Tata Steel Ltd

NSE:TATASTEEL

Earnings Call Analysis

Navigating a Challenging Global Landscape

In the latest earnings call, Tata Steel's management addressed a significantly challenging global operating environment marked by inflationary pressures, reduced economic activity, and geopolitical tensions. These factors have pressured steel prices, notably with increased exports from China leading to an unsustainable disparity in regional pricing. Despite these conditions, Tata Steel has shown resilience with a consistent performance in India, supported by demand for high-end products and a strong retail brand, Tata Tiscon.

Strong Performance in India

Tata Steel's crude steel production in India rose 5% year-on-year to 5.3 million tonnes, with domestic deliveries also increasing by 6%. Notably, the company achieved an impressive EBITDA margin of 21% on its standalone operations, equating to approximately INR 13,176 per tonne. The strong performance was also characterized by a significant 20% year-on-year increase in sales through the Tata Tiscon brand, demonstrating the company’s strong market position.

Operational Improvements Amid Rising Costs

The overall EBITDA for the latest quarter was INR 6,224 crores with a margin of 12%. The management noted an improvement in cost structures, with material costs decreasing by INR 600 per tonne driven by a decline in coking coal consumption costs. However, there were other factors at play; total costs increased by approximately GBP 100 per tonne in the U.K., impacting overall profitability. A focus on reducing fixed costs in the U.K. aims to optimize performance moving forward.

Adjustments and Future Guidance

Tata Steel has become strategic in its operations, particularly in the U.K., where a restructuring aims for cost reduction of about GBP 100 per tonne over the next two quarters. The management provided guidance indicating that the EBITDA for the U.K. should begin moving towards breakeven levels around June 2025. In terms of revenue, guidance for the upcoming quarter anticipates a decrease in realization by around INR 2,000 per tonne in India.

Innovations in Production and Sustainability

Tata Steel has also committed to innovation and sustainable practices. The commissioning of the second blast furnace at Kalinganagar is expected to enhance production capacities and lower specific water and power consumption by nearly 20% compared to traditional designs. Further investments in research and development aim to leverage technology in sectors like hydrogen and mining, indicating long-term growth strategies.

Exploring Growth in European Markets

In Europe, performance has been mixed. The Netherlands saw a decline in EBITDA from GBP 43 million to GBP 22 million in a single quarter due to subdued economic activity. However, production capacity is set to increase, potentially offsetting current underperformance. Appropriate measures are also being initiated to cut costs amid a sluggish market, though immediate challenges remain.

Financial Health and Strategic Investments

Tata Steel reported a consolidated revenue of approximately INR 108,676 crores for the half-year with plans for significant capital expenditure, primarily in India, set to total around INR 19,000 crores by the end of the current financial year. The company's net debt is around INR 88,817 crores, suggesting a strong liquidity position and preparedness for financial commitments while maintaining focus on reducing debt in subsequent periods.

Earnings Call Transcript 2025-Q2

[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 back end 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, executive]

Thank you, Kinshuk. Good morning, good afternoon, good evening to all our participants listening on to 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 FY '25. 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, of 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.

[Thachat Narendran, executive]

Thanks, Samita. 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 U.S. 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 has weighed on the regional prices across the world. Chinese steel exports for September were over 10 million tonnes. It's at 8 year high, and the year-to-date exports are about 100 million tonnes -- or rather on an annualized basis, it's about 100 million tonnes. In response, various nations, including India, have initiated antidumping 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 tonnes. For the quarter, deliveries stood at around 5.1 million tonnes and was aided by a 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 well-established retail brand, Tata Tiscon, witnessed a 20% year-on-year growth, aided by enhanced reach and the scale-up of the consumer connect programs.

During the quarter, our e-commerce portal, Aashiyana, expanded its service offerings and 2 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.

Industrial Product & 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 Indian Railways has launched. We made strategic progress during the quarter on the commissioning of the 5 million tonne blast furnace at Kalinganagar. The blast furnace is operating. It's already producing about 7,500 tonnes a day. And Kalinganagar expansion is an important milestone in our journey to scale up in the high-margin business.

The state-of-the-art cold rolling mill is already running. The annealing lines are getting commissioned this month and the galvanizing lines will get commissioned in the next couple of quarters, one 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 tonne pellet plant, our cost profile also improves.

In the U.K., 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. Our planned investment of GBP 1.25 billion will be partly supported by the GBP 500 million grant from the U.K. 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 U.K. We remain committed to supporting affected employees and have offered the best ever package of support in Tata Steel U.K., 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 thereby 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 our new blast furnace in Kalinganagar has an eco-friendly 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 R&D centers to leverage national and global technology systems and strategic focus areas such as hydrogen and mining and many other areas. And in U.K., upon transition to scrap-based EAF, the direct CO2 emissions will reduce by 50 million tonnes 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, executive]

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 INR 108,676 crores, and the EBITDA was INR 13,046 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 a 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 #25 of the presentation circulated. Consolidated revenues stood at INR 53,905 crores and an EBITDA of INR 6,224 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 stand-alone financial statements for the quarter reflect the merger and past periods have been restated as applicable.

Moving to Tata Steel stand-alone EBITDA for the quarter was about INR 6,734 crores, which translates to an EBITDA margin of 21%. On a per tonne basis, the stand-alone EBITDA was around INR 13,176 per tonne. As provided in Slide #31, EBITDA on an 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 noncash 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 INR 600 per tonne 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 INR 2,000 per tonne, 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 of around -- on an annualized basis of around 1 million tonnes. 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 GBP 22 million in quarter 2 compared to about GBP 43 million in quarter 1. The EBITDA on per tonne basis declined by about GBP 14 per tonne 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 tonne was down by about GBP 43 per tonne 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 tonne and the iron ore consumption cost to the extent of about 41 -- sorry, $14 per tonne. The other conversion costs were broadly stable.

Looking ahead, our liquid steel production numbers in Netherlands will be much higher than previous year 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 U.K., the loss -- EBITDA loss widened from about GBP 91 million in the first quarter to about GBP 147 million in the second quarter. EBITDA on a per tonne basis declined by about GBP 100 per tonne. One of the fundamental reasons is that this is a transition quarter for the U.K., and I'll explain a little bit more. The revenue per tonne was broadly stable, while total cost increased by about GBP 100 per tonne. Within cost, the raw material costs consumed plus the purchases declined by about GBP 59 per tonne 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 GBP 151 per tonne.

Inventory movement was primarily due to the buildup of stock in Q2 versus Q1. Overall, the material cost increase was about GBP 100 per tonne. This, as I mentioned, has been a transition quarter, where we operated 1 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 consolidation got extended by 4 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 GBP 100 per tonne of reduction in fixed cost from the current levels that we see.

Moving to the cash flows. We've spent about INR 4,800 crores on capital expenditure during the quarter and about INR 8,585 crores for the half year, mostly in India. We have commissioned our second blast furnace in Kalinganagar, as Naren mentioned, which costs about -- the entire complex cost about INR 3,900 crores. In the later part of the year, we will be commissioning associated facilities in Kalinganagar expansion, amounting to almost about INR 19,000 crores in this current financial year. So the work is in progress. It's a completion part. It's not that we are going to spend INR 19,000 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 tonnes EAF plant in Ludhiana and have started receiving select orders also.

During the quarter, we have also had an, after pursuing for about 3 years, income tax refund and a principal amount of the refund was about INR 1,500 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 a working capital negative, for the quarter, we have actually released about INR 850 crores of inventory and INR 1,000 crores of debtors, resulting to better cash flows from the gross working capital release.

So overall, the operating performance at stand-alone and Netherlands was offset by the U.K. 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 INR 485 crores. Our net debt stands at about INR 88,817 crores and our group liquidity remains strong at about INR 26,000 crores.

As Naren mentioned, we signed the grant funding agreement with the U.K. government for the GBP 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 on the planning application. We expect to commence groundwork at the site around July 2025. In the interim, we will operate the U.K. downstream operation by utilizing substrates sourced from our own operation and external market. This will help us sustain our significant market presence across the steel end-use segments in the U.K. 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 3 or 4 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 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 Orissa -- 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 Orissa 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 we'll consider the same in 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 stand-alone or consolidated financial statements.

With this, I'll end my comments and open the floor to questions. Thank you so much.

[Operator]

[Operator Instructions] The first question is from Satyadeep Jain of AMBIT Capital.

[Satyadeep Jain, analyst]

Yes. Just wanted to start off with U.K. Koushik, you mentioned, we're looking at a reduction in fixed cost of $1,000 per tonne in the coming quarters. Can you maybe give some clarity or insight into by when can these fixed costs be taken out? And by when are we -- just the trajectory of earnings in U.K. over the next 2 quarters. By when can we expect breakeven EBITDA and cash flow there in U.K.? That's the first question.

[Koushik Chatterjee, executive]

Okay. So what I mentioned is GBP 100 per tonne of fixed cost take out over the next 2 quarters. It is broad component. So if I were to just take 1 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 -- 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 higher-end leasing comes down, and of course, the people costs come down. So these are broadly the 4 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 4 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 3 years or 3.5 years of transition, we want to ensure that we achieve a neutral to positive breakeven. And it's not that at the end of 3 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 U.K., 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 this.

[Satyadeep Jain, analyst]

Okay. Second question would be on cash flows. So we've seen significant buildup in debt -- working capital in the last 6 months. Net debt has increased almost INR 10,000 crores. Just wanted to understand, when you look at working capital buildup in U.K., I would assume that it's the other entities within Tata Steel that are giving raw materials. So why is working capital at the consol level going up because of inventory buildup in U.K.? And also, when you look at how much inventory has been built up in U.K., now what kind of working capital release 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, executive]

So if I were to again deconstruct that question, the first up is the working capital level increase that happened did not happen only in the U.K. We were also building up inventory levels for India for coal. I'm talking about Q2. Q1, we 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 U.K., the stock release has also happened in terms of the raw materials, the iron ore, coal that was there. We have released it. The slabs stock buildup was happening to be ready for the closure. Second is that we were also running blast furnace for as much as we could and building up the stock, so that the supply chain buffer is there for the next couple of months. If you look at it, 2 million tonnes, 2.5 million tonnes of slabs and coil imports are coming in are not small volumes. So the system takes time to normalize. That's 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 U.K. also.

So I think as you see this quarter, we have released about INR 850 crores on account of inventory and about INR 1,000 crores of debtors. So INR 1,800 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, there's about an INR 1,800 crores of gross working capital release. And taking into account the creditors, it is still a positive about INR 400 crores. So I think that's the trajectory we will move.

Your second part of the question is, you talked about the Netherlands CapEx. We don't see Netherlands CapEx -- decarbonization CapEx coming in, in the next 6, 8 months or even 1 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 on also with the European Commission on stated 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 detailed engineering process, et cetera. So I don't see Netherlands CapEx coming into play in the next 12 months. U.K. CapEx will start happening, but not -- typically, in this kind of project, the first 18 months or 24 months of spends 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's almost about INR 19,000 crores of CapEx which will get completed over the next few months. So those payments will come. And then it will be more sustained. So next year, it will be a much more CapEx-light year compared to the last 2 years. But sustenance CapEx has to be spent, bolt-on CapEx has to be spent, improvement CapEx have to be spent, but the aggregate of all that will be much lower. U.K. will start spending, but we will also get 40% grant on a quarterly basis. So the net spending in the U.K. will also be not so significant.

[Satyadeep Jain, analyst]

Just want to get summary. 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? What could be potential deleveraging? Or is that something in the minds of -- is further deleveraging possible from here?

[Koushik Chatterjee, executive]

No, it is certainly not possible. It's also the target. So if you look at the gross debt numbers in FY '22, when we took out almost about $4 billion of deleveraging, it was about INR 75,000 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 INR 75,000 crores and INR 80,000 crores. So we will certainly -- 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 takeouts, both in U.K. 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.

[Operator]

The next question is from Sumangal Nevatia of Kotak Securities.

[Sumangal Nevatia, analyst]

Sir, my first question is on U.K. Now we are saying that the cost takeout would be gradual over the next 3 to 4 quarters. Just want to understand how will the P&L of U.K. will look like? I mean, should we expect these losses of INR 1,000 crores, INR 1,500-odd crores to continue with a declining trend? Maybe if you can add some more color for the next 2, 3 quarters? That's my first question.

[Koushik Chatterjee, executive]

Yes. So I think, it would be fair to say that -- see, if we were in 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, other than the people cost, all the other fixed cost takeouts 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 4 months I mentioned was important, because 4 months is a lot of time to engage with those people.

So we see that a significant tranche of people will move down -- 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 2 quarters, but that's not the -- 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 3 quarters. And as I mentioned a little bit 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, analyst]

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, executive]

At this point of time, I guess I can't take a view on the market, but...

[Sumangal Nevatia, analyst]

Sir, at the current market situation.

[Koushik Chatterjee, executive]

Yes. My assumption is on the current market situation because, only thing is, I would assume that the market wouldn't be worse off than where we are today. Then the 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, analyst]

Okay. Understood. Next question is on Netherlands. Now that our plant is stabilized, how do we see the spreads or, say, EBITDA per tonne shaping up in the 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, executive]

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 I think it's more around EUR 60, EUR 65. So that's one impact, but that's not the only impact.

So there also, we are looking at a significant fixed cost takeout and not just next 2 quarters, but it will continue, because we need to take out a lot more fixed cost, improve the efficiencies. The operating efficiencies, there are certain areas, including the maintenance costs, et cetera. So my point would be that the goalpost hasn't shifted. We still want to get to that $60, $80 of -- 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 1 year. And if the base levels are low, then the contract prices does get affected. So we certainly see that the next 2 quarters to be volatile as far as Europe is concerned. And we, therefore, are focusing more internally than externally. But the target of that EUR 60 per tonne continues to be the same.

[Sumangal Nevatia, analyst]

Got it. If I may just squeeze in one more on the India expansion. Now that we've commissioned KPO, almost, we've 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, executive]

So maybe Naren can add to it and then I will comment later.

[Thachat Narendran, executive]

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, et cetera. 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 29, and that's for expanding Neelachal to 10 million tonnes. So once we have the EC on that, then 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 tonnes to 5 million tonnes. After that, of course, we have the Kalinganagar option from 8 million tonnes to 13 million tonnes, and Bhushan option, the Angul plant option from 5 million tonnes to 7 million tonnes. So again, the engineering work, some of the work is already going on, on those 2 as well.

Immediately after this Kalinganagar expansion, the next facility to come on stream -- there are 2 facilities coming on stream. One is the Ludhiana steel plant, which is 0.8 million tonne 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 tonne mill to service, which is going to be downstream of the Usha Martin 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 the 2-wheelers. We're already servicing the commercial vehicles. So these projects are going on. So I think we think the pace is just right for the current market conditions.

[Operator]

The next question is from Amit Dixit of ICICI Securities.

[Amit Dixit, analyst]

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, executive]

So yes, there has been -- 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 -- 29th, 30th September movements, that's where the translation impact is coming. 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, executive]

Yes. So Amit, while the -- it's not the INR-USD actually, but the consol level impact is significantly driven by USD-euro, and that has been volatile, and that has actually reflected into such a large amount.

[Amit Dixit, analyst]

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?

[Thachat Narendran, executive]

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 tonnes a day. We are already at 7,500 tonnes 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 tonnes and so on and so forth. By Q4 of this year, we will be running at 15,000 tonnes a day. So that's the plan. It means, I think this year, we will have about 1.1 million tonnes 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 mill shop will be commissioned by September next year. So it's a step-by-step volume growth.

The other facilities being commissioned this quarter are the coke ovens 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 2 quarters, the 2 galvanizing lines will also be commissioned. So the 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, analyst]

Okay. One more, if I can squeeze in. You mentioned that in stand-alone statements, the operating cost benefit -- sorry, other operating cost benefit was to the extent of INR 2,000 per tonne. 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, executive]

So on that, Amit, so we are actually -- beyond the rates and taxes, you are right that will not have a -- it will keep going up and down. But fundamentally, we are undertaking a significant cost takeout program, which focuses on the stores, repairs, maintenance. Now we have 5 sites, so we are optimizing across 5 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 takeouts that we are working on in India and fundamentally to look at reduction in the cost. So I would say that this cost takeout is going to sustain after some time. So this trend will continue, and we are re-basing 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 costs will continue to remain.

[Operator]

The next question is from Ritesh Shah of Investec.

[Ritesh Shah, analyst]

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?

[Thachat Narendran, executive]

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 tonnes with 4,000 people -- 4,000, 4,500 people. So that is one big leverage. So in terms of labor productivity, it will be comparable to the best in the world. Secondly, the coke rates for these large blast furnaces, 2 blast furnaces operating will be much better than many of our smaller blast furnaces, let's say, in Jamshedpur, et cetera. 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 as Tata Steel, because today, Kalinganagar carries a lot of costs at the 3 million tonne level, which will get distributed over 8 million tonnes, because the infrastructure was built for 8 million tonnes. So I do see at least -- with this blast furnace coming in, at least INR 3,000 to INR 4,000 per tonne benefit for the steel coming out of Kalinganagar. On a consolidated basis, we'll have to calculate to see what does that benefit translate at the Tata Steel India level. So we can come back to you on that.

[Ritesh Shah, analyst]

That's quite useful. My second question was for Koushik. Sir, you indicated FY '26, the focus will be higher production, lower CapEx. And you also indicated that we will strive for a $1 billion target. Probably to my understanding, it would be back in FY '27. Is it possible you give some guidance for FY '26 for U.K., 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 U.K., what we are looking at for '25 and '26? I'm just trying to understand the debt profile and how we are looking at it?

[Koushik Chatterjee, executive]

So I would be -- as every year, when we get past the third quarter, when our planning numbers are in place, we give that guidance. And I think the direction of travel is what I mentioned. And specific, I would be able to give it to you more in January or February. Because fundamentally, there are some moving parts as far as Netherlands is concerned and U.K. 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 2, 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 the capacity. So 4 out of the 5 million tonnes, we should be able to get there.

[Ritesh Shah, analyst]

Sure. And the last question, you indicated for Tata Steel Netherlands, we don't see any CapEx coming for next 6 to 12 months. I'm just trying to understand...

[Thachat Narendran, executive]

Decarbonization CapEx.

[Ritesh Shah, analyst]

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 coking gas plant 2 by 2030. So we had specifically indicated a time line 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?

[Koushik Chatterjee, executive]

So when I say that the CapEx is not there, the spend -- see, the first 18 months, we spend on the engineering work, the site preparation work, the permitting part, et cetera, which is happening even in the U.K. If you look at the U.K., when we signed or when we are saying July '26, we will start work on the ground. All this time before that is on permitting, et cetera. 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 that it's not that 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 are -- we have to comply with the 2030 guidelines anyways. And the build period is typically 3.5 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, analyst]

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, say, only an 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 Netherland? I'm just trying to understand what can be the potential CapEx outgo pertaining to decarbonization over here?

[Koushik Chatterjee, executive]

So if I look at the -- if I tell you that it's not that we have not identified the configuration. We have actually submitted our application to the government. It is actually a DRI-EAF combination. In U.K., 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 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, in designing it, we are enabling the conversion to use hydrogen when it is available. But Naren, you want to add something?

[Thachat Narendran, executive]

So I think 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 at which hydrogen is available is important to make the choice. But the configuration is all fixed, and that's part of the proposal to the government.

[Ritesh Shah, analyst]

CapEx intensity indicative, if possible?

[Koushik Chatterjee, executive]

We would do that surely. As you know, in U.K., we have done a turnover 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 U.K., 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 the -- this is an existing plant. In U.K., 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]

[Operator Instructions] The next question is from Tarang Agrawal of Old Bridge Asset Management.

[Tarang Agrawal, analyst]

Sir, a couple of questions on cash flows and one on India. So on cash flow, sir, how much of INR 27,000 crores of KPO 2 has been spent till 30th September '24?

[Koushik Chatterjee, executive]

So roughly about -- so spend or you're looking at the completion?

[Tarang Agrawal, analyst]

Cash outflow. How much of the cash has moved out of the business?

[Koushik Chatterjee, executive]

So we would have spent almost about INR 18,000 crores of cash on account of KPO.

[Samita Shah, executive]

It will be higher, closer to INR 20,000 crores.

[Koushik Chatterjee, executive]

Yes. So INR 18,000 crores to INR 20,000 crores, but it also includes the iron ore circuit, et cetera. So if you take all of that, we have another INR 7,000 crores to spend. But a lot of it is also spent after the commissioning as part of performance guarantee, retention money, et cetera.

[Tarang Agrawal, analyst]

Correct. Sir, the second question is on the cash burn in H1 in Europe. And overall, how should we look at cash flows for Europe in FY '25? And a subsequent one, when do we expect the cash payouts for the settlement with the Port Talbot Employee Union?

[Koushik Chatterjee, executive]

So that will happen over the next 3 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, analyst]

Okay. And Europe overall cash burn in H1 and overall for FY '25, current estimates?

[Koushik Chatterjee, executive]

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 the -- rather complete the redundancy process over the next 2 quarters. So it will depend if we can complete that with the VR. Otherwise, there will be a compulsory redundancy training program, et cetera. So that is a big thing as far as U.K. is concerned.

As far as Netherlands is concerned, I think it's the operating cash flows are -- in Q3 will be negative, but will come back, because the spreads are at about EUR 200 at this point of time. So at EUR 200, the fixed cost numbers are -- or the operating costs 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 the -- 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 Mehta, analyst]

In terms of the India operations, we have started generating a very significant sort of the EBITDA margin in the range of INR 12,000 to INR 15,000 per tonne. 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.

[Thachat Narendran, executive]

We'll 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's 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, 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 is sold in the domestic. Today, in fact, most of the exports that you see is what's going to the U.K. The third thing is our downstream, we have a significant presence in tubes, wires, et cetera, which gives us an advantage. And our retail presence, now we sell almost 200,000 tonnes a month of steel, Tata Tiscon, to the retail segment through our network of dealers and distributors. We have over 12,000 dealers now across the country.

So these are the advantages that we have, and of course, our 50% market share with 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 our 2.2 million tonne cold rolling mill in Kalinganagar, that will get enhanced. The other approval-based business, we sell to oil and gas, which again is growing thanks to Kalinganagar. So we'll see what is the best way to capture this in a manner that is helpful to you. We'll work on that.

[Kirtan Mehta, analyst]

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 to the full margin potential of the CRM?

[Thachat Narendran, executive]

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 annealed 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 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're an approved supplier, you need to go through an approval process. So that will go on. So you'll probably get the best product mix out of the plant maybe in another 1.5 years or 2 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 suggest to us that we will get the approvals as fast as possible, and we have the experience to make those kind of quality products. But we can come back more specifically on the ramp-up of the cold rolling mill at a more specific level.

[Kirtan Mehta, analyst]

And what would be the full potential of CRM facility in terms of the EBITDA generation?

[Thachat Narendran, executive]

So again, 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 2 reasons. You will obviously get a better price when you make these very high-end products. And secondly, as you know, the auto contracts are typically 6 months. So you have stability. And so that 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 true 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 out 50% of that TS' conversion cost, but this is just broad level numbers.

[Operator]

The next question is from Amit Murarka of Axis Capital.

[Amit Murarka, analyst]

Actually, my first question is on the guidances that you usually provide for the next quarter. Maybe I missed it if you've already given, like what's the guidance on coking coal cost and also the realization?

[Thachat Narendran, executive]

So I think, basically, in India, we are saying that the net realizations would be about INR 2,000 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 started going up, but we don't expect prices in December to be the same as what was in July. So on an average basis, it will be about INR 2,000 lower. Also because of the fact that a lot of the auto contracts now are on the new terms. In the first half, we had the benefit of the 1st April prices. So these are the reasons why the guidance in India is INR 2,000 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 GBP 45 per tonne lower -- sorry, for U.K., I think, Q3 is about GBP 55 per tonne lower, and for Netherlands, about GBP 70 per tonne lower. And again, in terms of coking coal, Netherlands will be about $10 lower per tonne. Iron ore will be again about $10 lower per tonne. And for U.K., these numbers don't matter because we are no longer using iron ore and coal in U.K. It's more the substrate that goes out of Netherlands and India.

[Amit Murarka, analyst]

Sure. I got it. 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, executive]

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, analyst]

Yes. And in Q2, I mean, your other expenses seem to have dropped, even though volume is similar. So at least if you could just help understand that, maybe even later is okay.

[Koushik Chatterjee, executive]

Yes.

[Amit Murarka, analyst]

Sure. And on the cash outflow for the TSUK restructuring as of now, like you are -- I mean, any guidance that you can provide for H2?

[Koushik Chatterjee, executive]

Yes. So I think the restructuring cost, we had budgeted about GBP 250 million as a total restructuring cost, of which about GBP 150 million and GBP 160 million was on account of the redundancies. That spend has not happened. The contract termination, et cetera, has been spent. So I think it is more 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.

[Amit Murarka, analyst]

Koushik, just to first confirm this number. So the GBP 150 million redundancy related is what we are currently factoring as a cash outlay in the next 2 to 3 quarters in U.K.?

[Koushik Chatterjee, executive]

Yes.

[Amit Murarka, analyst]

Is that like high visibility for that? Or do we think there would be like meaningful upside risk to this number?

[Koushik Chatterjee, executive]

No, it will be between GBP 150 million and GBP 160 million. That's the number that we are looking at over the 3 quarters, because that's effectively determined on the number of people who will either take BR or take CR.

[Amit Murarka, 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 U.K. as well. Am I thinking right that next year, the CapEx would decline quite substantially versus what we have been doing in the last 2, 3 years and all? Or there could be new projects which we could take up in that time frame itself?

[Koushik Chatterjee, executive]

So that's what I mentioned that next year, compared to the last 2 years, we expect the CapEx cycle to slow before we start again in the year after, because honestly, once you complete the 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, et cetera. But it will not spend so much in the next 12 months, so is Netherlands. U.K., even when the site work starts in June '26, 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 lower.

[Amit Murarka, analyst]

Got it. My last question, the comments which Narendran sir made earlier that KPO cost would come down by INR 4,000 to INR 5,000 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 tonne can improve easily by INR 1,500-odd purely on the back of this INR 1,500 to INR 2,000 in the next, say, 24 months or so? Or that's very aggressive?

[Thachat Narendran, executive]

No, firstly, I said INR 3,000 to INR 4,000, but anyway, Samita, please respond.

[Samita Shah, executive]

So Ashish (sic) [ Amit ], as you know, we don't really give a guidance in terms of overall number. I think Naren was giving you directionally the kind of numbers. Obviously, it depends on a whole lot of other factors. But...

[Amit Murarka, analyst]

I'm not looking for a guidance. I mean, I know the dynamic business nature. But I'm just saying about INR 3,000 to INR 4,000 on let's say 8 million tonne capacity, which is 30% of India capacity, that itself is like roughly INR 1,200, INR 1,300, just from that simple math. Then pellet plant, product mix improvement. If I put all that together, INR 1,500 looks a fair safe assumption. That's the reason I just want to confirm this.

[Koushik Chatterjee, executive]

Not far.

[Amit Murarka, analyst]

Okay. Okay. Got it. That's helpful. And Koushik, that clarification on other expenses, actually, even I was looking for that. I think you referred to some one-off in 1Q in India business, at least I thought so. So maybe...

[Thachat Narendran, executive]

I think it's the water tax, Koushik.

[Koushik Chatterjee, executive]

Yes. See, there is a INR 400 crore non-cash part which is there on account of settlement of water charges with the government of Jharkhand. So Tata Steel 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 to 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 re-basing 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 Agarwal, analyst]

So 2 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, 12 months?

[Thachat Narendran, executive]

Yes. So Indrajit, the demand side is reasonably strong. The first 6 months was weaker than we thought, simply because construction activity was a bit slower than we thought. I think partly monsoons, 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 2, 3 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, if 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 tonnes 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 is selling the 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've expected to cut production by about 4%, which is 40 million tonnes this year. And if that continues for another 2, 3 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 for 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 U.S. presidential election, I think China will 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 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 then, prices have gone up. 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 about longs prices than flat prices, but flat prices also seem to be picking up now.

[Indrajit Agarwal, analyst]

So from the troughs of say, August, September, have we taken any price increase so far?

[Thachat Narendran, executive]

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, et cetera, will play 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. Samita Shah for the chat questions. Over to you, ma'am.

[Samita Shah, executive]

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?

[Thachat Narendran, executive]

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, 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, executive]

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 ROCE of integrated players is coming down? So some comments on what does this pricing regime really do to our future investments or broader investments in the sector?

[Thachat Narendran, executive]

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, et cetera, because of the electronics PLI schemes, et cetera. 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 tonnes, 60 million tonnes. 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 tonnes 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 2 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, right? 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 3 sites now, we can expand anywhere, which we didn't have earlier. 10 years back, we had only Jamshedpur, so all expansions had to happen sequentially. Now that you have a Kalinganagar site and Neelachal site and Angul site, if the markets are good, the cash flows are great, we can start expansion in all 3 sites at the same time. So the growth need not be sequential, and that's a big difference for us.

[Samita Shah, executive]

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?

[Thachat Narendran, executive]

Yes. So 2, 3 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, which 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, right? So we are seeing the impact of all that in Germany and also the closure, which Volkswagen 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 in 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 are 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 and the markets they serve. 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 U.K. were dependent on the support we got from the U.K. 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, executive]

There is a question on CapEx guidance for FY '26 and '27. I think Koushik has already directionally mentioned it will be lower. We will give you specific guidance after our -- in the first quarter of next year. There is a question on the tax rate. Koushik, maybe you'd like to take it. It says essentially that the PBT is around INR 2,164 crores, whereas the current tax is INR 1,142 crores, which is 53%. So why is it not the corporate tax rate of 25%?

[Koushik Chatterjee, executive]

So you shouldn't see it from a quarter-to-quarter. On a yearly basis, effective tax rate is at the marginal tax of 25%. During each quarter, there are deferred tax adjustments that come in, that create deferred tax assets. So fundamentally, our tax rate remains -- the ETR is at 25%.

[Samita Shah, executive]

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?

[Thachat Narendran, executive]

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 U.K., because U.K. is taking at least 1 million tonnes of steel from Tata Steel India and another 600,000, 700,000 tonnes 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, 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 6 months will be crucial to see what happens in China. Will they go back to that 50 million, 60 million tonne 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.

[Koushik Chatterjee, executive]

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 is saying 50%, because in consolidation, we don't -- the tax is actually being paid out of India. So in India, if you look at it, the PBT is INR 4,700 crores and the tax is INR 1,100 crores. So I think -- because in Europe and U.K., we don't have any tax payability, and they were in losses in any case.

[Samita Shah, executive]

Thank you. There's a question on the sales mix between long and flat. And Naren, maybe you want to give it just on an annual basis, because quarter-wise is less relevant.

[Thachat Narendran, executive]

Yes. So I think if you look at Tata Steel today in India, we are producing about 21 million tonnes. I mean, capacity-wise, after the Kalinganagar expansion, we will be at 26 million tonnes. In that 26 million tonnes, we are about 5 million tonnes of long and the balance is flat, right? 5 million to 6 million tonnes is long, because we have about 3 million tonnes to 3.5 million tonnes in Jamshedpur, another 1 million tonne in the Gamharia plant, which is Usha Martin plant that we acquired, and another 1 million tonne in Neelachal, which we acquired. So that's the 5 million tonnes, 5.5 million tonnes of long.

The Ludhiana plant will come up by March of '26. So that will add another 800,000 tonnes, right? And hence, the next expansion that we have planned is Neelachal, which will take it from 1 million tonnes to 5 million tonnes. So that will make our -- if you look at India at 30 million tonnes, 31 million tonnes, you will have longs at maybe 8 million tonnes, 9 million tonnes for us and flats at 20 million tonnes, 21 million tonnes.

[Samita Shah, executive]

There is a question on our gas requirements regarding Kalinganagar expansion. What are the requirements? And what are the kind of arrangements you have in place?

[Thachat Narendran, executive]

We don't need gas because we are still building -- we're 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, executive]

I think they probably are referring to oxygen.

[Thachat Narendran, executive]

Oxygen. Okay. So oxygen is an important part of a steelmakers cost. I think if I remember right, it's maybe about INR 2,000 per tonne 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 is the supplier for Kalinganagar. I don't know what is the specific question, but those are contracts, so...

[Samita Shah, executive]

Broad arrangements. So I think that answers. And we'll have the last question which we will take, which is -- there are 2 questions, but they're both relating to the same issue. So one is the jump in other income. And the second question is, in the segmental EBIT, other trade-related operations, there's a significant jump. So can you please clarify? So Koushik, maybe you'd like to take that?

[Koushik Chatterjee, executive]

You can explain that.

[Samita Shah, executive]

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 the difference when the currency moves, that is what gets reflected. So 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.

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.

[Thachat Narendran, executive]

Thank you.

[Koushik Chatterjee, executive]

Thank you.