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Rabindra Nath Sinha

KOLKATA, April 17

THE recent in-principle okay by the Tata Steel board for an investment of Rs.1,995 crore in a string of new and balancing facilities lends itself to several interpretations.

The timing of the information given to stock exchanges about the board's in-principle approval for the proposed investment is also significant.

SEs were informed on March 26, just a week after the company held an EGM (March 19) to obtain shareholders' approval for a financial restructuring by utilising the amount standing to the credit of the securities premium account and capital redemption reserve account to adjust the balance in the miscellaneous expenditure attributable to the right sizing exercise. The restructuring, the top brass claimed, would help enhance shareholder value through improved profitability.

What does this point to?

This simply shows the management's determination to see that the hefty investment will not in any way dilute its aim to emerge economic value-added (EVA)-positive, exercise on which is in full swing for over a year now. EVA calls for an improvement in fundamental economic performance and that becomes a reality when return on invested capital is higher than the weighted average cost of capital.

Now, about the investment proposal. An overriding consideration for Tata Steel has been to rectify the imbalance in its flat-long mix, currently 67:33. The long product market usually does not see the kind of fluctuations that characterise the flat product market, given the sizeable investments that flow into construction activity. A downturn in manufacturing activity immediately tells on the flat product market.

The decision to set up a bar mill has to be viewed in this context. While the exact capacity envisaged is not immediately known (600,000 tonnes initially?) indications are that it may be eventually aiming at a flat-long mix of 60 : 40.

But, perhaps, the more important and sequential move is to substantially strengthen the primary zone facilities. This has to be viewed in the context of the scheduled relining of the G blast furnance. The strategy it followed for the F blast furnance will be repeated. The capacity of F was increased by 400,000 tonnes. The capacity of G is proposed to be enhanced to 1.8 million tonnes (mt) from the existing 1.2 mt.

Linked to this scheme will be a new sintering facility (it will be third unit), which will warrant fresh investments in raw material handling & blending. Linked to the additional hot metal capacity will be fresh investments for desulphurisation and calcining, although it will be able to make do with the existing five LD vessels.

It should be needing extra coke too, but it is not known whether it wants to invest in coke oven batteries. One option certainly is to outsource the additional requirement of coke. The position regarding enhancement of slab casting capacity is expected to crystalise in the near future.

There have reports that the company wants to take the value-addition process a stage further by earmarking a part of the cold rolled output (150,000 tonnes?) for colour coated steel, which architectural applications.

What it boils down to is that out of the proposed Rs.1,995 crore investment to become a five mt plant, the primary zone may claim more than 60 per cent share. Going by present day costs, it seems that the G blast furnace upgrading may cost around Rs.500 crore while over Rs.200 crore may be needed for the new sintering unit.

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