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Koushik Chatterjee
No development in Tata Steel’s 105-year history is more significant than the moment in 2007 when it acquired the Anglo-Dutch steelmaker Corus (now known as Tata Steel Europe) — a company four times its size. The US$12b acquisition instantly made the company the fifth-largest steelmaker in the world, shooting up from 56th place.
At the time, the deal brought both huge advantages and challenges. Along with the obvious synergies in operations, manufacturing and marketing, there were also concerns over business integration, debt servicing and the cultural fit.
“We did not have any examples to emulate — there weren’t any multinational corporations from emerging markets,” says Koushik Chatterjee.
And while conditions in the Eurozone have meant that it has been a challenge to maintain performance, Chatterjee says the company is in a healthy financial position. In the past year, Tata Steel posted a net profit of INR89.83b (US$1.8b). While this was down from INR123.5b (US$2.4b) in 2009, this was largely due to the European operations, where demand has taken a considerable hit.
Globally, steel consumption is shifting toward emerging markets. According to World Steel Association statistics, steel use in the developed world in 2012 will still be 14% below 2007 levels, whereas in developing economies, it will be 38% above those levels. In 2012, rapid-growth economies will account for 72% of world steel demand, in contrast with 61% in 2007.
However, the EU still contributes 56% of Tata Steel’s revenue, as opposed to 39% that comes from high-growth markets in Asia. These figures have set the agenda for Chatterjee. He is looking to optimize the European operations and increase the share of revenue from developing markets.
Surviving amid volatility
According to Chatterjee, the market for steel has been uncertain for two reasons: raw material prices have been volatile and buying behavior has been unstable. “For instance, automobile producers are more careful about what kind of exposures they take,” he says.
Volatility makes things extremely difficult for the steel industry. “If we are buying raw materials today, they’ll arrive at the plant in 45 days; it then takes us another 35 days to produce the steel,” says Chatterjee. “So by the time we sell the steel, the price situation has changed completely.”
The uncertainty in the global markets leaves companies with little choice but to invest in new raw material sources and move to a product mix that has less exposure to price increases. “You need to manage your fixed costs by insourcing and outsourcing, by consolidating sites and by optimizing operations at each site,” he says.
More importantly, there are no overnight solutions to what is going on in the developed world. “It depends on how political decision-making will evolve,” says Chatterjee.
Tata Steel has worked on a methodology to deal with volatility in the global markets. Chatterjee’s team has been conducting a “scenario analysis” every month, since 2007.
“The idea is to create ‘a memory for the future’ and look at all kinds of contingencies. After that, we look at how we are geared up to deal with them,” he says.
This exercise helps the company manage circumstances more effectively. “There are no textbooks to guide a global company on how to anticipate and manage global risks,” he adds.
So how does Tata Steel plan to grow in such an uncertain global environment? The company has embarked on a wide-ranging series of management initiatives that seeks to improve its competitiveness. “We are looking to improve our supply chain management, and invest in asset quality and the people we employ,” says the CFO.
Tata Steel is undertaking the same measures across all its markets including Australia, Thailand, Indonesia, Singapore and Malaysia — though these will be on a smaller scale than at home in India and in Europe.
Optimizing Europe
It’s never easy to integrate an acquired business and Corus was a prime example. “There are several challenges,” says Chatterjee. “First, you need to get the strategy right. Second, the objectives of growth should be clear. And finally, these objectives need to be translated into actions.”
Even after five years, the restructuring at Tata Steel Europe is far from complete. Tata Steel has had to take some tough measures in Europe. These have included cutting jobs; restructuring its steel tubes business; suspending production at a hot strip mill in Llanwern, Wales; and also halting work at a blast furnace in Scunthorpe and at the Teeside Cast Product plant, both in northern England.
It has also announced a multi-year efficiency driving plan for the Netherlands, aimed at making the business more competitive. “We are rightsizing in asset configuration and we are investing capital more effectively. These initiatives will take 24 to 36 months,” says Chatterjee.
The CFO explains that undertaking these measures has not been easy, but “it helps to be transparent and open. This is an approach Tata Steel has always taken.” As an example, he points to the 1990s, when Tata Steel (then known as TISCO) reduced its workforce from 80,000 to 40,000, under the leadership of the managing director at that time, Dr. J. J. Irani, and emerged as a cost-effective steelmaker.
Improving earnings
Tata Steel Europe is undertaking several measures to improve earnings. The key strategy in this process is “variabilization” of cost — a strategy that transforms fixed costs into variable ones. The CFO is also looking to optimize capital by tightening up supply chains, focusing on high-end products in Europe and looking at new raw material sources.
Chatterjee feels that it is important for European countries to start orienting themselves toward manufacturing. “We have heard, in various forums in the UK, that the Government wants to start focusing again on manufacturing. This is excellent news, but it will not happen overnight,” he says.
The focus on manufacturing is the starting point. “If the economies rebalance themselves in terms of costs, the products can be quite competitive. They need to focus on high-end products,” says Chatterjee, using the example of Germany and how its high-cost economy is focusing on high-end engineering and premium products.
Raw material supply
Tata Steel’s projects in Mozambique, Australia, Canada and Côte d’Ivoire are designed to serve European nations. Securing raw material supplies is a crucial way to reduce costs, since these account for nearly 70% of the total costs.
“Having your own source of raw material gives you a natural hedge,” says Chatterjee. “We are also doing some process innovation work to utilize diverse raw material supplies.”
Capital execution
It’s been a two-speed world for some time now. Many developed markets are in the negative to 2% GDP growth range, while a number of emerging economies are growing at 5%–6%.
“The developed world is used to making more with more. But now, the consumption patterns and habits of people are changing,” he says. To that end, the CFO is looking to invest more capital at home in India.
Stepping up in India
Steel consumption in India is growing at a compound annual growth rate of 9.6% per year. In 2011, the Organization for Economic Co-operation and Development (OECD) reported that the demand for steel in India stood at 65.6 million tons (MT). Per capita steel use in India increased from 35kg in 2005 to 53kg in 2011. And demand is expected to grow at around 10% per year until 2020, according to the OECD.
More infrastructure projects in India mean that the demand for steel is intensifying. In fact, according to Chatterjee, India is in a unique position.
Unlike China, which created its infrastructure first, India is a consumption led economy. “This may mean double the growth for the steel industry in India.”
The company has invested around US$3.5b in expansion of capacity at the Jamshedpur plant, which will produce 9.7MT of steel in 2012 (up from 6.8MT in 2011). Moreover, it has invested capital in the Kalinganagar project, in Orissa, at the cost of US$7.5b. This plant will produce 6MT of steel by 2015–16.
Today, Tata Steel’s capacity is 28MT, out of which only 6.8MT comes from India. In another four years, the CFO wants Tata Steel’s domestic capacity to increase to 16MT and be equivalent to that of Europe. “This is an important structural shift for us,” says Chatterjee.
In 2005, Tata Steel signed a memorandum of understanding (MoU) with the Jharkhand Government to invest INR420b (US$8.3b) to set up a 12MT per year greenfield integrated steel plant in the Manoharpur and Chandil areas of the state.
In the same year, it signed another MoU with the Chhattisgarh Government to establish a 5MT greenfield integrated steel plant in the state’s Bastar region. “We hope, Chatterjee, India is in a unique position.
Unlike China, which created its infrastructure first, India is a consumption led economy. “This may mean double the growth for the steel industry in India.”
The company has invested around US$3.5b in expansion of capacity at the Jamshedpur plant, which will produce 9.7MT of steel in 2012 (up from 6.8MT in 2011). Moreover, it has invested capital in the Kalinganagar project, in Orissa, at the cost of US$7.5b. This plant will produce 6MT of steel by 2015–16.
Today, Tata Steel’s capacity is 28MT, out of which only 6.8MT comes from India. In another four years, the CFO wants Tata Steel’s domestic capacity to increase to 16MT and be equivalent to that of Europe. “This is an important structural shift for us,” says Chatterjee.
In 2005, Tata Steel signed a memorandum of understanding (MoU) with the Jharkhand Government to invest INR420b (US$8.3b) to set up a 12MT per year greenfield integrated steel plant in the Manoharpur and Chandil areas of the state.
In the same year, it signed another MoU with the Chhattisgarh Government to establish a 5MT greenfield integrated steel plant in the state’s Bastar region. “We hope, eventually, to produce much more than16MT in India,” says Chatterjee.
Into Africa
Tata Steel understands its home market. It has a strong distribution network, solid relationships with original equipment manufacturers and a good performance improvement framework. All of this makes India a very attractive proposition for the CFO. And, while Tata Steel is looking to invest capital in other developing markets, Chatterjee is aware of the risks.
“If you look at Africa as a continent, it has a great future,” he says. “It is the next hub for demand. But you must manage the risk of capital investment in Africa carefully.
“There are challenges such as political risk, execution risk and risks in operating from a specific location. All these will have to be managed effectively before we enter Africa.”
Capital complexities
As of December 2011, Tata Steel’s debt burden stood at US$9.5b. This largely comes from the Corus acquisition. A key issue for Tata Steel is whether to reduce the debt burden from this transaction, or expand capacity in India and work on increasing the top line.
“From a risk perspective, we have been taking steps in the last three years to ensure that debt management is not only about short-term repayments,” says the CFO.
As part of its strategy to de-risk the capital structure and provide more flexibility to the business, the company has refinanced the entire long-term debt of Tata Steel Europe, deferring repayments by four years and allowing deployment of earnings for growth and improvement initiatives.
“If we had not acquired Corus and grown the greenfield projects in India at the same time, then servicing the debt would not have been a problem. But we need these projects to ensure future growth,” says Chatterjee. Higher capacity in India could mean higher earnings, and this would reduce the net debt-to-EBIDTA ratio (which indicates the company’s leverage). This ratio has fallen from five in 2009–10 to three in 2010–11.
Does this mean that Tata Steel will not look at any further acquisitions? The CFO sees the company concentrating on organic growth for the next 12 months, but is upbeat about M&A activity in the longer term. “We may well look at future acquisitions. We want to have capacity near to raw materials or energy sources — or in an attractive market,” he says.
As for his own future as CFO, Chatterjee sees the role becoming a lot more complex. “CFOs are in the center of the chaos,” he says. But they can’t afford to get ruffled. “You need to be patient, but also proactive.” These are two traits that the CFO will need when it comes to balancing the developed and developing markets in the volatile steel industry.
Interview from Capital Insights by Ernst & Young - March 28, 2012
About capital insights
Capital Insights is a quarterly magazine produced by Ernst & Young. The publication seeks to help businesses manage their capital agenda by examining the latest developments around raising, investing, preserving and optimizing capital.
Each edition features analysis, trends and commentary around managing capital in the current economic and regulatory environment, and provides first-hand insights from business leaders on how they are steering their organizations through volatility towards success.
Capital Insights magazine is distributed through the Financial Times newspaper and by Ernst & Young’s network of member firms to over 180,000 readers across Europe, the Middle East, India and Africa (EMEIA).
www.capitalinsights.info
Tata Steel: facts and figures
Founded: 1907
Employees: 81,251
Countries: 50
Market capitalization: INR430b (US$8b)
Timeline
1907: Tata Steel is founded
1908: Plant becomes fully functional
1910: Tata Steel acquires its first colliery
1911: The first Tata blast furnace begins operation
1934: First Indian company to grant profit sharing bonuses
1936: Sir Jehangir Gandhy becomes first Indian general manager
1947: The Tata personnel department, the first of its kind in India, is founded
1955: Tata Steel signs agreement with Kaiser Engineers for 2MT expansion program
1995: Achieves 3MT capacity of steel production
2004: Tata Acquires The Indian Steel Wire Company in Jamshedpur
2005: NatSteel in Singapore becomes Tata's first overseas acquisition. Tata Steel acquires 40% stake in Millennium Steel in Thailand
2007: Tata Steel's centenary year and acquires Corus
2009: Tata Ryerson and HMPCL merge with Tata Steel
The CFO: Koushik Chatterjee
Born: India, 1968
Appointed CFO at Tata Steel: January 2008
Educated: Calcutta University, India
Previous positions:
2008-present: Group Chief Financial Officer, Tata Steel Group
2004-08: Chief Financial Officer, Tata Steel
2002-03: General Manager, Corporate Finance, Tata Sons
1998-2002: Group Executive Officer, Tata Sons
1995-98: Corporate finance and planning, Tata Steel
At the time, the deal brought both huge advantages and challenges. Along with the obvious synergies in operations, manufacturing and marketing, there were also concerns over business integration, debt servicing and the cultural fit.
“We did not have any examples to emulate — there weren’t any multinational corporations from emerging markets,” says Koushik Chatterjee.
And while conditions in the Eurozone have meant that it has been a challenge to maintain performance, Chatterjee says the company is in a healthy financial position. In the past year, Tata Steel posted a net profit of INR89.83b (US$1.8b). While this was down from INR123.5b (US$2.4b) in 2009, this was largely due to the European operations, where demand has taken a considerable hit.
Globally, steel consumption is shifting toward emerging markets. According to World Steel Association statistics, steel use in the developed world in 2012 will still be 14% below 2007 levels, whereas in developing economies, it will be 38% above those levels. In 2012, rapid-growth economies will account for 72% of world steel demand, in contrast with 61% in 2007.
However, the EU still contributes 56% of Tata Steel’s revenue, as opposed to 39% that comes from high-growth markets in Asia. These figures have set the agenda for Chatterjee. He is looking to optimize the European operations and increase the share of revenue from developing markets.
Surviving amid volatility
According to Chatterjee, the market for steel has been uncertain for two reasons: raw material prices have been volatile and buying behavior has been unstable. “For instance, automobile producers are more careful about what kind of exposures they take,” he says.
Volatility makes things extremely difficult for the steel industry. “If we are buying raw materials today, they’ll arrive at the plant in 45 days; it then takes us another 35 days to produce the steel,” says Chatterjee. “So by the time we sell the steel, the price situation has changed completely.”
The uncertainty in the global markets leaves companies with little choice but to invest in new raw material sources and move to a product mix that has less exposure to price increases. “You need to manage your fixed costs by insourcing and outsourcing, by consolidating sites and by optimizing operations at each site,” he says.
More importantly, there are no overnight solutions to what is going on in the developed world. “It depends on how political decision-making will evolve,” says Chatterjee.
Tata Steel has worked on a methodology to deal with volatility in the global markets. Chatterjee’s team has been conducting a “scenario analysis” every month, since 2007.
“The idea is to create ‘a memory for the future’ and look at all kinds of contingencies. After that, we look at how we are geared up to deal with them,” he says.
This exercise helps the company manage circumstances more effectively. “There are no textbooks to guide a global company on how to anticipate and manage global risks,” he adds.
So how does Tata Steel plan to grow in such an uncertain global environment? The company has embarked on a wide-ranging series of management initiatives that seeks to improve its competitiveness. “We are looking to improve our supply chain management, and invest in asset quality and the people we employ,” says the CFO.
Tata Steel is undertaking the same measures across all its markets including Australia, Thailand, Indonesia, Singapore and Malaysia — though these will be on a smaller scale than at home in India and in Europe.
Optimizing Europe
It’s never easy to integrate an acquired business and Corus was a prime example. “There are several challenges,” says Chatterjee. “First, you need to get the strategy right. Second, the objectives of growth should be clear. And finally, these objectives need to be translated into actions.”
Even after five years, the restructuring at Tata Steel Europe is far from complete. Tata Steel has had to take some tough measures in Europe. These have included cutting jobs; restructuring its steel tubes business; suspending production at a hot strip mill in Llanwern, Wales; and also halting work at a blast furnace in Scunthorpe and at the Teeside Cast Product plant, both in northern England.
It has also announced a multi-year efficiency driving plan for the Netherlands, aimed at making the business more competitive. “We are rightsizing in asset configuration and we are investing capital more effectively. These initiatives will take 24 to 36 months,” says Chatterjee.
The CFO explains that undertaking these measures has not been easy, but “it helps to be transparent and open. This is an approach Tata Steel has always taken.” As an example, he points to the 1990s, when Tata Steel (then known as TISCO) reduced its workforce from 80,000 to 40,000, under the leadership of the managing director at that time, Dr. J. J. Irani, and emerged as a cost-effective steelmaker.
Improving earnings
Tata Steel Europe is undertaking several measures to improve earnings. The key strategy in this process is “variabilization” of cost — a strategy that transforms fixed costs into variable ones. The CFO is also looking to optimize capital by tightening up supply chains, focusing on high-end products in Europe and looking at new raw material sources.
Chatterjee feels that it is important for European countries to start orienting themselves toward manufacturing. “We have heard, in various forums in the UK, that the Government wants to start focusing again on manufacturing. This is excellent news, but it will not happen overnight,” he says.
The focus on manufacturing is the starting point. “If the economies rebalance themselves in terms of costs, the products can be quite competitive. They need to focus on high-end products,” says Chatterjee, using the example of Germany and how its high-cost economy is focusing on high-end engineering and premium products.
Raw material supply
Tata Steel’s projects in Mozambique, Australia, Canada and Côte d’Ivoire are designed to serve European nations. Securing raw material supplies is a crucial way to reduce costs, since these account for nearly 70% of the total costs.
“Having your own source of raw material gives you a natural hedge,” says Chatterjee. “We are also doing some process innovation work to utilize diverse raw material supplies.”
Capital execution
It’s been a two-speed world for some time now. Many developed markets are in the negative to 2% GDP growth range, while a number of emerging economies are growing at 5%–6%.
“The developed world is used to making more with more. But now, the consumption patterns and habits of people are changing,” he says. To that end, the CFO is looking to invest more capital at home in India.
Stepping up in India
Steel consumption in India is growing at a compound annual growth rate of 9.6% per year. In 2011, the Organization for Economic Co-operation and Development (OECD) reported that the demand for steel in India stood at 65.6 million tons (MT). Per capita steel use in India increased from 35kg in 2005 to 53kg in 2011. And demand is expected to grow at around 10% per year until 2020, according to the OECD.
More infrastructure projects in India mean that the demand for steel is intensifying. In fact, according to Chatterjee, India is in a unique position.
Unlike China, which created its infrastructure first, India is a consumption led economy. “This may mean double the growth for the steel industry in India.”
The company has invested around US$3.5b in expansion of capacity at the Jamshedpur plant, which will produce 9.7MT of steel in 2012 (up from 6.8MT in 2011). Moreover, it has invested capital in the Kalinganagar project, in Orissa, at the cost of US$7.5b. This plant will produce 6MT of steel by 2015–16.
Today, Tata Steel’s capacity is 28MT, out of which only 6.8MT comes from India. In another four years, the CFO wants Tata Steel’s domestic capacity to increase to 16MT and be equivalent to that of Europe. “This is an important structural shift for us,” says Chatterjee.
In 2005, Tata Steel signed a memorandum of understanding (MoU) with the Jharkhand Government to invest INR420b (US$8.3b) to set up a 12MT per year greenfield integrated steel plant in the Manoharpur and Chandil areas of the state.
In the same year, it signed another MoU with the Chhattisgarh Government to establish a 5MT greenfield integrated steel plant in the state’s Bastar region. “We hope, Chatterjee, India is in a unique position.
Unlike China, which created its infrastructure first, India is a consumption led economy. “This may mean double the growth for the steel industry in India.”
The company has invested around US$3.5b in expansion of capacity at the Jamshedpur plant, which will produce 9.7MT of steel in 2012 (up from 6.8MT in 2011). Moreover, it has invested capital in the Kalinganagar project, in Orissa, at the cost of US$7.5b. This plant will produce 6MT of steel by 2015–16.
Today, Tata Steel’s capacity is 28MT, out of which only 6.8MT comes from India. In another four years, the CFO wants Tata Steel’s domestic capacity to increase to 16MT and be equivalent to that of Europe. “This is an important structural shift for us,” says Chatterjee.
In 2005, Tata Steel signed a memorandum of understanding (MoU) with the Jharkhand Government to invest INR420b (US$8.3b) to set up a 12MT per year greenfield integrated steel plant in the Manoharpur and Chandil areas of the state.
In the same year, it signed another MoU with the Chhattisgarh Government to establish a 5MT greenfield integrated steel plant in the state’s Bastar region. “We hope, eventually, to produce much more than16MT in India,” says Chatterjee.
Into Africa
Tata Steel understands its home market. It has a strong distribution network, solid relationships with original equipment manufacturers and a good performance improvement framework. All of this makes India a very attractive proposition for the CFO. And, while Tata Steel is looking to invest capital in other developing markets, Chatterjee is aware of the risks.
“If you look at Africa as a continent, it has a great future,” he says. “It is the next hub for demand. But you must manage the risk of capital investment in Africa carefully.
“There are challenges such as political risk, execution risk and risks in operating from a specific location. All these will have to be managed effectively before we enter Africa.”
Capital complexities
As of December 2011, Tata Steel’s debt burden stood at US$9.5b. This largely comes from the Corus acquisition. A key issue for Tata Steel is whether to reduce the debt burden from this transaction, or expand capacity in India and work on increasing the top line.
“From a risk perspective, we have been taking steps in the last three years to ensure that debt management is not only about short-term repayments,” says the CFO.
As part of its strategy to de-risk the capital structure and provide more flexibility to the business, the company has refinanced the entire long-term debt of Tata Steel Europe, deferring repayments by four years and allowing deployment of earnings for growth and improvement initiatives.
“If we had not acquired Corus and grown the greenfield projects in India at the same time, then servicing the debt would not have been a problem. But we need these projects to ensure future growth,” says Chatterjee. Higher capacity in India could mean higher earnings, and this would reduce the net debt-to-EBIDTA ratio (which indicates the company’s leverage). This ratio has fallen from five in 2009–10 to three in 2010–11.
Does this mean that Tata Steel will not look at any further acquisitions? The CFO sees the company concentrating on organic growth for the next 12 months, but is upbeat about M&A activity in the longer term. “We may well look at future acquisitions. We want to have capacity near to raw materials or energy sources — or in an attractive market,” he says.
As for his own future as CFO, Chatterjee sees the role becoming a lot more complex. “CFOs are in the center of the chaos,” he says. But they can’t afford to get ruffled. “You need to be patient, but also proactive.” These are two traits that the CFO will need when it comes to balancing the developed and developing markets in the volatile steel industry.
Interview from Capital Insights by Ernst & Young - March 28, 2012
About capital insights
Capital Insights is a quarterly magazine produced by Ernst & Young. The publication seeks to help businesses manage their capital agenda by examining the latest developments around raising, investing, preserving and optimizing capital.
Each edition features analysis, trends and commentary around managing capital in the current economic and regulatory environment, and provides first-hand insights from business leaders on how they are steering their organizations through volatility towards success.
Capital Insights magazine is distributed through the Financial Times newspaper and by Ernst & Young’s network of member firms to over 180,000 readers across Europe, the Middle East, India and Africa (EMEIA).
www.capitalinsights.info
Tata Steel: facts and figures
Founded: 1907
Employees: 81,251
Countries: 50
Market capitalization: INR430b (US$8b)
Timeline
1907: Tata Steel is founded
1908: Plant becomes fully functional
1910: Tata Steel acquires its first colliery
1911: The first Tata blast furnace begins operation
1934: First Indian company to grant profit sharing bonuses
1936: Sir Jehangir Gandhy becomes first Indian general manager
1947: The Tata personnel department, the first of its kind in India, is founded
1955: Tata Steel signs agreement with Kaiser Engineers for 2MT expansion program
1995: Achieves 3MT capacity of steel production
2004: Tata Acquires The Indian Steel Wire Company in Jamshedpur
2005: NatSteel in Singapore becomes Tata's first overseas acquisition. Tata Steel acquires 40% stake in Millennium Steel in Thailand
2007: Tata Steel's centenary year and acquires Corus
2009: Tata Ryerson and HMPCL merge with Tata Steel
The CFO: Koushik Chatterjee
Born: India, 1968
Appointed CFO at Tata Steel: January 2008
Educated: Calcutta University, India
Previous positions:
2008-present: Group Chief Financial Officer, Tata Steel Group
2004-08: Chief Financial Officer, Tata Steel
2002-03: General Manager, Corporate Finance, Tata Sons
1998-2002: Group Executive Officer, Tata Sons
1995-98: Corporate finance and planning, Tata Steel
