Tata Steel Ltd

NSE:TATASTEEL

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and welcome to the Tata Steel Analyst Call. Please note that this meeting is being recorded. [Operator Instructions]

I would now like to hand the conference over to Ms. Samita Shah. Thank you, and over to you, ma'am.

[Samita Shah, executive]

Good afternoon to all our viewers and thank you for joining us on this webcast. [Technical Difficulty]

Is this better?

[Operator]

Yes, ma'am. We're able to hear you.

[Samita Shah, executive]

Okay. Good afternoon to all our viewers and thank you for joining us on this webcast today to discuss our results for the second quarter of FY '23. We have with us our CEO and Managing Director, Mr. T.V. Narendran; and our CFO and Executive Director, Mr. Koushik Chatterjee, who will make a few opening comments and then take your questions.

As always, the entire discussion will be covered by the Safe harbor clause on Page 2 of the presentation, which is uploaded on our website.

Just one announcement. We will need to end the call at 12 noon sharp. As some of you may be aware, we lost Dr. JJ Irani, our former MD, late last night and the funeral is in a short while. So we will need to end the call strictly at 12 o'clock. The IR team and I will be available to answer any more questions, if you do have them.

So with that, we -- I will end here and hand it over to you, Naren. Thank you.

[Thachat Narendran, executive]

Thank you, Samita. Good morning to everyone. Good afternoon or good evening depending on where you are. The last few months has seen the global economies grapple with inflation and ensuing rate hikes have raised concerns about the growth momentum. The U.S. economy, for instance, contracted in the first half of 2022 while the euro area has been grappling with energy supply dynamics, and in China, the prolonged COVID-19 outbreaks have led to extended lockdowns. Large steel exporting countries like Japan and South Korea have also struggled with lower domestic demand. In India, the apparent steel demand was broadly stable despite the global cue and the effect of monsoon. In Europe, elevated input cost, particularly high energy costs and a volatile operating environment weighed on the demand. In this operating environment, global steel prices and spreads declined between July and September.

Moving to our performance during the quarter. Tata Steel India delivery stood at a record of 4.91 million tonnes, up 21% quarter-on-quarter and 7% year-on-year despite the seasonal factors and the global cues, which is a testimony to our strong franchise, as well as our ability to retain market leadership across the chosen segments. Our Industrial Product & Projects division registered record quarterly sales and a double-digit growth. The wide product portfolio supports large infrastructure projects, such as the Bogibeel railroad bridge in Assam, the Motera Stadium in Gujarat and the ongoing metro projects across the country.

In terms of the growth projects, we will shortly commission the 6 million tonne pellet plant at Kalinganagar. The cold trials are already ongoing and we should be making pellets later this month and this will help cost savings. This will also be followed by the pickling line and the tandem cold rolling -- cold mill, which is also undergoing cold trials as we speak, and subsequently, we'll have the galvanizing line and the continuous annealing line also commissioned over the next few months. The outer shell of the blast furnace has been erected and we're working towards bringing it online by the end of the next financial year. I am happy to state that within the -- within 3 months of closing the Neelachal transaction, we've been able to restart the blast furnace. As you are aware, the plant has been down for more than 2 years, almost 2.5 years. We've been able to start the blast furnace and we've also started making steel there, and we are wanting to commence steel production gradually for the rest of the financial year.

Speaking of Europe, the crude steel production was broadly similar quarter-on-quarter basis, but deliveries were lower due to the seasonal factors and subdued demand. Tata Steel Netherlands is well placed for its energy requirements as the majority of the energy needs are met by process gases generated during upstream steel making and its natural gas exposure is largely limited to the downstream operations. Looking ahead, there are visible signs of pickup of demand in India and the government spending on infrastructure is likely to drive gradual recovery in the second half of the year. In addition, the favorable movements in coking coal prices and the takeout of high-cost inventory is likely to aid margin expansion in India, particularly the second half of the year. In Europe, prices have [indiscernible] in the past few weeks, but the input costs remain volatile and a key watch point.

Moving to our strategic initiatives, we remain committed to net 0 by 2045 to pursue multiple pathways. In India, the Kalinganagar Phase 2 will help improve the energy balance and reduce our carbon footprint. Work has commenced at our new 0.75 million tonne per annum electric arc furnace in Punjab, which will drive volumes as well as reduction in the emissions profile. In Netherlands, we are collaborating with reputed firms to technically prepare for the green transition, and in U.K., the implementation of laser technology in the slab reheating furnace has reduced energy use and the carbon footprint. Our sustainability focus extends to water usage and biodiversity as well, and in Jamshedpur, a journey is underway to rejuvenate near-extinct water bodies. I'm delighted to share that our Jamshedpur site is the first in India to achieve the ResponsibleSteel Certified Site label and we are working towards getting all our sites certified. Our Board has approved the proposal to consolidate the 7 listed and unlisted entities into Tata Steel to simplify structure and drive business synergies and the work is ongoing.

Finally, I will talk about our digital ecosystems that is empowering the business and driving cultural readiness. Our journey that began in 2015 has created more than $1 billion of savings at the EBITDA level and led to connected operations, assets, connected workforce and connected platforms. I'm happy to note that we were the first steel company in India to remotely operate a sinter plant.

And with that, I hand over to Koushik to -- for comments on the financials. Over to you, Koushik.

[Koushik Chatterjee, executive]

Thank you, Naren, and good morning and welcome to the call. Before I start my comments, I'd like to start the call with tribute to Dr. Irani who left us last night. His contribution to the company was immense and his transformational leadership style and focus on institutional building has been an inspiration to many of us and many generations in Tata Steel. Today indeed is a sad day for us in the company.

Before I talk about our financial performance, as explained by Naren, the global steel spot spreads have declined during July to September period as we are witnessing the transition from an era of low interest rate to high interest rate environment, normalization of demand across key regions and high input costs due to volatile coking coal and natural gas prices, especially in Europe, even though there has been some softening in recent weeks.

With that as a backdrop for the quarter, our consolidated revenues for the quarter stood at INR 59,878 crores and were broadly similar on a year-on-year basis, but lower than the April to June quarter. There were multiple factors for the lower revenue compared to the previous quarter. Firstly, compared to the previous quarter, our India deliveries were at record volumes, as Naren explained, but the net realization in India dropped sharply on a sequential basis due to price pressure existing in the market. In Europe, our volumes were lower due to maintenance stoppages, but the steel price realizations were [ helping ] up.

Our consolidated EBITDA for this quarter stood at INR 6,271 crores and translated to an EBITDA margin of 10%. Excluding FX impact, the adjusted EBITDA stood at INR 5,817 crores, and on a per tonne basis, was about INR 8,045 per tonne. At India, stand-alone EBITDA stood at about INR 5,135 crores and translates to an EBITDA per tonne of INR 10,796 crores – INR 10,796 per tonne. The quarter-on-quarter movement in EBITDA was due to drop in realization coinciding with the consumption of higher cost inventory. ForEx gain for the quarter stood at about INR 977 crores. Excluding this, the adjusted EBITDA stood at INR 4,158 crores. At Tata Steel Europe, EBITDA was about GBP 199 million translating to an EBITDA per tonne of about GBP 106 per tonne.

Deliveries were down by about 12% on a quarter-on-quarter, as I mentioned, due to the market conditions and due to subdued demand and inventory buildup given the planned relining of one of the blast furnaces in Netherlands.

On a quarter-on-quarter basis, revenue per tonne was down by about GBP 17 per tonne, while total costs were higher about GBP 167 per tonne, primarily due to consumption of higher-cost inventory.

Taxes for the quarter stood at about INR 1,308 crores and are made up of 2 components, the current tax in line with the profitability and -- in India and in Netherlands, and non-cash deferred tax charge primarily due to the reduction in the surplus in the British Steel Pension Scheme. I will elaborate on the Pension Scheme shortly. I should also mention that in Tata Steel Netherlands, which had unabsorbed tax losses historically, these have now been absorbed fully, and therefore, in the future, Tata Steel Netherlands will be paying the marginal rate of tax at about 25.8%.

In the past few weeks, I've got a lot of queries from many of you on what is happening in the U.K. pensions given the volatility in the bond yields and the financial market turmoil in U.K. post the mini budget. So I'll spend a few minutes to explain the pension situation. Many of the U.K. pension schemes have recently faced margin calls on derivatives used to hedge interest rates and inflation.

So while the British Steel Pension Scheme also had to post additional collateral to keep the derivative positions in place, given our very low risk profile, we have been able to meet all the calls for additional collateral to date without any distressed selling and have further headroom, should the need arise. The Scheme remains in surplus of about GBP 1.49 billion based on IAS 19 as on 30th of September 2022.

We do not see or foresee any funding support as the Scheme is structurally adequately ring-fenced. To derisk the Scheme, the British Steel Pension Scheme has an umbrella agreement with Legal & General U.K. towards derisking the Scheme through insurance buy-ins. The Scheme and L&G has been executing insurance buy-in tranches of about GBP 3 billion so far, which is about 30% of the Scheme liabilities. This insulates the company and the Scheme from any potential market movements to an insurer who has guaranteed the payment of the pension liabilities.

We continue to explore further possibilities with L&G for further tranches of buy-ins and it all depends on the market conditions. Each buy-in also results in a reduction in the pension accounting surplus as the Scheme becomes smaller and smaller and the movement in the surplus is accounted for through the OCI or the other comprehensive income.

Consequently, there is also a non-tax deferred tax expense, a non-cash expense in the P&L recorded. And that is why you will continue to see some of these non-cash deferred tax expense in the consolidated accounts relating to British Steel Pension Scheme until it is fully derisked, but given the fact that this is such an important derisking strategy, such tax charges on a non-cash basis is bound to happen. This quarter also saw clubbing of several large cash payouts. We paid about INR 6,292 crores on account of the highest-ever dividends. We acquired Neelachal Ispat on July 4 and we had to be -- we had to pay almost about INR 10,000 crores. The CapEx for the quarter was about INR3,198 crores and it was driven primarily because of the acceleration on the Tata Steel Kalinganagar project closure. As a result, our gross debt increased by about INR 4,919 crores. However, our financial metrices continued to be well within investment grade and our group liquidity remains strong at about INR 29,480 crores.

Moving on, the operating environment should gradually improve in the second half of this year and steel margins, especially in India, should benefit from the favorable movement in the coking coal consumption cost. Most of the higher-cost inventory of the first quarter has been consumed in the second quarter, which should help in normalizing the working capital also. We continue to remain focused on cost optimization and operational improvements to maximize the cash flows.

Our deleveraging strategy and goal continues to be the same, even though there will be challenging times and we may not be able to achieve on a quarter-on-quarter basis. And our capital allocation is clearly focused on completing the Tata Steel Kalinganagar project. And with the improvement in the cash flows in the future, we will aim to leverage down again towards the end FY '22 levels and we continue to look at opportunities to deleverage further in the future.

With that, I will close my comments and open up for questions. Thank you very much.

[Operator]

[Operator Instructions] The first question is from Sumangal Nevatia of Kotak Securities. [Audio Gap] It looks like -- Sumangal, we are unable to hear you. We request you to please send in your questions via chat or rejoin the queue.

We will now move on to the next question. The next question is from Amit Dixit of ICICI Securities.

[Sumangal Nevatia, analyst]

Am I audible? Can someone confirm?

[Operator]

Yes. We are able to hear you clearly.

[Sumangal Nevatia, analyst]

Yes. The first question is on the domestic steel prices. The last couple of months, we've seen some stability in the prices. If you could just highlight, share your guidance on, say, 3Q, how do we see NSR movement? And also some outlook, I mean, given that Indian prices have been at some premium to import parity. So -- I mean, do you see [indiscernible] pressure in the coming months?

[Thachat Narendran, executive]

As far as domestic prices are concerned, yes, you're right, there has been stability, and because there is stability, people have stopped postponing purchases. That's one important change because when the prices were dropping, people were postponing purchases. Second thing is, we are coming out of what is typically the lean quarter. Monsoon is when construction activity slows down.

So particularly for long products, it's a difficult quarter. Thirdly, as you can see, the auto industry is doing quite well across all sectors, even the medium and heavy commercial vehicles, which has slowed down a bit has started picking up again.

So I think all indications are that demand is quite strong. It has been quite strong for July-September quarter and continues to be strong. It's expected to improve post festival. Second point is, a lot of destocking has happened. There was a buildup of stock both in flat products and long products, but I think a lot of destocking has happened and that's why you're seeing that balance in prices.

So we are expecting prices to be stable or trending upwards. We should also keep an eye on coking coal costs, which had gone down to $250. It's now back to $300. So that's also adding cost pressures.

As far as the Tata Steel guidance on NR is concerned, our guidance actually for Q3 is about INR 800 per tonne lower than Q2 largely because of the auto contracts, which -- where negotiations for H1 was concluded rather late and we had some debit and credit notes adjustments, which helped us in the last quarter particularly. But otherwise, if I look at it at product-to-product level, if I look at the base grade commercial hot rolled coils, we are expecting this quarter to be higher, but on a weighted average basis, we are expecting the realizations to be about INR 800 lower in this quarter than in the previous quarter.

In terms of imports, as of now there is not much pressure, simply because every now and then, there is talk of some parcel or the other coming from somewhere, but the weaker rupee, obviously, keeps some sort of cap on the imports. So imports is not yet a big threat. I think there is a risk involved, if you are booking today and expecting cargo to come in 2, 3 months. And I think that's where the domestic supplies are also helping people manage their working capital better because you can book your orders and get the materials on a daily basis. So I'm not seeing as such any great import threat just now.

[Operator]

Next question now is from Amit Dixit of ICICI Securities.

[Thachat Narendran, executive]

Amit just asked a question, right?

[Amit Dixit, analyst]

No, it was Sumangal actually. So I have a couple of questions. The first one relates to the BSPS scheme, particularly the Legal and -- the umbrella agreement with Legal & General. I didn't understand it fully. If you could explain again the kind of arrangement you have? And are there any condition precedent to Legal & General stepping in and supporting the Pension Scheme? That is first question.

I can ask the second question or wait for the answer?

[Koushik Chatterjee, executive]

No. You can ask the second question also. We'll take it together.

[Amit Dixit, analyst]

Okay. So the second question is on the coking coal. So what kind of coking coal price decline on consumption basis we can expect in India and Europe? And in Europe, if you can also let us know the iron ore price decline that we can expect going into Q3?

[Thachat Narendran, executive]

So I'll address the second one and then hand over to Koushik for the first one. So as far as coking coal is concerned, in India, we are expecting on a consumption basis drop of about $80 a tonne, and in Europe, about $100 a tonne as far as coking coal consumption is concerned. Iron ore in Europe will be about $15 a tonne lower.

[Koushik Chatterjee, executive]

Yes. So on the BSPS, Amit, I think I wouldn't go into too much of history, but as we stand post the Regulated Apportionment Arrangement, which was undertaken in 2017-'18 -- '17, post that, what we have is a scheme which is in surplus. On an IAS 19 basis, the surplus is about 126%. The next step of derisking is essentially to ensure that the Scheme moves out of active management and becomes -- and gets converted into an insurance policy for the pensioners.

So there is -- the management of the assets and liabilities will effectively be done by the insurance company. That process is essentially called a buy-in process. So first up, what happens is the assets of -- parts of the assets of the company, depending on how the market is -- the reinsurance market is liquid, there are tranches in which you continue to do this activity.

So of the total scheme size of, say, GBP 8 billion, we have completed about GBP 3 billion in 2 tranches, and effectively the assets are now managed by Legal & General. And this is backed by an insurance policy. So as far as the Scheme is concerned, they have an insurance policy of up to 30% of the liabilities, which is being managed by Legal & General. So there's no recourse to the company. The assets have moved.

So as it moves, the surplus also moves on a pro rata basis, and as the surplus moves, the surplus becomes smaller. And when it -- the surplus changes happen, the accounting of that surplus goes through the OCI and the deferred tax is a non-cash charge, which comes into the P&L. So this is -- in simple terms, this is what happened. Our aim is to continue that buy-in process as and when the market gives opportunities. It's a large size by any standards, especially in the U.K., and therefore, it goes in tranches. So we did a pilot of about GBP 500 million and then we have followed up with GBP 2.5 billion and we will continue to look for more opportunities. So that's in effect the situation. The Scheme, even on -- as the surpluses are moving, the assets are moving, the liabilities getting moved, so the Scheme surplus continues to be at about 126% on an IAS 17 (sic) [ IAS 19 ] basis. That's how I should -- you should kind of understand or look at it.

[Operator]

The next question is from Satyadeep Jain of AMBIT.

[Satyadeep Jain, analyst]

Just a couple of questions. First one, Mr. Naren, I think we saw CNBC flash where you mentioned, I think, Europe will not be an EBITDA loss in future. Just wanted some clarity, what is driving that confidence that that statement is correct, given we are looking at more headwinds possibly in the second half? And related to that would be there's one EBITDA positive and there is another one angle of cash positive. Historically, the company had talked about a spread of about EUR240 per tonne as a breakeven point. In your own presentation adjusting for energy and carbon it looks like the spreads are lower than that. So are we looking at possibly a cash negative situation? And if that is the case, where is that funding going to come from at the debt level, at the European entity or -- a 2-part question. That's the first question.

[Thachat Narendran, executive]

So I think let me clarify what we said yesterday. I think there was a specific question on whether we expect Europe to be EBITDA negative in the second half, and the answer was no. I think that was a more specific comment rather than say forever it's going to be EBITDA positive or whatever, while that's what we're working towards, but my comment was related to H2.

So if I look at the specific points that you raised, yes, the traditional way of looking at spreads has changed in Europe because typically when you looked at spreads, iron ore and coal were the biggest component of costs. So while they continue to be the biggest component of costs, energy and carbon are also important components of cost. So when you look at spread, you have to, in some sense, look at spread adjusted for carbon costs and energy costs. The carbon -- energy costs, both the carbon costs and energy costs peaked about 3 months back, and the carbon costs have actually dropped a bit, though long-term trend may be to increase, but just now it has dropped from its highs of over EUR80, it's now I think around EUR67 or EUR68.

In terms of energy and gas prices, as you know, they have dropped very significantly over the last 3 weeks. More than that, we've always had a hedging strategy. So when you look at our costs, you will see that both in Netherlands and in U.K., we have typically hedged 75% going forward. So that's insulated us to some extent against the cost increases. On top of that, particularly in U.K., we have some support from the government, which has capped the cost. At least till April, we have some comfort there. So in terms of costs, we believe the -- in some sense, the worst is behind us and we will start also seeing the benefit of coking coal prices that I guided sometime back of $100 drop in Q3 compared to Q2, and iron ore, which is soft, is also kind of $10, $15 lower. So on the costs side, I think we've gone through the peak.

On the revenue side, there are 2 parts to it. One is the spot prices, which have been lower than the long-term contract prices. The long-term contract prices are with us till December. So that gives us some comfort for Q3, and the discussions are going on about next year's contracts. I think in Europe, there is a little bit of concern amongst customers also about supply reliability because, as you know, there are many facilities in Europe who have shut down because of high energy costs, those who have been more exposed to energy costs, whereas facilities like one in Netherlands is fairly well balanced as far as energy balance is concerned.

And so we are less vulnerable to rising energy costs than some of the other steel sites. So we do see customers wanting to contract with safer sites and that also gives us some comfort. So that's the basis on which I talked about H2. Certainly, there will be margin compression in H2 in Europe. There will be margin expansion in India, the way we see it, because Europe has had the benefit of high price, long-term contracts for most of -- rather for the whole of this calendar year. So we will deal with that, but we are, as yet, not seeing a situation where we are EBITDA negative, and I don't think we will be there. That is one point.

In terms of cash, yes, the Dutch business has traditionally been cash positive and we expect it to be cash positive. We have had to build up some stocks because there is a blast furnace relining, which is due in the first quarter of next year, and we built up about 0.5 million tonnes of slab stocks, particularly for that, so that even when the blast furnace is down, we can keep the downstream units running based on the stocks that we built up. So that has taken a bit of a drag on the working capital, but we will keep diluting that. So we are diluting the finished good stocks as things improve and these slab stocks will be diluted as we do the shutdown. U.K. continues to be a challenge, and that's something that we've stated upfront. We are in discussions with the government and we'll take a call, now that we have a new government, let's see what their response is, and -- but U.K., yes, is clearly the most fragile part of our business, and it is going to be a struggle to keep it cash positive. We'll deal with it when we reach there.

[Satyadeep Jain, analyst]

Second question on -- just a follow-up on the U.K. question. Obviously, a change in government, but the management has also been in touch with government for the last 2 years. There is -- other companies are also taking a lead in decarbonization and when Tata Steel Netherlands is looking to sign up -- sign an MAU with Ford on hydrogen steel. Given that backdrop and you are looking at carbon border adjustment tax, where allowances would start dropping in future, the U.K. one is the one which is higher emissions within the Tata Steel Europe portfolio. A 2-part question to that again. Is the 50% contribution that you're looking at from the government or about GBP 1.5 billion, is that sacrosanct? If you don't get that contribution, is this a no-go? And when do you -- obviously, new government, but when do you say that now it -- enough is enough and then there is no option but to pull the plug? Because this has been going on for about 2 years.

[Thachat Narendran, executive]

Yes. So Satyadeep, yes, Europe and U.K. is basically ahead of the rest of the world in terms of planning for transition, right, because the policy framework is there, the carbon border adjustment mechanism has been announced, there are carbon costs, et cetera, et cetera. So everyone is planning that. But one thing which we are highlighting to the governments is that, governments are providing support.

This transition cannot happen without government support. And if there are governments supporting steel sites in some parts of Europe, then even to ensure a level-playing field, you need to make sure that the similar principle is followed in other sites. Okay?

So the ask generally of steel industry with the governments of the sites that they've been operating in is largely at least 50% of the CapEx should be -- should come from the government to help in transition and it's not an unusual ask because even if you look at the solar industry or most other industries who transitioned, the power industry transition to green, have got support from the governments.

So that is one part of it and I think some of our peers have said that they've already got some support and certainly our ask of the governments we are dealing with is to get at least that much support.

The second part of the support is on the OpEx support because even in U.K., you talked about U.K., the energy costs in U.K. even as we stand is -- I mean, even before the crisis, was twice the energy costs in Europe. And if you go into transition into a process routes, which uses more energy rather than the energy generated, although the gases that is there in a typical integrated steel plant site, then we -- you would look for that support.

So I think steel companies across Europe are looking at this support as a starting point for planning the transition. I think we had our submissions made and we'll await the conversations. I think in U.K., the conversations, as you said, has been going on for some time. The political situation has not helped us conclude, and as we've said before, the breathing space available to us is less in U.K. than in other sites.

And obviously, as the spreads compress and margin compresses, we are certainly running out of time and that's a conversation we're having with the U.K. government. So let's see over the next few weeks or months, we'll hopefully have more clarity on that, and we'll take a call as appropriate when we reach there.

[Operator]

The next question is from Anuj Singla of Bank of America.

[Anuj Singla, analyst]

Just to confirm, am I audible?

[Operator]

Yes, Anuj. You are audible.

[Anuj Singla, analyst]

Yes. So 2 questions. The first is on the deleveraging target. So when we look at the net debt for this quarter, INR 72,000 crores, we started the year at INR 51,000. So even if we exclude INR 12,000 crores for NINL, that puts the number at INR 60,000 crores. So I think Koushik mentioned in one of the comments that we are targeting the net debt to be flat versus FY '22. So just some more clarity on that, how -- so is it -- does it mean that the $1 billion deleveraging target is on pause for this year? And the second part of that question is, what kind of working capital release are we building in the second half of the year? So this is on the deleveraging part.

The second question is on Europe. On European side, can you talk about the disruption being caused by the energy on the customer side? I do understand Netherlands operations are very well balanced, but can you talk about the disruption on the customer side? Because ultimately if there is disruption on customer side, that is going to impact our operations as well indirectly. So how should we look at the 3Q numbers in that context?

[Thachat Narendran, executive]

Yes. So Anuj I'll address it -- yes, Koushik, you want to address the first part?

[Koushik Chatterjee, executive]

Yes. So if you look at the second quarter, we had about -- almost about INR 20,000 crores of cash outgo. We had a negative working capital of about INR 1,400 crores across on a consolidated basis. And obviously given the lower margins, the operating cash flow was -- before that was much lower than the first quarter.

So -- and the way I have mentioned is that, the deleveraging as a journey is on the same path. There is no change. In fact, the first year, when we said $1 billion, we achieved $1 billion. Then next year, we couldn't do that because of the market condition. The third year, which was last year, we could do almost 3x that number.

And this year, given the market conditions and the acquisition of NINL as the 2 specific points, we had obviously challenging second quarter from a cash flow point of view. The way we are looking at it is, and as Naren mentioned that we have built up stocks in the Netherlands for the blast furnace 6 reline early next year -- early next financial year.

So that is also a contributory factor towards it because in India, we did have working capital release in this quarter also. But I think the way we should look at is, our capital allocation is focused primarily on the targets that we had given at about INR 10,000 crores, INR 12,000 crores.

We will be on track of that. The working capital release should, in India, is something that we are looking at further for the next 2 quarters, also looking at options in Europe other than the stock buildup in slabs as to how we can release the same. And obviously with improved underlying operating conditions in India, our cash flows will be better off than what we have seen in the second quarter.

So all that in -- together, I said our aim is to see as to how to get back to the financial year '22 end levels, not necessarily at the net debt, but certainly at the gross debt level. And I think that is -- because net debt is a function of how much cash you carry, and therefore, we should look at the gross debt numbers because those are the ones which we will be looking at repaying. We also have fairly large scheduled repayments coming next year, which is what we will plan for.

So I think that journey is ongoing. The question is the pace and the timing of it, and given the underlying operating conditions, we will have to match up between the capital allocation, as well as the deleveraging target. But the focus on deleveraging continues to be the same as before. There is no change when it was in good times, no change when it is in bad times, but every quarter you can't do it linearly. It will go up and down and that's how the cycle moves and that's how our actual repayments or prepayments move.

So that's what I want to explain because there has been some misquoting also and out of context I've seen in the media that -- so I just want to explain that the deleveraging focus remains the same. The deleveraging target remains the same. Sometimes we overachieve it, sometimes we are struggling to meet the target, so -- but that's fine because we are not changing course here.

[Thachat Narendran, executive]

So Anuj, on the second part of your question, so it's like this, right? I think there was a significant concern 3 months back because of rising energy prices, plus, is there enough gas available? But Europe, as you know, started working on stocking up on gases. They encouraged a cut in consumption, and I think there has been at least a 20% cut in consumption, plus they have stocked up quite well, either out of Norway or from LNG. If you generally see, most European countries have fulfilled their goals of storage. So unless this winter is very severe, there's not much concern over the next 3 to 6 months on gas availability. There was, obviously, a concern on gas prices, but given that the gas availability is looking more stable for the next 6 months, gas prices have also started dropping. There is a longer-term concern, but that's more to see that how do you deal with next year's winter and situation like that, but I think Europe is also moving very rapidly into alternate sources for gas, whether it's from the U.S., whether it's from Norway or whether it's getting LNG, whatever.

So as far as our customers are concerned, we are less concerned today than we were maybe 3 months back on energy disrupting their short-term to medium-term operations. Second thing to keep in mind is, there are also supply disruptions. If you look at the aluminium industry, they're struggling because they are more energy-intensive than the steel industry. If you look at the steel industry, the more energy-intensive sites or the sites, which are more dependent on gas or the sites which are electric arc furnace-based or sites which don't have the gas balance that we would -- let's say, we have in Netherlands, are struggling because they need to buy more gas or electricity from the grid. So I think if you look at the closures in Europe, the more energy inefficient sites are getting closed. So that's also driving a little bit of demand-supply balance even if there is a little bit of a shrinkage of demand.

And the third point is, of course, imports into Europe, the biggest exporter used to be Russia. That's out of the system. As you know, Europe is also bringing in regulation to make sure that Russian slabs don't come in beyond, I think, October next year. So there is a fair amount of control happening on that. A weaker euro also works against imports. So I see headwinds, but I also see that there are some balancing factors, which will make sure that it will be a challenging half year, but I think maybe not as bad as we had thought maybe 2, 3 months back.

[Operator]

The next question is from Prashanth KP of Emkay Global. [Audio Gap] Prashanth, we are unable to hear you. We request you to please send in your question via chat.

We will now move on to our next question. The next question is from Tarang Agrawal of Old Bridge Capital.

[Tarang Agrawal, analyst]

[Audio Gap] Yes. A couple of questions. One on Europe, what's the cash burn that you're anticipating for the U.K. business for FY '23 given the state that we're in currently?

And number 2, there seems to be a wide disparity in terms of the long-term realization prices and -- of Europe, the prices that are being reported and the extend market prices that we get. So is it because the spot market is highly illiquid, therefore, the prices there are -- may not be truly representative of what's happening in the market?

[Thachat Narendran, executive]

Yes. I'll address the second part and ask Koushik to address the first part. Yes, the spot market prices are not necessarily the price that typical steel company realizes. They are typically reflective of transactions which happen. It's a 160 million tonne or a 150 million tonne market. So a few parcels here and there sold at some prices don't really truly reflect the market prices. So you will typically see our realizations are higher than what is reported as spot prices, and obviously the annual contracts, 2 years back, it was lower than the spot prices when the spot prices went up, but in a weakening -- or in a weaker market, you typically find the annual contract prices are higher than the realized prices on the regular market, which is higher than the spot prices. Koushik?

[Koushik Chatterjee, executive]

Yes. So typically, I think at mid-cycle level, with the current level of sustenance CapEx, maintenance, et cetera, we are seeing in the U.K. of about GBP 100 million, broadly the cash burn -- on a cash flow basis. The first quarter, for example, we were significantly cash positive, but I'm taking into account the winter months and the shutdowns and where our maintenance costs are going to be because, as Naren mentioned, the assets in U.K. are also older than in Netherlands, and in fact, in the rest of the portfolio that we have across Tata Steel Group. So this will -- it will become maintenance heavy in due course of time, but largely, we are looking at around GBP 100 million on a broad basis.

[Operator]

The next question is from Vishal Chandak of Motilal Oswal.

[Vishal Chandak, analyst]

Am I audible?

[Operator]

Yes, Vishal.

[Vishal Chandak, analyst]

Sir, given that you have acquired Neelachal Ispat and in the past also, you've mentioned that you have enough land bank now available to expand up to 40 million at the existing locations. Would the company really have any appetite for RINL acquisition? Or we are done with acquisitions in India at least for now, if I were to put [indiscernible]?

[Thachat Narendran, executive]

So Vishal, I think what we were basically saying is, see, now in Kalinganagar, between Neelachal and our existing Kalinganagar site, we have 6,000 acres, right? So we are today producing 4 million tonnes there, 3 million in Kalinganagar and 1 million in Neelachal. So we can take that 4 million to 25 million in that place alone. So when you have that opportunity to scale up in a single site, that's more attractive than most other options that you will have. So we really don't need to pursue other options. We also have an option to grow in Meramandali or Angul, the Bhushan site, from the current level of 5 million to 10 million. So -- and in addition, we have our strategy of setting up EAFs. So I think Tata Steel's growth ambitions can be met through existing sites. I think that's what we've said and, obviously, any opportunity will be weighed against this advantage that we have.

[Vishal Chandak, analyst]

Great. So -- and my second question was with regard to the decarbonization strategy at Tata Steel Netherlands. U.K., obviously, you have clarified that if there is no government support, it's a no-go and you'll be looking at options on how to close the facility. I don't know really if that is really an option and how will that work out. But in Tata Steel Netherlands, what kind of CapEx are we looking at? And how do we plan to fund? Would the entity over there would be sufficient -- can generate cash flow sufficient by itself or it will ultimately be a support from the Indian parent entity as well?

[Thachat Narendran, executive]

So if I were to answer it slightly differently, right, so firstly, Netherlands has been cash positive and we are working on building a corpus to help us with this transition. But having said that, I think the submission that we have made to the government there is that, if in Europe, some sites get support from the governments, then we also need to ensure this is a level-playing field. So there is a need for similar support if a site in Germany or site [indiscernible] 50% of the CapEx, there is no reason why we would also not ask for that. Otherwise, how will you ensure there is a level-playing field if some sites have more advantage than the others? I think that's the principle on which our submission is. Of course, parallelly, we will try to make sure that we create as much of a corpus as possible. And I think our guidance to all our units, which we've said before, is that, they should be self-sufficient through the cash that they generate for all the plans that they have.

Koushik, do you want to add anything?

[Koushik Chatterjee, executive]

No, that's perfectly fine. I think the principle is to get the government support and the point that Naren just mentioned that we have already started internally escrowing cash flows as far as the company's contribution is concerned from Netherlands. And therefore, between these 2, it should meet for the requirements and that's how we are envisaging. It's also important to mention that these are not like spends in 1 year or 2 years. It is a spent over a period of time. So there is a longer transition period in the decarbonization journey that will happen. And I think that is -- that needs to be taken on board because it will cross possibly more than 1 cycle, up or down, and therefore, we will have the opportunity to bank -- keep banking the free cash flows of Netherlands and investing in decarbonization.

[Operator]

The next question is from Ashish Kejriwal of Nuvama Wealth. Ashish, we are unable to hear you. We request you to...

[Unknown Analyst]

Am I audible now?

[Thachat Narendran, executive]

Yes.

[Operator]

Yes, Ashish. We can hear you now.

[Unknown Analyst]

Sir, my simple question is, is it possible to quantify what kind of inventory loss we witnessed in India in second quarter?

And secondly, again, is it possible that we can break down the EBITDA of European operation between U.K. and Netherlands? And can we do it later -- in the future also going forward? That will be helpful.

[Koushik Chatterjee, executive]

Yes. So as a segment, Ashish, we treat the TSE as 1 segment and therefore, from -- purely from a disclosure point of view, we -- it is still 1 portfolio, the way we manage it from India. That's why we don't give the segregation because of the same -- because it has to be followed through completely and that's a big exercise. And we do the consolidation of TSE even for Tata Steel [ Board ].

Then you mentioned about the inventory loss in the first -- second quarter...

[Unknown Analyst]

I mean, the impact on P&L because of the use of high-cost inventory in second quarter.

[Koushik Chatterjee, executive]

So there is a mix of both. So there is a inventory on the FG side and there is an inventory on the raw material side. So for example, the finished good inventory that we had in the first quarter end, which we sold in the second quarter, and then there were raw material inventories. But just to give you a sense, there was an inventory release of -- total inventory release of about INR 5,300 crores during the second quarter in India, which was -- which had a price impact as well as a quantity impact. And that is, to me, the more important part because that was the release that happened. So that had obviously the -- there's a cash impact to it. And then there was a P&L impact because that included a higher cost of that. But we can't quantify between the raw materials and the finished goods, how much was the per tonne compression. But from a quantifiable point of view, the cash point of view, we had a release of about INR 5,000 crores only on account of inventory.

[Unknown Analyst]

Sir, my only question is, while calculating for third quarter, what should one should take as a EBITDA, if we assume that there will be no further uses of high-cost inventory, which we have already used?

[Koushik Chatterjee, executive]

So you heard Naren say that the -- as far as coal is concerned, there will be, on a consumption basis, an $80 per tonne reduction. So that, I think, is the most important because iron ore is not an element, which has a volatility as far as India is concerned. So that will -- that is certainly a kicker that will come in from a cost point of view because that's a consumption cost, not the procurement cost.

[Operator]

I'd now like to hand the conference over to Ms. Samita Shah for the chat questions. Over to you, ma'am.

[Samita Shah, executive]

Yes. In the interest of time, we will just take some of the questions, I think, which are repeated most often. So firstly, there is a question on coal, where the question is actually what is our view on coal prices and why do we think -- do we think they're going to rise further? And if yes, why? So some color on what we expect coal prices to be going forward? I know we gave the guidance, but I think at a broader level, what is the coal price movement expected to be?

[Thachat Narendran, executive]

While iron ore more reflects demand sentiment, coal is a balance of demand and supply because coal is less liquid than -- at least coking coal is less liquid than iron ore, right? So that's why this time of the year, normally coal prices trend upwards because there is always a concern about any weather event in Australia, which disrupts supplies. So that's why coal prices which dropped down to $250 went up to $300, we expect it to stay around this level. So that's the way we see coal prices.

The other reason why coal prices stopped dropping was because thermal coal prices went up 2 months back when Europe started buying a lot of thermal coal. And as you know, there was a time when thermal coal prices were higher than coking coal prices. So the overall sentiment changed a bit and many coking coal producers also found that they could make more money selling it as thermal coal. So there were all these things happening. I think there is more stability now, but we expect coal prices to stay in this $250 to $300, $325 range and fluctuate within that range. It's not going to drop well below that because there's -- even in the medium- to long-term, the liquidity in the market is not great.

[Samita Shah, executive]

There are also a few questions on China, essentially saying that have production costs -- cuts stopped in China? And is there a risk that Chinese exports will come back and flood the market and depress prices -- steel prices further?

[Thachat Narendran, executive]

Yes. So the interesting thing is, though, China has had its own set of difficulties from a macroeconomic point of view and construction, which consume 60% of the steel produced there, has struggled. Still, we've not seen Chinese exports the way we saw it in 2015, right? It is still at 5 million. In fact, it's been trending down for the last few months after hitting a peak of maybe about 7 million tonnes.

Now it's running at 5 million or lower, which is a manageable volume for the world steel industry, largely because Chinese steel companies are not making money at these prices. So if you really see the margins of the Chinese steel companies, pretty much everyone is negative. So they have very, very little appetite to keep dropping prices and that's why they are not as aggressive in the international markets and there is also a lot of production, which has been cut.

If you see Chinese consumption, the World Steel Association also released the numbers. The production as in some sense kept pace with consumption. If consumption drops, the production is also dropping, and we are coming into winter months when normally there are production cuts as well. So I think we are not seeing a big issue of Chinese exports.

Exports is more coming out of Japan and Korea. Japan is exporting aggressively because they are benefiting from the weak yen. Korea had supply side issues, but they have traditionally been a big exporter.

[Samita Shah, executive]

There are a few questions on our growth plans that we have said we will double our capacity from here, but given the cash flows and given the performance of the company, are we still committed to that? And what does that mean in terms of sort of the broader CapEx outlook for the company?

[Thachat Narendran, executive]

So I think the advantage we have today is, most of our growth plans are around organic growth. The last 5 years, most of our growth came from inorganic growth. So when you are chasing or you're pursuing inorganic growth opportunities, you are limited by the opportunities that come your way and the timing of that.

This way we can pace our growth well. And just like we slowed down on the Kalinganagar expansion 2, 3 years back soon after we acquired Bhushan, just to manage our deleveraging goals and cash flows, we have that opportunity if really the outlook continues to be bad, which we don't think so, we can reflect on the pace at which we want to grow. So we are in a good position that we have the optionalities.

We don't need to pursue inorganic growth to achieve our ambitions. We have enough sites, which can grow in the existing portfolio, and we can pace our growth depending on the cash flows that we generate out of India. We believe that, on a through-cycle basis, the cash flows that we generate out of India will help us grow in India without adding to the debt. And I think that's the position that we are in, but we'll review it quarter-on-quarter.

Just now the focus is on completing the Kalinganagar expansion, which should be completed in the next financial year that will add another 5 million tonnes of capacity and EBITDA to our bottom line. And we have drawn up the plans to expand Neelachal. We are drawing up the plans to look at Kalinganagar expanding from 8 million to 13 million tonnes, as well as Bhushan from 5 million to 10 million, but we'll decide on how to prioritize and pace those projects or phase those projects based on the situation on the ground.

[Samita Shah, executive]

And there is a question on the Kalinganagar expansion that -- I think Koushik, you did mention that we are committed to it, but since there are questions, I will ask it again. What is the progress on the Kalinganagar expansion? When is it expected to be -- to reach 8 million tonnes? And are you still committed to completing it?

[Thachat Narendran, executive]

Yes. So basically, as I mentioned, this quarter, the pellet plant and the PLTCM, which is the cold rolling part of the cold rolling mill will start. The cold trials have already started. In the next financial year, we will complete the upstream. We had taken a pause on the upstream during COVID and then we restarted it last year. So the focus was on setting up the pellet plant, which helps us bring down costs and setting up the cold rolling mill, which helps us in the product mix, but next financial year, we will be commissioning all the facilities. So the volume impact of the expansion will be felt not in the next financial year, but in the financial year after that. Next financial year, you will see the benefit of the Neelachal facilities coming on to 1 million tonnes. By the end of this financial year, we hope to be able to ramp it up to the rated capacity, which means next financial year we'll have the full benefit of the Neelachal volumes.

[Samita Shah, executive]

And the last question we will take is on Tata Steel Long Products. The question is, why are they reporting operating losses on a back-to-back basis for the last couple of quarters? And is this just the royalty, which -- royalty payment, which is due or is there anything else which is contributing to this performance?

[Thachat Narendran, executive]

Koushik?

[Koushik Chatterjee, executive]

Yes. So I think the royalty payment certainly hurts at the time when the steel realizations are not significant. I think from a cost takeout point of view, post integration, a significant cost has been taken out, and we have an improvement program. So I don't think from an underlying operating point of view, there is any issues. It, obviously, is exposed to the steel cycle, but the royalty has an additional charge. And secondly, if you look at also from the finance cost point of view, because the acquisition of NINL was done through TSLP, a significant part of the funding has gone from Tata Steel, and therefore, on a stand-alone basis, it is reporting losses. But if you look at it from a consolidation, that finance cost gets eliminated with Tata Steel. So I think these are the 2 main reasons, if we look at it from a stand-alone perspective, and both are actually structural and not necessarily operational. So I think we just need -- and that's one of the reasons why this whole merger actually helps that business to consolidate with Tata Steel and ensures that some of these are addressed.

[Thachat Narendran, executive]

And in the last quarter, we had a specific impact of the Neelachal costs coming in with no revenues coming in from Neelachal, which will start changing going forward. Yes.

[Samita Shah, executive]

Yes. So with that, I think we will end the questions. Thank you very much everybody for joining us. And if there are any additional questions, the IR team and I will be happy to take them. Thank you, and connect again in the next quarter.

[Koushik Chatterjee, executive]

Thank you very much.

[Samita Shah, executive]

Thank you.

[Thachat Narendran, executive]

Thank you.