Tata Steel (NS:TISC) Limited (TATASTEEL) faced a challenging global steel market in the second quarter of FY25, as CEO T.V. Narendran reported during the company's recent analyst call. Despite economic headwinds, Tata Steel India achieved a 5% year-on-year increase in crude steel production and a 6% rise in domestic sales. The company is focusing on cost management and stabilizing cash flows while advancing in strategic areas such as the Kalinganagar expansion and transitioning to green steelmaking in the UK.
Key Takeaways
- Tata Steel India's production rose to 5.3 million tons, with deliveries at 5.1 million tons.
- Revenues for the half-year reached Rs1,08,676 crores, with a Q2 EBITDA of Rs6,224 crores.
- The company maintains strong liquidity with Rs26,000 crores and a net debt of Rs88,817 crores.
- Capital expenditures for Q2 were Rs4,800 crores, focusing on expansions in Kalinganagar and a new EAF plant in Ludhiana.
- Tata Steel UK is set to begin groundwork on a green steelmaking project in July 2025, supported by a £500 million government grant.
- Negotiations with the Netherlands government regarding grant applications and state aid issues are ongoing and expected to take several months.
Company Outlook
- Tata Steel aims to maintain gross debt between Rs75,000 crores and Rs80,000 crores.
- The company is targeting a resumption of its $1 billion deleveraging goal.
- In the UK, losses are expected to peak this quarter, with an improvement in EBITDA and cash flow neutrality by June 2025.
- The Netherlands operations aim for through-cycle margins between $60 to $80.
Bearish Highlights
- Global steel market challenges include subdued economic activity, inflation, and geopolitical tensions.
- Anti-dumping investigations in India due to a surge in Chinese steel exports.
- Subdued demand in the Netherlands impacted performance.
Bullish Highlights
- Strong domestic demand in India, with a 6% increase in sales.
- Strategic progress at Kalinganagar with a new blast furnace operational.
- UK operations transitioning to green steelmaking with significant investment plans.
Misses
- Despite an increase in production, steel prices moderated due to market conditions.
- The impact of China's steel exports on global pricing and demand remains a concern.
Q&A Highlights
- The company addressed the gap between adjusted EBITDA and reported EBITDA, mainly due to foreign exchange translation changes.
- Tata Steel discussed cost optimization operations across five sites to sustain cost reductions.
- Future CapEx guidance for FY26 will be provided in early 2024, with no significant CapEx expected in the next 12 months.
Tata Steel's strategic focus remains on internal efficiencies and measured growth amidst a volatile market environment. The company is preparing for a future with greener technologies while maintaining its competitive edge in the domestic market.
Full transcript - None (TATLY) Q2 2025:
Operator: Ladies and gentlemen, good day and welcome to the Tata Steel Analyst 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: Good morning, good afternoon, good evening to all our participants listening onto the call. On behalf of Tata Steel, I'm delighted to welcome you to this call to discuss our results for the second quarter of FY25. I'm sure you've gone through the presentation which has been uploaded on the website and have questions which we'll be happy to take. Before I hand it over and introduce our other participants, I would just like to remind you that the entire proceedings are governed by the Safe Harbor clause on page 2 of the presentation. We have with us course our CEO and MD, Mr. T.V. Narendran and our Executive Director and CFO, Mr. Koushik Chatterjee. Both of them will make some opening comments and then we will take questions first in audio mode and then in chat mode. Thank you. And over to you, Naren. You're on mute, Naren.
T.V. Narendran: Thanks, Samita. Sorry about that. Good afternoon and good morning to everyone. I'm going to make a few comments and then pass it on to Koushik for his comments and then we'll open it up for Q&A. The global operating environment has remained challenging due to the subdued economic activity, inflation, and sustained geopolitical tensions. The US and EU have initiated rate cuts and China has announced stimulus measures. However, elevated steel exports from China has distorted the dynamics of the global steel trade and have weighed on the regional prices across the world. Chinese steel exports for September were over 10 million tons. It's at the eight-year high and the year-to-date exports are about 100 million tons -- or rather on an annualized basis it's about 100 million tons. In response, various nations including India have initiated anti-dumping investigations on selected steel products. And while Indian steel demand has continued to remain strong, steel prices have witnessed moderation. Moving to our performance, Tata Steel India crude steel production rose 5% year-on-year to 5.3 million tons. For the quarter, deliveries stood at around 5.1 million tons and was aided by 6% year-on-year growth in domestic deliveries across business verticals. The automotive and special products volume for the quarter was aided by the increase in sales of high-end products. And our still well-established retail brand Tata Tiscon witnessed a 20% year-on-year growth aided by enhanced reach and the scale of our Consumer Connect programs. During the quarter, our e-commerce portal Aashiyana expanded service offerings and two new construction service centers have also been launched taking the total to 35 construction steel service centers across India. This will aid in scaling up our ready-to-build solutions for the B2B customers. We remain focused on simplifying our customers journey and experience in construction. In our Industrial Products and Projects business witnessed strong growth across value accretive segments with engineering registering a 28% year-on-year growth. We've also executed a number of orders for railways including the first one for the Amrit Bharat Express which the Indian Railways has launched. We made strategic progress during the quarter on the commissioning of the 5-million-ton blast furnace at Kalinganagar, and the blast furnace is operating; it's already producing about 7,500 tons a day. And Kalinganagar expansion is an important milestone in our journey to scale up the high margin business. A state-of-the-art cold rolling mill is already running. The leading lines are getting commissioned this month and the galvanizing lines will get commissioned in the next couple of quarters, galvanizing line by March and the other by June next year. The new blast furnace along with the cold rolling mill complex will boost our production capabilities and aid in strengthening our position as a market leader in high-end value added steel segments and further with facilities such as a 6-million-ton pellet plant our cost profile also improves. In the UK, we have safely decommissioned both the blast furnaces at our Port Talbot plant and this paves the way for the green steelmaking project that we are executing. A planned investment of £1.25 billion pounds will be partly supported by the £500 million grant from the UK government which has been signed during the last quarter and this investment will aid in preserving steelmaking in the region as well as sustain more than 5,000 jobs in the UK. We remain committed to supporting affected employees and have offered the best of a package of support in Tata Steel UK and the restructuring as we speak is going on and you will see the benefits of it over the next few quarters. In Netherlands, the subdued demand side has weighed on the prices and weighed our performance. Koushik will elaborate about the same and we have initiated a number of cost saving measures to offset the weakness in market conditions. The production is back on track after the blast furnace relining. We are committed to sustainable value creation and are dynamically calibrating our decarbonization journey to the operating geography. In India, we are committed to responsible growth and the new blast furnace in Kalinganagar has an ecofriendly design and utilizes an evaporative cooling system, for the first time in India something like this has been used. This is expected to lower specific water and power consumption by approximately 20% compared to conventional designs. We have set up satellite RD centers to leverage national and global technology systems and strategic focus areas such as hydrogen and mining and many other areas. And in UK upon transition to scrap-based EAF the direct CO2 emissions will reduce by 50 million tons over a decade, and similarly in Netherlands we are working on the transition plan with the government in Netherlands. So with that I thank you and hand over to Koushik.
Koushik Chatterjee: Thank you, Naren. Good morning, good afternoon, and good evening to all those who have joined in. I will begin with the half-yearly performance. Our consolidated revenues for the half year were about Rs1,08,676 crores and the EBITDA was Rs13,046 crores which translates to an EBITDA margin of around 12%. The EBITDA margin actually improved by about 300 basis points year-on-year aided by steady performance in India and better profitability in Netherlands compared to the previous year. Moving now to the quarter, our performance has been provided on Slide number 25 of the presentation circulated. Consolidated revenue stood at Rs53,905 crores and an EBITDA of Rs6,224 crores which translates to an EBITDA margin of 12%. Before I delve into the numbers across geographies, I would like to mention that we have received approvals for the amalgamation of the Indian Steel and Wire Products Limited, ISWP, and the standalone financial statements for the quarter reflect the merger and past periods have been restated as applicable. Moving to Tata Steel, standalone EBITDA for the quarter was about Rs6,734 crores which translates to an EBITDA margin of 21%. On a per ton basis, the standalone EBITDA was around Rs13,176 per ton. As provided in Slide number 31, EBITDA on absolute basis was broadly similar to the previous quarter despite the seasonal factors. Higher volumes and improvement in total cost more than offset the drop in the realizations. I would like to elaborate a bit more on the cost. There has been a decrease in the valuation of chrome ore inventory as on 30th of September 2024 and this is primarily on account of lower accrual of the royalty charges. This has led to a non-cash charge in the raw materials and also a decrease in the other expenses which includes the royalty related expenses. So broadly it is P&L neutral. Excluding the chrome ore effect, the material cost declined by around Rs600 per ton due to the decline in the coking coal consumption cost and lower purchases. However, this has been partly offset by the inventory movement and the raw material buildup for starting the new blast furnace at Kalinganagar, as Naren just mentioned. The conversion cost excluding royalty declined by about Rs2,000 per ton primarily on account of lower employee benefit costs, consumables rates and taxes. Overall, this led to an improvement in the total cost structure. The NINL or the Neelachal Ispat Nigam Limited performance, which is part of the consolidated performance, produced at its rated capacity on an annualized basis of around 1 million tons and its operating parameters have now stabilized and have resulted in an EBITDA margin of 13%. We are obviously looking forward to growing this part of the asset in the future. In Netherlands, the EBITDA generated was about £22 million in Quarter Two compared to about £43 million in Quarter One. EBITDA on a per ton basis declined by about £14 per ton on a quarter-on-quarter basis. The EU steel demand has been weighed by subdued economic activities including the weakness in the industrial output. If you have seen the PMI is now at about 42. At the same time, steel imports have remained steady and the China dynamics continues to weigh in on the global steel prices. Given this, the revenue per ton was down by about £43 pounds per ton on a quarter-on-quarter basis. However, this was partly offset by the material cost primarily driven by the lower coking coal consumption cost to the tune of $27 per ton and the iron ore consumption cost to the extent of about $14 per ton. The other conversion costs were broadly stable. Looking ahead, liquid steel production numbers in Netherlands will be much higher than previous years because, as Naren mentioned, the blast furnace 6 is operating which was not operating at capacity. The market conditions though remain challenging with spreads contracting in the near term and, therefore, the efforts are on across the company on improvement of the cost. In the UK, the EBITDA loss widened from about £91 million in the first quarter to about £147 million in the second quarter. EBITDA on a per ton basis declined by about £100 per ton. One of the fundamental reasons is that this is a transition quarter for the UK and I'll explain a little bit more. The revenue per ton was broadly stable while total cost increased by about £100 per ton. Within cost, the raw material cost consumed plus the purchases declined by about £59 per ton given the shutdown of one of the blast furnace. But this was more than offset by the inventory movement that led to a quarter-on-quarter increase of about £151 per ton. Inventory movement was primarily due to the buildup of stock in Q2 versus Q1. Overall, the material cost increase was about £100 per ton. This, as I mentioned, has been a transition quarter where we operated one blast furnace and also purchased slabs and coils. So the fixed costs have not declined as yet because the grant funding agreement and the completion of the union consultation got extended by four months due to the elections. It's been done now. So far we have been issuing letters post the formal consultation at the union level, at the individual level to the voluntary redundancy candidates, and in the coming quarters we expect that about £100 per ton of reduction in fixed cost from the current levels that we see. Moving to the cash flows, we've spent about Rs4,800 crores on capital expenditure during the quarter and about Rs8,585 crores for the half year mostly in India. We've commissioned our second blast furnace in Kalinganagar, as Naren mentioned, which cost about -- the entire complex cost about Rs3,900 crores. In the later part of the year, we will be commissioning associated facilities in in Kalinganagar expansion amounting to almost about Rs19,000 crores in this current financial year. So the work is in progress. It's a completion part. It's not that we have to spend Rs19,000 crores, associated facilities including the continuous annealing line, continuous galvanizing line, and the air separation unit to name a few. Separately, we have placed equipment orders for the 0.85 million tons EAF plant in Ludhiana and have started receiving select orders also. During the quarter, we have also had, after pursuing for about three years, income tax refund and the principal amount of the refund was about Rs1,500 crores which has been adjusted directly in the tax assets in the balance sheet. This pertains to the Bhushan merger of Financial Year 2020. While for the full half-year you would see working capital negative for the quarter we have actually released about Rs850 crores of inventory and Rs1,000 crores of debtors resulting to better cash flows from the gross working capital release. So overall the operating performance at standalone and Netherlands was offset by the UK performance and coupled with the working capital and dividend payout led to a marginal quarter-on-quarter decline in the cash and cash equivalent of about Rs485 crores. Our net debt stands at about Rs88,817 crores and our group liquidity remains strong at about Rs26,000 crores. As Naren mentioned, we signed the grant funding agreement with the UK government for the £500 million grant support for building the EAF and we are progressing on setting up the project. We have signed a contract with Tenova to deliver a state-of-the-art electric arc furnace and have completed the public consultation process and the planning application. We expect to commence groundwork at the site around July 2025. In the interim, we will operate the UK downstream operation by utilizing substrate sourced from our own operation and external markets. This will help us sustain our significant market presence across steel end-use segments in the UK and we are obviously committed to supporting the affected employees and are providing best ever support package and reskilling. We are also focused on ensuring that we will continue to work on the cost side to take out fixed cost which is more appropriate to the operating model for the next three or four years till the EAF comes in. In Netherlands, as Naren mentioned, we are engaged with the government on potential support for the decarbonization project. Moving on, finally, to the ORISED Act in India, it is the tax judgment that you would have seen. It is unclear at this point of time the manner in which the ORISED 2004 Act will have to be reenacted once the decision of the Honorable High Court of Odisha -- the verdict is considered by the regular bench of the Supreme Court which is currently pending. We are also in the process of filing a curative petition with the Honorable Supreme Court and is in active discussion with the Government in Odisha as well as in Delhi on the way forward. Given the above background, we would not be able to assess any financial impact at this point of time and will consider the same impact due course. Presently, there is no legal obligation in respect of the levy related to the ORISED Act and accordingly we have not recognized any provision in the standalone or consolidated financial statements. With this, I'll end my comments and open the floor to questions. Thank you so much.
Operator: Thank you, sir. We will now begin with the question-and-answer session. [Operator Instructions]. The first question is from Satyadeep Jain of Ambit Capital. Satyadeep, request you to please go ahead.
Satyadeep Jain: Hi. Thank you. Am I audible?
T.V. Narendran: Yes.
Koushik Chatterjee: Yes.
Satyadeep Jain: Yes, Naren, Koushik, I just want to start off with UK. Koushik, you mentioned we're looking at reduction in fixed costs of $1,000 per ton in the coming quarters. Can you maybe give some clarity or insight into by when can these fixed costs be taken out and just the trajectory of earnings in UK over the next two quarters? By when can we expect breakeven, EBITDA and cash flow there in UK? That's the first question.
Koushik Chatterjee: Yes, Satyadeep, thanks. Can you hear me?
Satyadeep Jain: Yes.
Koushik Chatterjee: Okay. So what I'd mentioned is £100 per ton of fixed cost take-out over the next two quarters. It has broad components. So if I were to just take one minute to explain that, now we are buying the substrate, whether it's supplied from India, Netherlands, external markets, and then taking out the conversion -- and doing the conversion and then selling into our customers. So the fixed cost base has to come down because that's the only way to beat the conversion cost value added that we have from the market. So some of the natural outcome of closing the heavy end is that the maintenance cost comes down, the stores, repairs comes down, the hire and leasing comes down and of course the people cost comes down. So these are broadly the four levers and these are the areas that we are working on. And as I said that between Q3 and Q4 we will be looking at this. This may not be the end of the cost take-out because we will have to continue to do the same. And our sense is that we are four months extended because of the delay in the grant funding agreement. Of course, the market is a big impact but our objective is during the three-year or three-and-a-half years of transition we want to ensure that we achieve a neutral to positive breakeven. So it's not that at the end of three years, but it is more around the first quarter or second quarter of next year that we should be able to do that. The cost take-out is the primary goal at this point of time in the UK and there are enough levers to do that. So we are focusing on that. So to give a short answer, it's essentially by June of 2025 we should be looking at it. Hopefully the market should also support us in giving us.
Satyadeep Jain: Okay. Second question would be on cash flows. So we've seen significant buildup in debt, working capital. In the last six months, net debt has increased almost Rs10,000 crores. Just wanted to understand when you look at working capital buildup in UK, I would assume that it's the other entities within Tata Steel that are giving raw materials. Why is working capital at the consolidated level going up because of inventory buildup in UK? And also when you look at how much inventory has been built up in UK, now what kind of working capital lease can we see? And also tied to debt and cash flow would be, when do you start incurring CapEx on Netherlands decarbonization? So all of this is tied to basically what kind of net debt levels are we looking at in the next 12 months or so?
Koushik Chatterjee: So if I were to again deconstruct that question, the first step is the working capital level increase that happened did not happen only in the UK. We were also building up inventory levels for India for coal. I'm talking about Q2. Q1, we also had a significant amount of creditors to be paid off because of the BF6 payment for the reline which extended. So when your creditors go down, so you see a net working capital increase because your creditors are actually being paid off. So you see double impact of that. In the UK, the stock release has also happened in terms of the raw materials. The iron ore coal that was there, we have released it. The slab stock buildup was happening to be ready for the closure. Second is that we were also running blast furnace 4 as much as we could and building up the stock so that the supply chain buffer is there for the next couple of months. As you know, if you look at it 2 million, 2.5 million tons of slabs and coil imports are coming in are not small volumes. So the system takes time to normalize. That is why I say this is a transition quarter and possibly another quarter of transition. I think once the Kalinganagar ramp up happens, which is already on its path and we commission more the downstream allied and associated facilities, we will see stabilization of that working capital. So that is certainly going to happen. So the working capital buildup is not always because of the debtors and inventory or finished goods. It also happens because of the movement in the creditors. So we just need to take that into account because the creditors have also got to be paid out. So it is a function of both. In fact, our number of days of gross working capital has been very tight as far as India is concerned and it will continue to go down in Netherlands and the same stable in the UK also. So I think as you see this quarter we have released about Rs850 crores on account of inventory and about Rs1,000 crores of debtors. So Rs1,800 crores have come down in this quarter. You referred to the half year number which is what you would see in the SEBI release. But for the quarter it is about Rs1,800 crores of gross working capital release, and taking into account the creditors it is still a positive about Rs400 crores. So I think that's the trajectory we will move. The other thing which your second part of the question is you talked about the Netherlands CapEx. We don't see Netherlands decarbonization CapEx coming in in the next six, eight months or even one year from today because we are in negotiations with the Netherlands government. There is a process by which the grant numbers will be decided by the government based on our application where the negotiation is also with the European Commission on state aid issues. So all this will take some months to finalize. Once that gets finalized then the question will be on the ground, the permitting process, the detail engineering process, etc. So I don't see a Netherlands CapEx coming into the play in the next 12 months. UK CapEx will start happening but not, you know, typically in this kind of project the first 18 months or 24 months of spend or 20 months of spends are not very significant. It's the last 12, 16 months of spend which actually starts picking up. So 2025, '26 will be mostly completion payments of Kalinganagar because as I mentioned that there is almost about Rs19,000 crores of CapEx which will get completed over the next few months. So those payments will come, and then it will be more sustainable. So next year it will be a much more CapEx light year compared to the last two years. But sustenance CapEx has to be spent, bolt on CapEx has to be spent, improvement CapEx has to be spent but the aggregate of all that will be much lower. UK will start spending but we will also get 40% grant on a quarterly basis. So the net spending in the UK will also be not so significant.
Satyadeep Jain: Just wanted to get summary or when we tie all of this together, Tata Steel historically had this $1 billion deleveraging target. Now it's become deleveraging in the last 12 months or so, more than that. So when we look at all the CapEx requirements and maybe working capital, would you say this is the peak debt or is there what could be potential deleveraging or is that something in the minds of is deleveraging possible from here?
Koushik Chatterjee: No, it is certainly not possible. It's also the target. So if you look at the gross debt numbers in FY22 when we took out almost about $4 billion of deleveraging it was about Rs75,000 crores. And for a growing company I think that will be the level at which we would be comfortable from a gross debt perspective between Rs75,000 crores and Rs80,000 crores. So that's why I said the underlying indication of the next year being a CapEx light year and a year in which we will have higher production numbers from India for sure, and the benefits on cost take-outs both in UK and Netherlands. We would certainly want to resume the long-term targets that we have of $1 billion of repayments. That's certainly on something that we are planning at this point of time.
Satyadeep Jain: Thank you so much and wish you all the best.
Koushik Chatterjee: Thank you.
Operator: Thank you. The next question is from Sumangal Nevatia of Kotak Securities. Sumangal, request you to please go ahead.
Sumangal Nevatia: Good afternoon everyone and thanks for this chance. So my first question is on UK. Now we are saying that the cost take-out would be gradual over the next three to four quarters. Just want to understand how will the P&L of UK will look like? I mean, should we expect these losses of Rs1,000 crores, Rs1,500 odd crores to continue with a declining trend? Maybe if you can add some more color for the next two, three quarters. That's my first question.
Koushik Chatterjee: Yes. So I think it would be fair to say that, see, if we were in a good market conditions we would certainly have been in a much better position. But I think that we are somewhat peaking in terms of the losses in this quarter and our target, as I said, is to take out more and more cost. Actually, it has got other than the people cost, all the other fixed cost take-outs are being pushed. But in people cost it has a certain process and that process is essentially in terms of individual consultation. So if a person is identified as redundant or will have to move towards or has volunteered to take redundancy, there is a process of engaging with that person over multiple rounds. So that takes time. And that's why that four months I mentioned was important because four months is a lot of time to engage with those people. So we see that a significant tranche of people will move out by end of March and there will be a stub left who would possibly go off in June of next year and some more maybe after that. So the people reduction, so we have signed up with the government that 5,000 people will continue. Our aim is to essentially come as close to that. Today the number is much higher because we are coming down from a base level of 8,000 plus. So we have to give that time over the next two quarters, and given the pressure on the market, we are seeing the fact that you would possibly look at assuming that the level of losses will come down over the next three quarters. And as I mentioned a little while back, our target is to ensure that we are neutral as far as EBITDA is concerned, and also as neutral as possible in cash flows by June 2025.
Sumangal Nevatia: Okay. And Koushik, in that assumption, are we expecting market to improve or in the current state of the market also we are confident that we would be breaking even at the EBITDA level and cash level?
Koushik Chatterjee: At this point of time, I guess, I can't take a view on the market, but --
Sumangal Nevatia: No. At the current market situation.
Koushik Chatterjee: Yes, my assumption is on the current market situation because only thing I would assume that the market wouldn't be worse off than where we are today. That assumption gets even worse. But I'm basing the assumption that it is actually the internal levers on fixed cost which is the most important issue.
Sumangal Nevatia: Okay, understood, Understood. Next (LON:NXT) question is on Netherlands. Now that the plant is stabilized, how do we see the spreads or at say EBITDA pattern shaping up in next few quarters? We used to say $80, $100 as through-cycle margins. How far are we from that level in the current market situation?
Koushik Chatterjee: So the through-cycle margins were not $80, $100. I would say through-cycle margins were more around $60 to $80. Peak levels $120, $140 through-cycle at that level. What has happened in Netherlands is there are some structural regulatory costs which has also started coming in, including while carbon is still much higher than the historical level. So when that $60, $80 we used to talk the carbon prices used to be more around $18, $20, $25. Just now think it's more around €60, €65. So that's one impact, but that's not the only impact. So there also we are looking at significant fixed cost take-out and not just next two quarters, but it will continue because we need to take out a lot more fixed costs, improve the efficiencies, the operating efficiency, there are certain areas including the maintenance costs, etc. So my point would be that the goal post hasn't shifted. We still want to get to that $60, $80. Of course, the market conditions today if you look at it, the spreads are really declining in this quarter compared to first quarter and it is also showing up in the third quarter. The other thing which happens on the spreads is the fact that the contract prices gets settled in this quarter and next quarter for the next one year. And if the base levels are low then the contract prices do get affected. So we certainly see that the next two quarters to be volatile, as far as Europe is concerned, and we, therefore, are focusing more internally than externally. But the target of that €60 per ton continues to be the same.
Sumangal Nevatia: Got it. If I may just squeeze in one more on the India expansion. Now that we've commissioned KPO almost we still not started the next phase of expansion. So don't we think we are slower than desired in taking up growth projects in India?
Koushik Chatterjee: So maybe Naren can add to it and then I will come in later.
T.V. Narendran: Yes. So I think the work is already going on. Our approach to capital projects is now more about doing all the detailed engineering, get the environment clearances ahead of going to the board for approvals because that gives us more certainty in the execution. Because oftentimes we take the board approval and then take longer than planned on environment clearances, etc. So the work is already going on on that. In fact, in November we have the public hearing for the Neelachal expansion. I think it's on November 29th. And that's for expanding Neelachal to 10 million tons. So once we have the EC on that then and obviously we can progress as fast as we want. And a lot of the engineering work is already going on. So while we have not announced the project because we will do that after the board approval, but the work is already going on. The board has already approved expenses to be incurred for all this preliminary work. So basically immediately after this the focus will be on Neelachal expansion which will take it from 1 million ton to 5 million tons. After that, of course, we have the Kalinganagar option from 8 million tons to 13 million tons and the Bhushan option, the Angul plant option from 5 million tons to 7 million tons. So again the engineering work, some of the work is already going on on those two as well. Immediately after this Kalinganagar expansion, the next facility to come on stream. There are two facilities coming on stream. One is the Ludhiana steel plant which is 0.8-million-ton steel plant which should be ready by 2026. The work is going on full steam. And in Jamshedpur, we're setting up a 0.5-million-ton mill to service which is going to be downstream of the Usha Martin (NS:USBL) steel business which we had acquired, the Gamharia steel plant. That is more to cater to the high-end forging quality requirements of the passenger car vehicles and two wheelers. We are already servicing the commercial vehicles. So these projects are going on. So we think the pace is just right for the current market conditions.
Sumangal Nevatia: Got it, got it. Thank you so much and all the best. Yes.
Operator: Thank you. The next question is from Amit Dixit of ICICI Securities. Amit, request you to please go ahead.
Amit Dixit: Yes, hi. Good afternoon and thanks for the opportunity. I have a couple of questions. The first one is on the forex movement in this quarter. So if I look at the adjusted EBITDA versus the reported EBITDA there is a significant gap although I mean the USD-INR movement was not that stark. So just wanted to get your view on this why there is so much gap in adjusted EBITDA versus reported EBITDA? And I know it's very difficult to quantify how is it going to be, but some of the factors that led to that would be very helpful.
Koushik Chatterjee: So yes, these are all the translation changes that we see in the forex which is why we adjust that and it has happened because if you look at the September end, September 29th, 30th September movements, that's where the translation impact has come in. It's been fairly steady but it is more at the end. I don't know if, Samita, you want to expand it?
Samita Shah: Yes. So Amit, it's not the INR-USD actually but the consol level impact significantly driven by USD-Euro and that has been volatile and that has actually reflected into such a large amount.
Amit Dixit: Okay, understood. The second point is on KPO-2, how is the ramp up going on? What were the incremental volumes in this quarter, if any, and how do we expect this to take place in Q3 and Q4 of this year?
T.V. Narendran: So as far as Kalinganagar is concerned, the blast furnace, as we mentioned, is the largest one in India. Steady state production should be 15,000 tons a day. We are already at 7,500 tons a day. I mean there is a ramp up that we have planned. It's as per the plan. Next step is to take it to 10,000 and so on and so forth. By Q4 of this year we will be running at 15,000 tons a day. So that's the plan. It means I think this year we will have about 1.1 million tons additional volume coming out of Kalinganagar. Next year it will be closer to 4 million, 3.5 million to 4 million and the year after will be the full 5 million. The reason why 3.5 million to 4 million next year is because the third caster in the steel mills shop will be commissioned by September next year. So it's a step by step volume growth. The other facilities being commissioned this quarter other co-owners are being commissioned this quarter. The cold rolling mill was commissioned earlier but the annealing line is being commissioned this quarter, and in the next two quarters, the two galvanizing lines will also be commissioned. So volumes are as per the guidance I've just given you, but the ramp up is going on well. Of course, in any big steel plant when you ramp up you hit different bottlenecks at different points in time. Just now the bottleneck is oxygen supply which we are sorting out, so on and so forth. So I think that's where it is, largely on track as we had planned.
Amit Dixit: Okay. One more, if I can squeeze in. You mentioned that in standalone statements the other operating cost benefit was to the extent of Rs2,000 per ton. So just wanted to understand how much of it would be recurring because some of it is due to rate and taxes that might not recur in the next quarter?
Koushik Chatterjee: So on that, Amit, we are actually beyond the rates and taxes, you are right that we will not have a -- it will keep going up and down. But fundamentally, we are undertaking a significant cost take-out program which focuses on the stores, repairs, maintenance. Now we have five sites, so we are optimizing across five sites. We are looking at our -- not looking but working on our purchase, on stores, spares, consumption patterns, predictability on maintenance, what gets done within and external. And then there are rework on many of our additional processing costs which is done externally, conversion costs, et cetera. So there is a menu of cost take-outs that we are working on in India fundamentally to look at reduction in the cost. So I would say that this cost take-out is going to sustain after some time. So this trend will continue, and we are rebasing and structurally addressing the cost. So I think that is the only thing that you can do at this point of time when the markets are so challenging. So we will continue that direction of travel. Apart from the rates and taxes, the other structural cost will continue to remain.
Amit Dixit: Great. Thank you so much and all the best.
Koushik Chatterjee: Thank you.
Operator: Thank you. The next question is from Ritesh Shah of Investec (LON:INVP). Ritesh, I request you to please go ahead.
Ritesh Shah: Just had a couple of questions. First for Narendran, sir, so you indicated we'll go from 7,500 to 15,000. What is the sort of cost benefit that we can see on operating leverage for the India operations with KPO going full throttle?
T.V. Narendran: I don't know if Samita or Koushik has an exact number but basically at a broader level the Kalinganagar plant is going to be producing 8 million tons with 4,000, 4,500 people. So that is one big leverage. So in terms of labor productivity will be comparable to the best of. Secondly, the coke rates for these large blast furnaces, two blast furnaces operating will be much better than many of our smaller blast furnaces, let's say, in Jamshedpur, etc. So we have the advantage of that. Thirdly, Kalinganagar itself, the conversion cost will come down and Kalinganagar will now become the most competitive site for us at Tata Steel. Because today Kalinganagar carries a lot of costs at the 3 million ton-level which will get distributed over 8 million tons because infrastructure was built for 8 million tons. So I do see at least you know with this last one is coming in at least Rs3,000 to Rs4,000 per ton benefit for the steel coming out of Kalinganagar. On a consolidated basis we'll have to calculate to see what is that benefit to the Tata Steel India level. So we can come back to you on that.
Ritesh Shah: That's quite useful. My second question was for Koushik. Sir, you indicated FY26 the focus will be higher production, lower CapEx, and you also indicated that we will strive for $1 billion target. Probably to my understanding it would be back in FY27. Is it possible you give some guidance for FY26 for UK, Netherlands separately? You already indicated for KPO. And when we say lower CapEx, is it possible to break it up for, say, India, Netherlands and UK what we are looking at for '25 and '26? I'm just trying to understand the debt profile and how we're looking at it.
Koushik Chatterjee: So I would be, as every year when we get past the third quarter when we are planning numbers are in place, we give that guidance and I think the direction of travel is what I mentioned specific, I would be able to give it to you in January of February because fundamentally there are some moving parts as far as Netherlands is concerned and UK is concerned. So we need to stabilize that, push that and ensure that we are doing that. As far as the CapEx light is concerned, it's because, as Naren mentioned, we are doing the engineering work for the NINL expansion but fundamentally closing and completing the TSK phase two. There's only one part that will remain which will happen in August or so, which is the caster 3 in TSK. But other than that most of the facilities would be commissioned. So we certainly get to not to the full capacity in '26 out of KPO but a significant proportion of capacity. So 4 out of the 5 million tons we should be able to get.
Ritesh Shah: Sure. And the last question you indicated for Tata Steel Netherlands we don't see any CapEx coming from for next 6 to 12 months. Just trying to understand --
Koushik Chatterjee: Decarbonization?
Ritesh Shah: Base decarbonization CapEx. Yes. So just trying to understand, I think what we had proposed the government based on the consultation, what's publicly available, we were looking to replace the blast furnace 7, as well as the cooking and gas plant 2 by 2030. So we had specifically indicated a timeline over here and now when we say that we don't see any CapEx coming for, say, next 12 months, what is it that has changed from a regulatory standpoint, how should we look at it?
T.V. Narendran: So --
Koushik Chatterjee: So when I say -- sorry, so when I say that the CapEx is not there, see, the first 18 months is spent on the engineering work, the site preparation work, the permitting part, etc, which is happening even in the UK. If you look at the UK when we are saying July 26th we will start work on the ground. All this time before that is on permitting etc. So I think that is the lead time that is required. What we call here as environment clearance is a permitting time there. It's the same kind of stuff. So what I said is it's not the work will not start, but the spend is not significant on that at this point of time for the next 12 months. But based on it we have to comply with the 2030 guidelines anyways, so. And the build period is typically three and a half years. So if you factor that in you would see that this is broadly in line that we will complete it around 2029, 2030.
Ritesh Shah: Sure. If I can just squeeze one, I presume, I think you will indicate that we have not finalized the configuration for Tata Steel Netherlands. But hypothetically, if we had to go for, for say only a EAF or a hydrogen-based DRI, what are the broader parameters in the marketplace from a CapEx intensity standpoint one can look at, from an industry Standpoint not specific to Tata Steel Netherlands? I'm just trying to understand what can be the potential CapEx outgo pertaining to decarbonization over here.
Koushik Chatterjee: So if I tell you that we have not identified the configuration, we have actually submitted our application to the government. It is actually a DRI EAF combination. In UK it was an EAF combination because we have a pellet plant in Netherlands and the mix of Netherlands is different. So we've submitted that. It's not that we have not kind of done. And hydrogen is not a fuel which is not either available in the price or quantity at this point. Europe is building up the hydrogen infrastructure at this point and they have themselves, the EU themselves, want companies to commit to the tapping in or conversion from natural gas to hydrogen over the next 15 years. So all that we are doing is designing it, we have enabling the conversion to use hydrogen when it is available. But Naren, you want to add some on that?
T.V. Narendran: So I think that the other reason why we are building a DRI or proposing to build a DRI plant in Netherlands is Netherlands has gas available. And the way it has been configured is the DRI plant that we build in Netherlands will use gas, and as and when hydrogen is available in plenty and competitively, as Koushik said, you can always switch from gas to hydrogen. So that's a call that will be taken based on the economics of it. And that's also part of the discussion with the government because the price of which hydrogen is available is important to make the choice. But the configuration is all fixed and as part of the proposal to the government.
Ritesh Shah: CapEx intensity indicative, if possible?
Koushik Chatterjee: We would do that surely. As you know, in UK we have done a Tenova contract. When we get into that stage it is much easier to give that intensity. But as far as the EAF is concerned, it will be of the similar number as UK which is about £1.2 billion and the DRI of the similar configuration is about €1 billion, €1.2 billion. So that is known. But given the fact that it is an asset where this is an existing plant. In UK, we shut down the heavy end and building whereas here we are going to continue to run the blast furnace and build next to it. So the infrastructure requirement or the ability to actually build around a running plant will have its impact on the infra and the enabling facilities which is what is being determined as part of the detailed engineering.
Operator: Thank you, sir. Before we take the next question, I would like to remind the participants to please limit your audio questions to two per participant. Should you have a follow up question, you are requested to rejoin the queue or post the same in the chat box. The next question is from Tarang Agrawal of Old Bridge Asset Management. Tarang, over to you.
Tarang Agrawal: Sir, couple of questions on cash flows and one on India. So on cash flow, sir, how much of Rs27,000 crores of KPO2 has been spent till 30th September '24?
Koushik Chatterjee: So roughly about -- so spend or are you looking at the completion?
Tarang Agrawal: Cash outflow. How much of the cash is moved out of the business?
Koushik Chatterjee: So we would have spent almost about Rs18,000 crores of cash on account of KPO.
Samita Shah: It's even higher. Closer to 20.
Koushik Chatterjee: Yes. So Rs18,000 crores to Rs20,000 crores. But it also includes the iron ore circuit, etc. So if you take all of that, we have another Rs7,000 crores to spend. But a lot of it is also spent after the commissioning as part of performance guarantee, retention money, etc.
Tarang Agrawal: Okay. So the second question is on the cash burn in H1 in Europe and, overall, how should we look at cash flows for Europe in FY25? And a subsequent one, when do we expect the cash payout for the settlement with the Port Talbot employee union?
Koushik Chatterjee: So that will happen over the next three quarters. So some of them will be there in Q3, but mostly Q4 and Q1 of next year is what we will look at, that cash will come in.
Tarang Agrawal: Okay. And Europe overall cash flow in H1 and overall for FY25, current estimates?
Koushik Chatterjee: So I think it would be more appropriate to talk about it when we finish the Q3 because there are certain transition cash flows that we are also building up, including the redundancies. Because when you do voluntary redundancies you can't be precise because we want to push out or, rather, complete the redundancy process over the next two quarters. So it will depend if we can complete that with the VR. Otherwise, there will be a compulsory redundancy training program, etc. So that is a big thing as far as UK is concerned. As far as Netherlands is concerned, I think it's the operating cash flows are in Q3 will be negative, but we'll come back because the spreads are at about €200 at this point of time. So at €200 the fixed cost numbers or the operating cost and fixed cost numbers are significantly higher. So we will have to look at Q3. Q4, we expect the turnaround to happen. And in the meanwhile we are tightening up the working capital. And also one other thing which helps is the lower level of iron ore and coal cost. So we see at best a neutral cash flow as far as Netherlands is concerned by the second half.
Operator: The next question is from Kirtan Mehta of BOB Caps. Kirtan, request you to please go ahead.
Kirtan Mehta: Thank you, sir, for this opportunity. In terms of the India operations we have started generating a very significant sort of the EBITDA margin in the range of Rs12,000 to Rs15,000 per ton. And this is coming because of our advantage of the iron ore security, value added products, retail presence, improving retail presence. Is it possible to bifurcate now our EBITDA margin into sort of the commodity component and additional uplift that we get from each component on a quarterly basis? Would be very helpful to understand how the volatility is getting reduced and what is our relative competitive advantage to our peers.
T.V. Narendran: We will do some work on that. I don't think we can share that with you just yet. But yes, internally we do track it very differently. I think, like you said, there is an iron ore advantage which is less visible when iron ore prices are low and more visible when iron ore prices are high. So if you look at iron ore prices at $100 the difference is not so much. When the iron ore price is $150 or $200, it's more. Right. So that is one part of it. But the other part is typically you look at Tata Steel's sales, typically 90%, 85%, 90%, 95% of our sales is in the domestic market largely because we have a very strong franchise. Even though we have incremental volumes everything was sold on the domestic market. Today, in fact, most of the exports that you see is what's going to the UK. The third thing is that downstream we have a significant presence in tubes, wires, etc which gives us an advantage in our retail presence. Now we sell almost 200,000 tons a month of steel Tata Tiscon to the retail segment, through our network of dealers and distributors. We have over 12,000 dealers across the country. So these are the advantages that we have and of course our 50% market share in the auto segment which will increase further with the cold rolling mill coming in because we are a bit short on cold rolled and galvanized products for the auto. But with that 2.2-million-ton cold rolling will in Kalinganagar that we'll get enhance the other approval based business we sell to is oil and gas which again is growing thanks to Kalinganagar. So we will see what is the best way to capture this in a manner that is helpful to you. We will work on that.
Kirtan Mehta: Sure. Sir, the second question was about the CRM complex. You have now given a detailed guidance in terms of the ramp up of the KPO phase 2. Would it also be possible to sort of give similar guidance on the CRM both on volumes as well as sort of the margin potential that we can achieve and how do we ramp up with full margin potential of the CRM?
T.V. Narendran: Sure. So the cold rolling mill itself has been operating for the last few months. So that is going on as per plan, there's no issue there. But the annealing line is getting commissioned this month. So that means you can then have the anneal product. Otherwise, you had what was called the full hard CR which we were using in other facilities of Tata Steel or selling. We will have the one galvanizing line coming in March and the other one by June. That will help us in the mix as well. But obviously one is a volume ramp up which we can give you more specific guidance on each of these. But the quality ramp up is more a question of the approvals by customers. So typically with auto customers, it's a new facility. Even if you are an approved supplier, you need to go through an approval process. So that will go on. So you will probably get the best product mix out of the plant maybe in another year and a half or two years, because that's when it takes to get all the approvals in place. But the fact that customers are waiting for us to ramp up these facilities suggests to us that we will get the approvals as fast as possible and we have the experience to make that those kind of quality products. But we can come back more specifically on the ramp up of the cold rolling mill at a specific level.
Kirtan Mehta: What would be the full potential of CRM facility in terms of the EBITDA generation?
T.V. Narendran: So again that typically when you look at it in the long term for base CR grades, you look at $100 difference between CR and HR, right. But as you go up the product mix, you get a better value for two reasons. You will obviously get a better price when you make these very high-end products. And secondly, as you know, the order contracts are typically six months. So you have stability and so the gap looks better in a falling market because the auto price is fixed and the commodity price drops. But in a rising market, that margin may get squeezed. So that's why the benefit will vary. But I would say $100 to $200 is typically the range that you would look at within which to play. Of course, there is a conversion cost in that, so you can take off 50% of that basis of conversion cost. But this is just broad level numbers.
Operator: Thank you, sir. The next question is from Amit Murarka of Axis Capital (NYSE:AXS). Amit, request you to please go ahead.
Amit Murarka: Good afternoon and thanks for the opportunity. Actually my first question is on the guidance that you usually provide for the next quarter. Maybe I missed it, you have already given like what's the guidance for coking coal cost and also the realization.
T.V. Narendran: So I think basically in India we are saying that the net realization would be about Rs2,000 lower in Q3 compared to Q2 largely because in Q2 July prices were quite high and then it dropped till September. In October, steel prices start going up. But we don't expect prices in December to be the same as what was in July. On an average basis it will be around Rs2,000 lower. Also because of the fact that a lot of the auto contracts now are on the new terms. We have the benefit of the 1st April prices. So these are the reasons why the guidance in India is Rs2000 lower. Coal prices are expected to be about $20 lower consumption wise for Q3 compared to Q2. As far as Europe is concerned, I think the guidance for Netherlands is I think about £45 per ton lower -- sorry, for UK I think about Q3 is about £55 per ton lower. And for Netherlands about £70 per ton lower. And again in terms of coking coal, Netherlands will be about $10 lower per ton. Iron ore will be again about $10 lower per ton. And for UK these numbers don't matter because we are no longer using iron ore and coal in UK. It's more the substrate that goes out of Netherlands and India.
Amit Murarka: Oh sure, that's helpful. And also about the reasons for the lower other expenses, sorry, I didn't capture it too well. What did you really mention on that and how much of that is one off?
Koushik Chatterjee: Lower other expenses, maybe I'll have to get back to you but there are not too many one-offs, but I can get back to you separately.
Amit Murarka: Yes, and in Q2 I mean your other expenses seems to have dropped. Even the volume is similar, and that maybe even big, is okay.
Koushik Chatterjee: Yes.
Amit Murarka: Sure. And on the cash outflow for the TS UK restructuring as of now like you are, I mean, any guidance that you can provide for H2?
Koushik Chatterjee: Yes, so I think the restructuring process cost we had budgeted about £250 million pounds as a total restructuring cost of which some of which about £150 million, £160 million was an account of the redundancies. That spend has not happened. The contract termination, etc has been spent. So I think it is more about that and the people component of it which is due, which is what I just said, that it will flow out slowly between Q3, Q4, and Q1 of next year as we get into the people numbers. [Technical difficulty].
Unidentified Analyst: Hello. Hello. Hi. Hello. Am I audible?
T.V. Narendran: Yes.
Koushik Chatterjee: Yes.
Unidentified Analyst: Just to first confirm this number. So the £150 million redundancy related is what we are currently factoring as a cash outlay in the next two, three quarters in the UK?
Koushik Chatterjee: Yes.
Unidentified Analyst: Is that like high visibility for that or we think therefore be like meaningful upside risk number?
Koushik Chatterjee: No, it will be between £150 million and £160 million over the three quarters because that's effectively determined on the number of people who will either take BR or take CR.
Unidentified Analyst: Right. Secondly, based upon the numbers you spoke about in terms of KPO cash outlay for the CapEx, so let's say roughly $900 million is pending for KPO and we will have some CapEx for UK as well. Am I thinking right that next year the CapEx would decline quite substantially versus what we have been doing in the last two, three years and all, or there could be new projects which we could take up, you know, in that timeframe itself?
Koushik Chatterjee: So that's what I mentioned that next year we compared to the last two years we expect that the CapEx cycle to slow before we start again in the year after. Because honestly once you complete Kalinganagar phase 2, one, there is no big start as far as the CapEx is concerned. There are a lot of enabling work like the NINL engineering work is happening, etc, but it will not spend so much as in the next 12 months. So is Netherlands. UK, even when the site work starts in June 26th it will not be as significant pickup. And anyway it is 60% of the CapEx, not 100% of the CapEx on us. So on a quarterly basis it will be much, much lower.
Unidentified Analyst: Got it, Got it. My last question, the comments which Narendran sir made earlier that KPO cost could come down by Rs4,000 to Rs5,000 once it is fully ramped up. And if I also factor the commissioning of pellet plant, the product mix which will improve with everything ramp up, should we think that India business EBITDA per ton can improve easily by Rs1,500 odd purely on the back of this, Rs1,500 to Rs2,000 in the next say 24 months or so? Or that's very aggressive?
Samita Shah: So actually -- sorry.
T.V. Narendran: No, firstly I said Rs3,000 to Rs4,000. But anyway, Samita, that's fine.
Samita Shah: So Ashish, as you know, we don't really give a guidance in terms of overall number. Naren was giving you directionally the kind of numbers. Obviously it depends on a whole lot of other factors.
Unidentified Analyst: But I'm not looking for a guidance. I know the dynamic business nature. But I'm just saying Rs3,000 to Rs4,000 on, let's say, 8-million-ton capacity which is 30% of India capacity, that itself is like one of the Rs1,200, Rs1,300 just from that simple match, then pellet plant product mix improvement, if I put all that together, Rs1,500 looks a fair safe assumption. That's the reason I just want to confirm this.
Koushik Chatterjee: Not far.
Unidentified Analyst: Okay, got it. That's helpful. And Koushik, clarification on other expenses. Actually even I was looking for that. I think you referred to some one-off in one in India business at site also. So maybe --
Koushik Chatterjee: Yes, there are.
T.V. Narendran: So I think it's the water tax charges.
Samita Shah: Yes.
Koushik Chatterjee: Yes, see, there is a 400 crore non-cash part which is there on account of settlement of water charges with the Government of Jharkhand. So that is Jamshedpur is to draw water from the river for a century. And there was a charge that kept on increasing for a long period of time by the Government of Jharkhand. And therefore, there is an element which went to litigation because the rate at which it was increasing was significant. And that got settled because of a High Court order to ask us commercially settle it. But we have been providing it on the basis of the notified order price or the cost per gallon of water drawn. So now that it's got settled that is in excess. So that will be rebasing itself. So that will not happen again because it's one. But there are other administrative and contract costs which are also there which are more sustainable in the future.
Operator: The next question is from Indrajit Agarwal of CLSA. Indrajit, request you to please go ahead and ask your question. Indrajit, we are unable to hear you.
Indrajit Agarwal: Can you hear me now?
Operator: Yes, we can hear you now.
Indrajit Agarwal: Hi, thank you for the chance. Good afternoon, sir. So two questions. First, can you talk a little bit more about the current market environment in India in terms of how are you seeing the demand post the festive season? Are we seeing pickup already? And as I understand current domestic price is at a discount to import parity. What kind of discussions you are having with the government, or what kind of pricing outlook for the market do you see in the next 6 to 12 months?
T.V. Narendran: Yes. So Indrajit, the demand side is reasonably strong. The first six months was weaker than we thought, simply because construction activity was a bit slower than we thought. I think, partly monsoon, partly because the government expenditure was a bit less, maybe because of elections and things like that. Right. So which we've been told that the second half will be much better and that's good for construction, which is good for steel, because 60% of the steel goes there. Automotive started the year well, has struggled a bit in the last couple of months. In automotive, motorcycles, which has struggled for the last two, three years, has started picking up well over the last few months, which suggests that the rural demand is back. The urban demand is what has struggled a bit more. In automotive, commercial vehicles will pick up once construction activity picks up. Passenger vehicles, the expectation is it should start picking up. But these are areas where there's a little bit of concern. Other government areas are railways, which is strong, spending is strong, oil and gas will also pick up. So we expect second half to be better. And of course, India's GDP grows at 7%. Steel consumption in India should grow at 8%, 9%. So that's our expectation. Our concern is more about unfairly priced imports. China is exporting 100 million tons of steel. Most other countries have already taken action, so our submission to the government is to take action. I think government is looking at it because obviously China selling these steel at these prices and not making money at these prices, so they shouldn't export that problem to us. So I think that's where it is. That's a conversation going on. But otherwise I think demand we are quite optimistic about. And pricing we'll wait and see what happens. I also think that China is also taking actions. They expected to cut production by about 4%, which is 40 million tons this year, and if that continues for another two, three years, then some of the surplus which is finding its way to global markets will come down because China has also stopped approving any new projects on steel, even if it is the replacing capacity. So that's the other action they've taken. So I think there are actions being taken in China and now with the US Presidential election, I think China would be even more concerned about its trade options and I'm sure will take some action to reduce some of these excesses. So that's the way we see it. So I'm more positive on demand pricing. Let's wait and see. I think we've hit the lowest that we did maybe in September, October since the prices have gone up we see more. We are more optimistic about long product prices because that is less dependent on China, impacted by China exports because China's exports is mainly flat products and longs consumption is more dependent on construction. So we are more positive at launch prices than flat prices. But flat prices also seem to be picking up now.
Indrajit Agarwal: So from the drops of since August, September have we taken any price increase so far?
T.V. Narendran: Yes, we have. In both long and flat, we've taken price increases in October. But like I said earlier when you look quarter-on-quarter, the July prices were quite high. It dropped significantly in August, September. So even if you get some price increases in October, November and December, I don't think we will reach July prices by December. That's why I'm saying that the guidance for this quarter is lower than last quarter. Second thing is the auto contracts which are at a higher price in the last half year and some of the adjustments, etc will out in this quarter. So that's the reason why the NR guidance is lower. But if you look at the international prices this quarter is higher than last quarter because it had hit 450 levels. Now it is in the 480 to 520 levels.
Operator: Thank you, Indrajit. I would now like to hand over the conference to Ms. Samhita Shah for the chat questions. Over to you, ma'am.
Samita Shah: So some of the questions on the chat have already been answered. So we'll just take the ones which are yet to be answered. So Naren, this one is for you. I think there are some questions on our overall guidance in terms of volumes for the year. You did mention about Kalinganagar but at a consol level what do the volumes look like for the year?
T.V. Narendran: I think at the consol level we are in that region of 1 million to 1.4 million for a couple of reasons. We have a blast furnace relining coming up in Jamshedpur and which was due to go down in Q4. We are trying to see how we can fine tune those dates to make up for shortfalls elsewhere. This last quarter we lost some volumes in Jamshedpur because there was a significant power outage in Jamshedpur. I mean Tata Steel was more the victim than the cause of it. But we had a problem there. We lost some production there. So overall we are seeing 1 million to 1.4 million on a consol basis.
Samita Shah: There are some questions on broader markets which also I will request you to answer. So one is I think in terms of overall market conditions in India and the kind of pricing we are seeing and the margin regime, does this incentivize greenfield investments in India? Because the ROC of integrated players is coming down. So some comments on what does this pricing regime really do to our future investments or broader perspective?
T.V. Narendran: Yes. So I think this is a point we've been making with the government. I think the private sector investment in some sense in India, the recovery of it is actually being led by the steel industry and of course electronics, etc because of the electronics in PLI schemes, etc. But I think largely steel between Tata Steel and all the other steel makers have committed or announced significant capacity expansion plans. But if steel prices stay at $450, $500 levels, it will be difficult for any steel company to support very significant expansion. You can keep expanding, but it will not be as value accretive as one would expect it to be. I think a good place for steel prices is between $550 and $600 or $550 and $650, which is where it will be when China's exports come down to about 50 million tons, 60 million tons. So that's where we are pushing hard to say that we need some sort of comfort there and which is what other countries are doing. Right. So yes, to answer your question, if steel prices stay at today's level, it will be very difficult to expand in the tens of millions of tons that everyone is talking about. It will be more muted for sure. The cash flows won't support that kind of growth. But if it goes back to where it was even two years back, like I said, closer to $550, $600, then there's a justification for those kind of investments. So we have the advantage of having all the options open, like I described. Neelachal, of course, we need to take it forward simply because we are short on long products. We need more long products in our mix. And because we have three sites now, we can expand anywhere which we didn't have earlier. Ten years back we had only Jamshedpur. So all expansions had to happen sequentially. Now that you have a Kalinganagar site, an Neelachal site and Angul site, if the markets are good, the cash flows are great, we can start expansion in all three sites at the same time. So the growth need not be sequential, and that's a big difference for us.
Samita Shah: Thank you. There are a few questions on the European market as well. So there are some comments that the European auto giants are going through a lot of turbulence. How does that affect our business in Netherlands? And in light of these changes, are we recalibrating our strategy for investing in Europe?
T.V. Narendran: Yes. So two or three things are happening in Europe. Yes, the largest economy in Europe, Germany is struggling. And Germany has had the advantage of low energy prices and strong export markets and a lot of workers from Poland and places like that. All these things have changed. A lot of Polish workers have gone back to Poland. Energy prices are high. Export markets, particularly into China, has not been so great. So we are seeing the impact of all that in Germany and also the closure which Volkswagen (ETR:VOWG_p) has announced. So there is that disruption going on. We are watching that space. We have a product mix which is rich in Netherlands. So hence the quality of consumption of the European market is important for us. But you are also seeing supply side restructuring in Europe, right. You are seeing that some of our peers having their own challenges in Europe, and not everyone in Europe will be able to make this transition because it depends on support of the government, the financial strength of the companies and the product mix in the markets itself. So it's going to be a period of some disruption both on the market side and on the supply side. Structurally, we are well positioned because we are on the coast. We have traditionally been a very competitive plant. So we are watching the space. And of course the investments in Netherlands will depend a lot on the support we get from the Dutch government. Same as the investments in UK were dependent on the support we got from the UK government. So that's a conversation we are having with the Dutch government and let's see where that goes. And then while we have submitted our proposal, let's see what the extent of support is and then we'll take a call.
Samita Shah: Thank you. There is a question on CapEx guidance for FY26 and '27. I think Koushik has already directionally mentioned it would be lower. We will give you specific guidance in the first quarter of next year. There is a question on the tax rate. Koushik, maybe you would like to take it. It says essentially that the PBT is around Rs2,164 crores whereas the current tax is Rs1,142 crores which is 53%. So why is it not the corporate tax rate of 25%?
Koushik Chatterjee: So if you shouldn't see it from quarter to quarter. On a yearly basis we are at the effective tax rate is at the marginal tax of 25%. During each quarter there are deferred tax adjustments that comes in it get deferred tax assets. So fundamentally tax rates remain. The ETR is at 25%.
Samita Shah: Thank you. There is a broader question again on the markets in terms of competing with Chinese players in the export markets. What is our strategy and how do we actually do that?
T.V. Narendran: Yes. So firstly, traditionally Tata Steel's exports has typically been about 10% of its production. For the next couple of years, our exports, actually most of our volumes of exports will go to UK because UK needs, is taking at least a million tons of steel from Tata Steel in India and another 700,000 tons from Netherlands in the international markets. Like I said, at these prices the Chinese steel companies are not making money and we don't want to export at prices at which we lose money. So that's why when on the earlier question of expansion, there's no point expanding if you have to export a lot into markets which are priced like this, right. So it's not just about the return on capital in the domestic markets. You have to look at how much are you exporting and what's the return on capital on that. So hence the next six months will be crucial to see what happens in China. Will they go back to that 50 million, 60-million-ton export level? And that's where it is. On a cost basis, we are more competitive than the Chinese because even at today's prices, Tata Steel's domestic business is at 20% EBITDA margin. I don't think there's any Chinese company making even 5% EBITDA margin, right. So it's not about cost, it's about the price at which we are willing to sell at, which is why we look at it from that perspective. We are one of the lowest cost producers of steel in the world and so that allows us to make money even at these prices in India.
Samita Shah: Thank you.
Koushik Chatterjee: Samita, one clarification is I think the numbers on tax, what I just saw is I think the person who is asking the question has seen the consol profits, which is why he's seeing 50% because in consolidation the tax is actually being paid out of India. So in India, if you look at it, the PBT is Rs4,700 crores and the tax is Rs1,100 crores. So I think because in Europe and UK we don't have any tax payability and they were in losses in any case.
Samita Shah: Thank you. There's a question on the sales mix between long and flat. And Naren, maybe you want to give it just at an annual basis, quarter-wise is less relevant.
T.V. Narendran: Yes. So I think if you look at Tata Steel today in India we are producing about 21 million tons. I mean, capacity-wise after the Kalinganagar expansion we will be 26 million tons. In that 26 million tons, we are about 5 million tons of long and the balance is flat. Right. 5 million to 6 million tons is long because you have about 3 million, 3.5 million in Jamshedpur. Another million in the Gamharia plant which is Usha Martin plant that we acquired and another million in Neelachal which we acquired. So that's the 5 million, 5.5 million of long. The Ludhiana plant will come up by March of '26. So that will add another 800,000. Right. And hence the next expansion that we have planned is Neelachal which will take it from 1 million to 5 million. If you look at India, 30 million, 31 million, you will have longs that may be 8 million, 9 million for us and flats at 20 million, 21 million.
Samita Shah: Thank you. There is a question on our gas requirements regarding to Kalinganagar expansion. What are the requirements and what are the kind of arrangements you have in place?
T.V. Narendran: We don't need gas because we are still building. We are expanding in Kalinganagar using blast furnaces. So we use coal, coking coal, and the gases that we generate from our operations is used within the operation. But we don't need to buy natural gas of any significant volume from anywhere. So we are not dependent on gas as an input cost for Kalinganagar.
Samita Shah: I think they probably are referring to oxygen.
T.V. Narendran: Oxygen. Okay. So oxygen is an important part of a steel maker's cost. I think if I remember right, so maybe about Rs2,000 per ton or something like that. So it is an important part of the cost. And there we typically work with global leaders. We outsource the oxygen production, we bid out the capacity. They build it for us, run it for us and we have a contract with them where the oxygen price is also dependent on the energy prices. So typically the electricity cost is a pass-through, and so that's a contract we have in all our steel plants. And I think Linde (NYSE:LIN) is the supplier for Kalinganagar. I don't know what is a specific question, but those are contracts.
Samita Shah: Just broad arrangements in input. Thank you. And we'll have the last question which we will take which is there are two questions but they're both relating to the same issues. So one is the jump in other income and the second question is in the segmental EBIT, other trade related operations is significant jumps. Can you please clarify? So Koushik, maybe you'd like to go.
Koushik Chatterjee: You can explain that.
Samita Shah: Yes. So this is on account of foreign exchange translation, what we talked about earlier. There is a loan which we have, which is a Euro-USD loan, and that the difference when the currency moves, that is what gets reflected. So it comes in the segmental sort of allocation. It comes under trade related operations. That's what's driving a bulk of the increase. And that's the same which is featuring in our other income as well.
Samita Shah: So with that, I think we've answered all the questions. Thank you to all our viewers and the participants for all your questions. We look forward to connecting with you again next quarter. Thank you and have a good day. Thank you.
T.V. Narendran: Thank you.
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