Enduring the Turbulence and getting Fit for the Future

A: The three key pillars of the international financial markets are confidence, capital and liquidity and these three are somewhat interrelated. Until September 2008, all these three pillars were on a high and therefore, businesses across the various sectors were performing in a robust manner. However, the confidence in the financial system was shaken with successive crises across various banks in the US and Europe. This then resulted in a significant erosion of capital in the banking industry in the developed world which eventually spiralled into an unprecedented global financial crisis. This phenomenon brought about a sharp decline in consumption of steel as it did in other products, affecting the steel demand across the globe. Consequently, global liquidity was choked and the manufacturing sectors including the consumers of the steel industry were severely affected. It is estimated that during the second half of the year, the steel demand declined by around 20% globally over the same period last year.

A: The Group has responded in time and with great speed executing several initiatives to counter the slowdown. Our actions have been geography specific and well planned.

In India, we have responded by increasing production post commissioning of the 1.8 mtpa programme and focussing on performance improvement to neutralise the effect of reduced realisations, whereas in South East Asia, the focus is on working capital management and cost reduction. In Europe we have cut production by idling blast furnaces at three sites in order to align production with demand as a part of the “Weathering the Storm” initiative which resulted in cash savings of £712 million (US$1.02 billion) in the second half of the financial year 2008-09. Further, these efforts have been supplemented by a strategic restructuring initiative launched as “Fit for Future” programme which when completed, will result in improvement of the operating profit of around £200 million annually. In all our sites across the Group, the journey of ‘Continuous Improvement’ stays on course, covering the entire range of manufacturing and mining processes.

A: The strategic levers of the Group have remained the same over the last few years. The current global economic scenario has only rephased some of these strategies in terms of timing and speed. The four levers are

1. Making our European operations competitive by hastening the speed of the “Weathering the Storm” and “Fit for the Future” programme.
2. Quick completion of our expansion plans in India. The 3 mtpa project will be commissioned by 2011 and will add significant value to the Group. Further expansion in India through the Greenfield project in Orissa and Chhattisgarh are ongoing and their commencing will depend on ground realities and iron ore allocation.
3. Investment in raw material assets to provide better raw material security especially to our European operations.
4. Vigourous pursuit of continuous improvement across all our operations.

A: Our Indian operations are one of the most competitive assets in the global steel industry and therefore, capacity expansion in India is one of the key strategies for Tata Steel. In the financial year 2008-09, we have commissioned the 1.8 million tonnes of crude steel making capacity at Jamshedpur which will be further augmented by 3 million tonnes through ongoing brownfield expansion by 2011. The 3 mtpa expansion at Jamshedpur will enable Tata Steel to strengthen its market share in the Flat Products segment and simultaneously reduce the operating costs over a large volume of production. The above expansion will involve setting up a new ‘I’ Blast furnace, LD Shop, a Thin Slab Caster and Rolling facilities of 2.4 mtpa, New Coke ovens of 1.4 mtpa capacity, Pelletising plant of 6 mtpa and of course the augmentation of the existing mines. Post commissioning of the above facilities, Jamshedpur will be a single site with 10 million tonne capacity.

Our long term strategy is to continue to pursue capacity expansion in India through greenfield projects as well. We have made initial progress in Orissa in the last few years and we will continue to work towards developing the capacity in Orissa.

The other projects in Jharkhand and Chhattisgarh are at a nascent stage and will take time to
develop depending on the resolution of the ground level issues.

Therefore the India growth strategy remains a fundamental part of the long term strategy of the Tata Steel Group.

A: Tata Steel in India is an integrated player, for the majority of its raw material requirements. However, raw material self-sufficiency for the consolidated entity is at 25% post the Corus acquisition. It has been the stated objective of the company to increase self-sufficiency of raw materials to 50% in the medium to long term. We are actively pursuing raw material interests in coking coal and iron ore either in terms of virgin sites with significant resource potential or in terms of smaller existing ventures which can be quickly aligned to the requirements in Europe. Riversdale Energy Mining Limited, where we hold 35% stake, has announced an inferred reserve of around 4 billion tonnes in one tenement, in Mozambique, where its subsidiary has been awarded the Mining Concession. The feasibility study for the same is currently underway. Tata Steel also has a Joint Venture with New Millennium Capital Corp (“NML”) in Canada, with an option to acquire 80% in the Direct Shipping Ore (“DSO”) project. This has estimated reserves of around 100 million tonnes of iron ore. We also have an option in a South African iron ore mine, to enter into a Joint Venture with the promoters. This project is currently under evaluation. It is expected that iron ore from both the DSO project and the South African mines will service part requirement of the European operations starting from mid 2011.

A: The British Steel Pension Scheme (BSPS) had assets at March 31, 2009 of approximately £9 billion. As part of the strategy of de-risking the BSPS, the investment management team has been progressively altering the asset mix, out of equities into fixed income assets (bonds). This was largely carried out at a time when equity markets were at relatively high levels, with a resulting benefit to the scheme. As at March 31, 2009, the asset mix comprised 68% of fixed income assets, with the balance of 32% being principally equities. The comparable figures at December 2006 prior to the acquisition by Tata Steel were 50% and 50% respectively. The BSPS on an IAS19 accounting basis had a surplus of over £600 million as at March 31, 2009. The Company has also completed discussions with the Pension Trustee on the triennial valuation of the scheme as at March 31, 2008 and the Company contributions to meet the cost of future service benefits will continue from April 1, 2009 at the rate of 12% of pensionable earnings subject to review at future actuarial valuations.

A: The gross debt in the Tata Steel Group was US$10.54 billion in March 2008 which increased to US$11.78 billion as at the end of March 2009. The increase was primarily on account of raising of new loans to the tune of US$2.07 billion, during the year in Tata Steel India, to fund growth projects and to ensure an adequate liquidity buffer in the wake of global liquidity crisis. During the year, we repaid debts to the extent of US$1.66 billion including a prepayment of debt in Tata Steel Europe of around £150 m (US$215 million). The entire foreign currency term debt in Tata Steel India is hedged into rupees at acceptable levels. Therefore the company was unaffected by the volatile movement of the rupee on account of the above loans. The only instrument which is unhedged are the Convertible Bonds (CARS) which have a convertible option. The gross debt as on March 2009, showed an increase of US$830 million, which was primarily on account of revaluation, due to currency movements. The corresponding value of the hedges taken to cover foreign currency loans in Tata Steel Limited, amounted to approximately US$611 million, which was reflected on the asset side of the Balance Sheet. Taking into account the liquid cash and cash equivalents on the books as at March 31, 2009 of US$1.9 billion, the net consolidated debt as at March 31, 2009 was US$9.9 billion.

A: The Senior Facility Debt in Europe is a non-recourse debt to Tata Steel Limited. This debt carries certain covenants, which are tested on a quarterly basis. Tata Steel Europe has performed strongly in 2008-09 and has met all its covenant obligations till March 2009 with a strong liquidity position at the year end.

We have informed our lenders that we are taking significant steps to restructure our operations and reduce costs to weather the downturn. This would enable us to emerge stronger with improved profitability in the future. In the near term, however, like most other companies in the industry, there could be an adverse impact on our EBITDA, which could put a stress on the covenant package in the forthcoming quarters.

As part of the pro-active discussions with our lenders on the covenant package, we had not sought any additional funding, as we had sufficient liquidity for our operations and had also not requested any re-scheduling of our debt servicing obligations as there are no material repayment/refinancing requirements in the near future. Furthermore, as part of the covenant reset package being sought, we volunteered to prepay £200 million of the non-recourse debt to continue with our objective to de-leverage our European operations. The Lenders voted unanimously in favour of the resolution, the redeeming feature being, that there will be no increase in the current level of interest costs for the remaining life of the loan.

The covenant reset package, as agreed, requires Tata Steel, the parent company, to inject £425 million into Tata Steel Europe in a phased manner, of which around £200 million will be used to prepay debt and de-leverage the European Balance Sheet.

The covenant resetting agreement demonstrates the strong relationship of the Tata Steel Group with its lenders and underlines the commitment of the parent company to its European operations.

A: Given the unprecedented scale of the global financial crisis, the company responded very quickly on many fronts and financing was certainly one of them. Recognising the uncertain financing environment and the fragile state of the global banking industry, we focussed on both internal and external levers. Internally as an organisation, we placed primary importance on conserving liquidity through reduced spend management and sharp reduction in working capital levels. We also focussed on improvement in the productivity levels and reduction in overheads. On capital expenditure, we have re-prioritised on the most value creating and critical projects and reworked the capital planning strategy.

On the external front, we raised long term capital which acted as a liquidity buffer in the current circumstance and would be deployed in value creating long term assets. The above actions ensured that the Tata Steel Group had adequate liquidity and also financial flexibility for growth and exigencies.
The liquidity position of the Group at the year end was approximately US$1.9 billion of cash and cash equivalents and undrawn lines.

A: Our near term focus is on the implementation of the “Fit for Future” restructuring in Europe, to continue with the 3 mtpa expansion project in Jamshedpur and overseas raw material projects, to increase production volume in India and optimise working capital management across the Group to preserve liquidity.