q1 itself, but because where it carried forward, and then in Q2, we had that being liquidated. So you can see the change in stock.
Rahul Gupta: Got it. Thank you. My second question is just an extension of the UK business that we discussed earlier. I understand that the profit or the breakeven of the business has been pushed out to later this year. But just want to harp more on the fact that now you discuss about UK businesses should not be treated as a standalone business, but as an extension of the overall Tata Steel. How should we look at the profitability of the business beyond FY 2027 end? I mean, does that mean the profitability of this business may remain a drag vis-a-vis the entire group profitability? Thank you.
Koushik Chatterjee: Well, if I can explain the reason why I made that comment is that today we supply a significant part of the substrate from India to UK till the EAF is being built. So when you do that, if you look at the reason why I said it's an extension, because then you look at the combined profitability or the EBITDA of the volume that gets supplied from India to UK. The part in India makes about, say, INR 8,000 per ton of EBITDA margin. It goes off to the UK for subsequent rolling, finishing, downstream, et cetera. The same coil, if you extend further, as of last quarter, it was, say, about INR 5,000 to INR 6,000 per ton. Therefore, if I add the same, it is somewhere around INR 13,000, INR 14,000 per ton. That is the reason why I said that.
Koushik Chatterjee: It will change once the EAF comes in, because then again, the profitability will be measured based on the cost of steel that the EAF makes and the rolling that it does.
Rahul Gupta: Got it. Thank you so much, Vijay. Everyone, very helpful.
Koushik Chatterjee: Thank you.
Operator: Thank you. The next question is from Sumangal Nevatia of Kotak Securities. Sumangal, please proceed with your question.
Sumangal Nevatia: Yeah, good afternoon. Thanks. First question is on steel prices and costs. If you could guide, how are we seeing prices and costs move across geographies in Q3 versus Q2?
T.V. Narendran: Yeah. So in India, we expect the realizations to be about INR 3,500 or INR 3,600 per ton higher in Q3 compared to Q2. In UK, it will be about GBP 28, GBP 28 to 30 per ton higher in Q3 compared to Q2. In Netherlands, while on a product-to-product level, it will be about EUR 30 higher, but because of the mix that we are selling, we are expecting it to be about EUR 11, not pounds, EUR 11 lower in Q3 compared to Q2 because of the mix rather than at a product-to-product level, it is about EUR 30 higher, but because of the mix. The annual contract benefits will only come from Q1 next year, while it is being negotiated this quarter.
T.V. Narendran: As far as costs are concerned, the coking coal impact is expected to be about $15 a ton, both in Netherlands and in India, Q3 compared to Q2 on a consumption basis. UK, as you know, we do not buy coal, so it is not relevant. Netherlands will get the benefit of about $5 per ton reduction in iron ore consumption price.
Sumangal Nevatia: Understood. That is very helpful. I just wanted to understand on the iron ore sales. So in the H1, how much have we sold? I believe for the full year, we are looking at 8 to 10 million tons. Generally, I understand there is a higher royalty if you are selling. If you could just share some economics as to what is the contribution at the EBITDA level per ton of iron ore?
T.V. Narendran: Kaushik?
Koushik Chatterjee: I think we don't do. Because of various reasons, we don't want to give this separately, but all that I can say is, it is the same iron ore which gets charged to the plant for steel-making. Based on the price that we get in the market as set by the domestic iron ore prices, we are able to sell it. But I'm sorry, we wouldn't want to do that at this point of time.
Sumangal Nevatia: Sure. But on the volumes, we are looking at 8 to 10 this year, and what would be next one, two years?
Koushik Chatterjee: We should ramp up to, say, about 14 to 15.
Sumangal Nevatia: In FY28?
Koushik Chatterjee: Yes.
Sumangal Nevatia: Got it. That is useful. One last question.
Operator: The next question is from Vikash Singh of 5Y Capital. Vikash, please go ahead.
Vikash Singh: Good afternoon, sir. Thank you for the opportunity, and happy Diwali to all of you. Sir, my first question is on our volume or sales volume targets, basically. If I believe that in FY28, we would reach our-
Samita Shah: Vikash, we cannot hear you actually. There is some echo.
Vikash Singh: Is it better?
Samita Shah: Yes.
T.V. Narendran: Yeah.
Samita Shah: Yes.
Vikash Singh: Yeah. The first question, we would reach the 27 million tons. We already have 27 million tons of steel sales capacity, and our next capacity is coming at FY 2027. Is there any product improvement or the value addition percentage we would continue to do during this year, which would support our at least these-
T.V. Narendran: Yeah. Vikas, we lost you towards the end. Are you there?
Samita Shah: He might be on mute.
T.V. Narendran: Okay.
Samita Shah: Let's see. Did you hear the question?
T.V. Narendran: Yeah.
Samita Shah: Essentially-
T.V. Narendran: I think the question is, while there is not much of volume growth, will there be a product mix enhancement?
Samita Shah: Yes.
T.V. Narendran: The answer is yes, because one is even the cold rolling mill and galvanizing lines in Kalinganagar, while they have ramped up in volume, the product mix continues to get ramped up as we get more and more approvals from the auto company. You will see more and more movement from what we call Steelium, which is cold rolled steel sold in the market to cold rolled steel sold to automotive customers. We will see enrichment also more and more galvannealed. We are growing in Colors, which is the business that we acquired, the JV that we have with BlueScope and who we bought out. We are seeing growth in tubes continuously. We are also seeing a tinplate project which will be ready in another 2 years, which is doubling of the tinplate capacity. We continue to grow in wires as well. Pretty much across downstream, we are growing.
T.V. Narendran: The other thing which is growing a lot is our downstream for construction. In addition to the retail sales, which is growing and which is helping us get better realizations for the same product, we are also doing a lot of what we call cut and bend, mesh, both pile cages, ready-to-use solutions for the construction industry, and that is also growing very fast. Across multiple sectors and multiple products, the value-added part is growing much faster because that does not require that much of time or capital to build. The value there is more from the equity that we have with the customers and the solutions that we are developing for them. We are seeing a lot of growth in those areas.
Operator: Thank you, sir. The next question is from Ritesh Shah of Investec. Ritesh, please go ahead.
Ritesh Shah: Hi, sir. Am I audible?
T.V. Narendran: Yeah.
Samita Shah: Yeah.
Ritesh Shah: Yeah. Hi. Thank you so much. A few questions. First, starting with UK, just understand what percentage of our volumes will face higher tariffs. Is there a plan B to avoid those tariffs, specifically with respect to sales to EU? Second question, are we looking at any support from the UK government? If at all, why, and what is the underlying math? Third, assuming, say, we have an EAF ready, how are we looking at the variable cost structure, including fuel and power? The fourth is specific to India. Is it possible to further crystallize the cost transformation number that we have given? I think these are the four questions. Thank you.
T.V. Narendran: Yeah, Ritesh, there is no duty. The slabs that we send to the UK, we do not pay any duty. If your question is UK to Europe, yes, that is a negotiation going on between UK and Europe, because we used to sell almost 0.7, 0.8 million tons into Europe from the UK. So, there are some restrictions there. That is being negotiated between the UK government and EU. UK has an advantage in exports to US, where there is a 25% duty on UK exports to US, import duty of 25% on products from UK, and 50% on products from Europe. So, UK has an advantage vis-a-vis Europe as far as US is concerned. G2G, they are trying to sort out the UK-EU part. But for us to send the slabs to the UK to get converted, we have an exemption, so there are no duties.
T.V. Narendran: I will ask Koushik to comment on the other questions that you raised.
Koushik Chatterjee: Ritesh, our engagement with the UK government is fairly continuous. We talk on a couple of things. One is the market, as Naren just talked about, with the trade regulatory authorities, and also the environment where we can look at public procurement of steel, increasing more domestic products, rather than imports, and ensuring there is a level playing field as far as UK is concerned. As you know, we have a grant funding agreement with the UK government for the project, and we are also engaged with them on the national grid connectivity and any implication on any increase in the CapEx due to the delay in the national grid. There are multiple things that we continue to keep talking to the UK government. Your last question was in relation to India, but I could not hear it. It was a-
Samita Shah: On the cost. The question, I think, was on the cost transformation. What is the progress and what kind of numbers are we looking at?
Koushik Chatterjee: As I mentioned, our cost transformation project, which was last year about INR 11,000 crores, this year at around INR 7,000 crores. It is about INR 1,800 crores currently because of the volume issues that we have faced across geographies. We would target to continue to reach up to that level, but also we are looking at a multi-year structural cost transformation program taking us through to 2030, over the next three and a half years, which will look at various other operating models, which we have not looked at so far, and which can deliver more sustainable cost takeout. I think this is now an ongoing cadence of taking out costs from the system, not just as cost, but also enhancing productivity and efficiency. I think this is a program that we are certainly going to be very focused and serious about leading up to 2030.
Operator: Thank you, sir. The next question is from Parthiv Jhonsa of Anand Rathi. Parthiv, please go ahead with your question.
Parthiv Jhonsa: Am I audible, sir?
T.V. Narendran: Yeah.
Koushik Chatterjee: Yes.
Parthiv Jhonsa: Happy Diwali, sir. Happy Diwali to you and-
T.V. Narendran: Happy Diwali to you. Yeah.
Parthiv Jhonsa: My first question is pertaining to the European operations, both UK and Tata Steel Netherlands. This quarter, we saw a substantial increase in the other expense. Can you quantify the reasons, especially on a per-tonne basis?
Koushik Chatterjee: The other expense, you are talking about the consolidated or you are talking about only?
Parthiv Jhonsa: No, only the European operations, both Tata Steel Netherlands and UK separately.
Koushik Chatterjee: The other expense is actually a mixed bag, because often when you do not have the volumes on a per-tonne basis, it does increase, which is what the effect is, because there are many other fixed cost overheads. The second part is that there are freight cost increases that has also happened because of the war. All taken together, it has increased, and the volume has come down, so therefore, you see a per-tonne increase.
Samita Shah: I think there was also an increase due to consumables, because we restarted Llanwern.
Koushik Chatterjee: Llanwern and also the DSP.
Parthiv Jhonsa: Okay. My second question is pertaining to the debt. When can we expect the debt levels here? I think you are about 2.4x the leverage today. When can we expect it to go back to, say, sub 1.5 or 2x level?
Koushik Chatterjee: Sub 1.5 is never our target. I mean, it has happened in FY22 when the market was of a different nature. But if you are spending INR 20,000 crores on CapEx, I don't think that is our target. We have always said our debt should be less than 3x. We are comfortable at 2.3, 2.4. Our EBITDA growth will keep happening because of both volume coming in. Additionally, next year, we will have more volume because all our plants will be at capacity in India. We expect more stabilization as far as Netherlands and UK is concerned. Then, as we spend more and more in NINL and others. I think from a debt, absolute debt perspective, if you see, it has to be related to the EBITDA.
Koushik Chatterjee: Long we are in that zone of 2.3 to up to 3, we should be fine because we will chase growth. If we chase growth, there is a timing issue between deployment of that capital and the earnings. I do not honestly see us going to 1.5 in a hurry, because then we will have to stop a lot part of our growth. We are absolutely comfortable in servicing debt. Our interest cover is more around +5. I do not think there is any concern around there, because we will be spending more CapEx. If every year we are going to spend INR 20,000 crores, you will see some level of debt, but the important thing is circularity of the capital. As we spend that capital to get the earnings back into the P&L, we will be hovering around the zone.
Parthiv Jhonsa: Okay. Thank you, sir. If I may, I just want to squeeze in one last question. I think there was one of the companies, I think one of the subsidiaries, which is BRPL. I think they are going to do some work for, I think, Joda East or Joda West Mine or something like that, and a couple of other mines. Can you just walk us through what exactly is that contract or what exactly this arrangement is?
Koushik Chatterjee: BRPL is a subsidiary joint venture with states, and we have been using, in the past, MDO operations for some of our mining for other people. BRPL has that capability, so they will be doing it for us. Instead of company X, it is BRPL. That is about it. Being a subsidiary which has the capability, it actually helps us on a net economic basis also, and ensures that we can get better outcomes from that MDO.
Operator: Thank you, sir. I would now like to hand over the conference to Ms. Samita Shah for the chat questions. Ma'am, over to you.
Samita Shah: Thanks, Shivam. I think we have answered a lot of the questions. A couple, which you might want to address. The first is actually on Netherlands, and the notes to the accounts which you have had on it. I think the broad question, sort of looking to the questions is, given what has been happening in TSN, what are the three or four big takeaways investors and analysts should think of when you are looking at Netherlands operation?
Koushik Chatterjee: If I were to, Naren, if I take this, yeah, I think if you really look at it, we have signed an agreement or other term sheet with the Netherlands government on the JLoI, which is called the Joint Letter of Intent. That needs to get to a certain amount of finality. For getting into that finality regarding the decarbonization project, we are exploring multiple options, along with the government, to ensure that we have an investment case or options which ensure sustainability of Tata Steel Netherlands in some form or the other. There are regulatory issues which needs to be sorted out. The closure of the CGP, the coke and gas plant, is being asked to be done, and we have offered through various options and a fairly intensive preparation. This is an engagement with the regulator, so we need a clarity on that.
Koushik Chatterjee: The steel slag storage and export is an issue, where the regulator and us are in engagement along with the government, and we need a resolution of that. These two are pretty fundamental to looking at the future. Third is to look at the investment case which makes the cut effectively for making Tata Steel Netherlands a more profitable and competitive company. There are a lot of things, a lot of moving pieces, and I think over the next 6 months, we will come to it and take a final view.
Samita Shah: Thank you. I think the last question which we will take is on the prioritization of capital allocation between India and Netherlands and UK.
Koushik Chatterjee: I think I have said this in the past, Naren has also repeated in the past, almost 70% of the capital allocated during the year is on India. Our India growth is both on the mining side, upstream, midstream, and the downstream. We are just now in the midst of the starting point of the NINL expansion. I have listed out number of downstream expansion. We will continue to grow in our downstream, and we will continue to grow also the optionality of our upstream growth, both in Kalinganagar as well as in Meramandali. I think that is very much on the anvil. In the longer term, we are working with the Maharashtra government on the site in Maharashtra, and that is another greenfield site which will get capital allocation. Growth in India is important for us.
Koushik Chatterjee: We will grow in a methodical way, both in downstream as well as in the upstream. That is our priority. UK is currently allocated capital for its EAF, and Netherlands, based on the outcome that will come in, we will find an appropriate funding solution. Depends on the investment case.
Samita Shah: Okay. Thank you. With that, I think we will end the call. Thank you, everyone, for joining us. And again, happy Diwali to all of you, and enjoy the festivities. Thank you.
Koushik Chatterjee: Thank you.
