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Edited Transcript of TATASTEEL.NSE earnings conference call or presentation 7-Nov-19 5:30am GMT

Q2 2020 Tata Steel Ltd Earnings Call

Mumbai Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Tata Steel Ltd earnings conference call or presentation Thursday, November 7, 2019 at 5:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Koushik Chatterjee

Tata Steel Limited - CFO & Executive Director

* Samita Shah

Tata Steel Limited - Group Head of Corporate Finance & Risk Management

* Thachat Viswanath Narendran

Tata Steel Limited - CEO, MD & Director

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Conference Call Participants

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* Amit A. Dixit

Edelweiss Securities Ltd., Research Division - Financial Analyst

* Anuj Singla

BofA Merrill Lynch, Research Division - VP in Equity Research

* Ashish Kejriwal

IDFC Securities Limited, Research Division - Research Analyst

* Ashwani Kumar

* Bhavin Chheda

Enam Holdings Pvt. Ltd - Analyst

* Chintan Shah

* Indrajit Agarwal

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Kamlesh Bagmar

Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst

* Nitij Mangal

CLSA Limited, Research Division - Research Analyst

* Pinakin M. Parekh

JP Morgan Chase & Co, Research Division - Associate

* Ritesh Shah

Investec Bank plc, Research Division - Analyst

* Rohan Jain

* Saumil Mehta

BNPP Asset Management India Private Ltd - Research Analyst of Equities

* Vishal Chandak

Emkay Global Financial Services Ltd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Tata Steel Limited Q2 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Ms. Samita Shah from Tata Steel Limited. Thank you, and over to you, ma'am.

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Samita Shah, Tata Steel Limited - Group Head of Corporate Finance & Risk Management [2]

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Good morning. Welcome to the call to discuss our results for the second quarter FY '20. I have with us our CEO and MD, Mr. T.V. Narendran; and our CFO, Mr. Koushik Chatterjee. We will be discussing the presentation which has been uploaded on our website. I just want to mention that we will take calls, not just on -- questions not just on Tata Steel India, but also on Tata Steel BSL and Tata Steel Products. We also have audio link for our retail shareholders, and we will take any questions which come from them, which we have already not answered.

Before I hand this over, I would like to mention that the entire discussion today will be governed by the safe harbor clause on Page 2 of our presentation. Thank you, and over to you, Naren.

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [3]

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Yes. Thanks, Samita. I'll start with the macroeconomic and industry situation. As you know, amongst all the key geographies -- almost all the key geographies faced a slowdown due to the ongoing trade friction. Amidst a weak environment -- demand environment, steel prices declined by more than $100 per tonne over the last year. While iron ore prices have come off the peaks and coking coal has softened, the meaningful benefit of the same yet to flow through, and this has led to a drop in industry margins.

In India, the steel price was marked by demand weakness on the back of persistent liquidity issue, weak investment sentiments and seasonal impact of heavy and prolonged monsoons. A slew of economic measures announced by the Indian Government and the recent rate cuts by RBI to address liquidity issues should yield benefits over the next few months. Moreover, with the end of the monsoon season and the onset of the festive season, we hope there is a pickup in overall consumption and steel demand.

Moving on to our performance during the quarter. In this weak environment, our India business, which includes Tata Steel Standalone, Tata Steel BSL and Tata Steel Long Products grew by 4% quarter-on-quarter to 4.13 million tonnes. We maintained good steel production at 4.5 million tonnes, and our India volumes now account for more than 60% of our consolidated volumes. We have successfully maintained the sales volume in segments like the Industrial Product & Projects segment and Branded Products and Retail segment. There has been a reduction in our auto segment sales. And as you know, the auto sector has witnessed a significant slowdown, and this has been offset by higher exports.

Tata Steel Europe profitability remained weak, mainly due to the weak market conditions. We have initiated a transformation plan with an aim to make it self-sufficient and cash positive and have started making some progress on the same.

Some comments on our key subsidiaries and large projects. Tata Steel BSL continues to improve utilization rates and operating KPIs. It has developed steel rolled skin panel for India's largest auto manufacturer and has successfully commercialized skin panel steel for commercial vehicle segment as well. It has also received approvals for X70 API grade steel orders from -- for cross country pipelines and city gas distribution projects.

Tata Steel Long Products completed the acquisition -- completed its acquisition of iron ore mines during July 2019, and this will improve its cost structure. The team continues to work on stabilizing the newly acquired facilities and has made good progress in improving various operating parameters. These benefits and the initiatives we are undertaking in the marketplace will help them counter the downturn in auto, the key customer segment.

Moving on to Kalinganagar Phase II expansion, we are prioritizing on the pellet plant for cost reduction and the cold rolling mill for the value addition. Both these facilities will be commissioned in the next financial year. We are reorganizing our footprint in India, and the merger with Tata Steel BSL is already announced, and we are consolidating our wire business into Tata Steel Long Products, which will be a vehicle for long products. We are also holding our multiple subsidiaries into verticals; Long Products, Downstream, Mining and Infrastructure to scale -- to drive scale, synergy -- scale, synergies and simplification.

I will now hand over to Koushik to comment on our financial performance. Thank you.

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [4]

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Thank you, Naren, and good morning to all of you. I would like to share some highlights of our financial performance.

Our consolidated revenue were about INR 34,579 crores for the quarter, and our consolidated adjusted EBITDA was INR 4,018 crores. These numbers do not include our Southeast Asian operations as they continue to be classified as held for sale.

Tata Steel India, which includes Tata Steel BSL and Tata Steel Long Products, along with Tata Steel Standalone recorded revenues of INR 20,204 crores with an adjusted EBITDA for the quarter at about INR 3,817 crores. The EBITDA margin of the Tata Steel India Group stood at about 18.9%, and the average adjusted EBITDA per tonne was INR 9,238. The Tata Steel Standalone adjusted EBITDA margin was about 22.4% and the EBITDA per tonne on an adjusted basis was about INR 11,200.

Moving on to Tata Steel Europe. The revenues were flattish on a quarter-to-quarter basis at about GBP 1.62 billion in the second quarter of the financial year as compared to GBP 1.63 billion in the first quarter as marginally higher deliveries were more than offset by the sharp reduction in the average selling prices in Europe.

The EBITDA for the quarter was about $19 million. And as mentioned earlier, we are working to make it more cash self-sufficient and cash neutral by the end of the financial year amidst the very challenging market conditions.

The consolidated reported profit after tax for the quarter stood at INR 3,302 crores, which works out to a nonannualized diluted EPS of about INR 29 per share. For the quarter, the reported PAT includes significant tax-related impact of about INR 4,233 crores and that has got 3 parts, includes about INR 2,425 crores on the adoption of the new corporate tax rate by Tata Steel Standalone and some of its subsidiaries. This has been done based on the recent announcement by the Government of India, and we have evaluated our position vis-à-vis the conditions applied therein; about INR 661 crores arising on recognition of deferred tax assets at Tata Steel Europe on the waiver of the intercompany loans and the interest and conversion of such loans into equity and about INR 1,147 crores on consequent reversal of deferred tax liability by Tata Steel Global Holdings as it will no longer receive certain payouts post the conversion of debt to equity.

As you remember, during the last quarter, we had reduced our CapEx guidance from about INR 11,000 crores to INR 8,300 crores, while the capital expenditure for the quarter was about INR 2,535 crores. It takes the half year numbers to about INR 4,900 crores. We expect there will be sharp reduction in the CapEx spend in the next couple of quarters with a focus on recalibration and prioritization of CapEx in the immediate and short term. And as you heard from Naren on the focus in Kalinganagar is on the coal rolling mill complex and on the pellet plant.

I will just spend some time working through our cash flows. We generated about INR 2,457 crores from operations, which is EBITDA minus interest and tax. Out of which about INR 2,535 crores was spent on CapEx, about INR 1,028 crores was spent in India and INR 1,300 crores in Europe. And much of the European CapEx was actually committed earlier than the previous year, so we had to complete them. The working capital increased by about INR 502 crores, largely on the back of increase in the finished goods inventory. We were able to minimize the impact of finished goods increase by focusing on tightening the raw material inventory, raw material procurement, shipping logistics and in the whole, supply chain. We have consciously chosen to build the inventory rather than production or increase receivables. As a result, the total cash outflow during the quarter was about INR 2,394 crores.

This, coupled with the increase in the leases, which is about INR 643 crores, an FX impact of similar number, the increase -- and increase in our cash balance by about INR 1,039 crores, led to our consolidated gross debt during the quarter increase by about INR 4,900 crores. The net debt increased by about INR 3,860 crores to about INR 1,06,952 crores of the total net debt.

I would like to mention that post September, we have repaid about EUR 370 million of scheduled repayment of debt, reducing our gross debt by about INR 2,900 crores.

During the quarter, we tied up with about USD 525 million of foreign currency loan, which will help us in lengthening our debt maturity schedule. But as of September, we had drawn down a very small amount, about $40 million. But given the conditions in the financial markets, our strategy has been to make sure that the financings are tighter. Our liquidity remains robust at about INR 11,858 crores, comprising of cash and cash equivalents of about INR 4,596 crores and a significantly higher undrawn bank lines.

In terms of portfolio development during the quarter, we completed the sale of the First Steel business in the U.K. and Cogent Power Inc, Canada. Earlier this week, we had also signed a definitive agreement to divest our equity in Natsteel Vina in Vietnam. We remain committed to divest our holding in Tata Steel Thailand and look forward to finalize the definitive agreement and close the deal in the next coming months.

With this, I'll end my commentary, and I open the floor for questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Amit Dixit from Edelweiss.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [2]

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I have a couple of questions. The first one is on borrowings. So this gross debt level that we are seeing, is it the peak level or we might see further increase in debt? And are you also considering cutting CapEx in FY '21 as well? If so, what is the guidance on that?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [3]

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So, Amit, first of all, on the borrowing levels and the gross debt numbers, I think it's very clear that our directional journey is to reduce the debt numbers, not only for this year, but also for the coming years. And last year, if you recall, given the market conditions, we had said that we would take the target of reducing about $1 billion every year. Last year, the market allowed us to reduce it by almost INR 18,000 crores compared to the peak debt that we had reached after the Bhushan acquisition. This year, we continued the same target to say that we will focus on the same. I can clearly see that the -- we have about INR 370 million that we paid and another about INR 300 million to be paid down. However, if you look at the overall market conditions, the gross debt comes down only when you have internal generations which commensurate and facilitates the reduction of the borrowing numbers. So clearly, we would like to keep the gross debt numbers at or around this level, and in fact, work towards reduction of the same. Just how the market uncertainty is not helping in giving a very clear path or a commitment on the number, but I can say that this is irreversible process as far as the strategy to reduce debt and calibrate it down and make it kind of the first priority amongst all others.

So I think if you look at the operational focus of the business, releasing working capital, reduction and calibration of CapEx, reduction and takeouts of costs are all part of the same menu to ensure that we have the free cash flows to reduce debt.

So I think that path is very clearly and that path will not end by this fiscal end, it will continue for some years. And as far as your second question is concerned, I think the guidance for 2021 will be more appropriate in the third quarter results outcome because that's when we have a better line of sight on how the market is looking like. And secondly, it would also give us a sense as to what our future cash flow is going to be. At this point of time, I think all bets are open, but I wouldn't kind of commit a number at this point.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [4]

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Great, sir. The second question is on other subsidiary -- other trade-related subsidiary performance. There was a sharp swing we saw. So just wanted to understand the drivers for the same? And what can we expect going forward?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [5]

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Those were largely the FX translation issues that have floated and it's -- so some of our subsidiaries have also -- why should I say some of the subsidiaries? Most of our subsidiaries have also been impacted by the current market conditions being in the same or adjacent businesses. So I think it will -- there's one performance element also there, but also there is FX translation issues.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division - Financial Analyst [6]

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Okay. And the outlook going forward for these? I mean FX, of course, you can't, I mean, say. But as far as the performance is concerned, do you expect some improvement in performance on that front?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [7]

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So as Naren just highlighted, we are also in the process of undertaking a cluster consolidation process. I must also say that we are in the process of, as part of the simplification, targeting close to about 100 companies across the Tata Steel Group to get eliminated and that will -- that process already started. We have started filing for it all across the world wherever we have. So some of these things will also get addressed out of it. There are some smaller businesses, which are part of our divestment list, which is also being pursued. And finally, when we actually get the cluster consolidation in place, we will have one single management focus, including synergies to undertake cost takeouts and drive better market performance. So I think that journey has also been rolled out. It doesn't happen in a quarter or 2. But I think operationally, some of the businesses are doing better and some of the businesses have been impacted by the market conditions. Hopefully, we should see -- and most of the businesses are in the midst of taking out cost also to remain competitive. So therefore, we expect a more stable performance on the underlying basis. FX part, which is a significant part of this variation that you are asking for, obviously, is an extraneous factor.

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Operator [8]

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(Operator Instructions) The next question is from the line of Anuj Singla from Bank of America.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [9]

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So first question is on Sukinda mine. So there was some news flow earlier that it has been -- maybe it has been reserved for IDCOL and it will not be auctioned. So any updates you can share on that?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [10]

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Well, we have not been formally intimated yet, neither has there been a notification of the auction, not a formal intimation that it's been reserved. But as you may be aware, we are participating in other couple more auctions, one of which we've been formally informed that we bought it. The other one, we are waiting for a formal intimation. So we will, obviously, continue to be in the ferro alloy business. And if Sukinda mine is available, we will look at it, but we have other options as well, which is -- which are with us now.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [11]

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And would it be possible to quantify maybe the EBIT contribution from the Ferro Chrome operations in the first half? We used to have that in the earlier disclosure format, but in the new disclosure, it's not there, so any pointers you can give on that?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [12]

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About INR 300 crores to INR 350 crores.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [13]

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So this is for the first half?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [14]

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Yes.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [15]

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Okay. Okay. Great. And secondly, I wanted to understand on the steel pricing environment. I think a significant portion of the price decline would have already come in this quarter. But look -- the benefit of coking coal will obviously come in the next quarter. So when we look at the spread for the EBITDA per tonne trajectory over the next couple of quarters, any color you could give on what kind of price decline we can see? And on the cost savings, what kind of levers we have in order to offset that price decline?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [16]

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Yes. So I think from a pricing point of view, we feel it has bottomed out. And as you said, all the impacts are being kind of seen not only in the last quarter, a bit of it will be seen in this quarter also because we already have gone through October. But I think we are pretty much at the bottom, the way we look at it. Internationally, also, if you look at Southeast Asian prices, it has gone up by about $10 in the last few days. And in India also, as you must be aware, we announced a price increase. So let's see how that sticks. It's not as if the demand is taken off, but at least we see that the destocking process seems to have ended. And people are buying what they need, and there is a feeling that we have bottomed out. That is as far as the prices are concerned. As far as costs are concerned, yes, there are internal actions which continue across all our units, whether it's in Europe, whether it's in India. Even in India, whether it's Tata Steel BSL or Tata Steel Long Products. So those internal actions are focused on improving KPIs, synergy benefits, so on and so forth. They are playing out both in Tata Steel BSL and in Tata Steel Long Products. Long Products is still early days, we're just 1 quarter into it. But we see a good impact in the future. The second part is of the input costs. Input cost of coking coal prices, we expect it to be about $15 per tonne lower this quarter as compared to the previous quarter. And of late, we also got some better deals on coking coal, which will benefit us in the next quarter. So I think input costs should be drifting downwards. Steel prices should be stable, hopefully moving upwards. So to that extent, yes, the spread should slowly start improving, but we are looking forward to some more pickup in demand and that should set us up for the Jan-June period, which is when we normally have a good season.

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Anuj Singla, BofA Merrill Lynch, Research Division - VP in Equity Research [17]

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And sir, what kind of lag impact we can see from the steel price weakness in October to December quarter from the weakness which has already happened in the last quarter?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [18]

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A bit early to say now because our views are being recalibrated based on what's been happening over the last week or 10 days. So I think just now a bit premature to give you a specific guidance. I think as we go along later in the quarter, we'll have a better sense. Maybe by the first week of December, we'll have a better sense of what it should look like.

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Operator [19]

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We'll move on to the next question. That is from the line of Pinakin Parekh from JPMorgan.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division - Associate [20]

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Sir, my first question is on Tata Europe. The first half EBITDA was INR 220 crores. The CapEx was INR 1,300 crores. So broadly, what would have been the cash burn at Europe because there would have been interest payments, tax, working capital requirement as well.

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [21]

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So Pinakin, if I look at the overall cash burn in -- as far as Europe is concerned, the -- as you mentioned, the cash EBITDA was about INR 220-odd crores. The way you should look at it is they have about INR 200 crores of -- $200 million of cash -- operating cash level, they had a deficit after everything else, which is after CapEx, after interest, loose tools and foreign exchange and so on. So broadly, that was met by the working capital lines that they do as far as Europe is concerned.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division - Associate [22]

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Sir, my second question is on -- again, going back to the balance sheet. So fourth quarter, we had a gross debt of INR 1 lakh crores and the guidance was to reduce it by $1 billion. And in the first half, that INR 1 lakh crores has gone to INR 1,11,000 crores. So obviously, it has been a big swing. Now, sir, going forward, if the industry profitability were not to materially improve from here, I mean, it bounces, slightly higher, but we don't go back to, for example, last levels -- last year's profitability, would the company look to raise equity to reduce debt because net debt-to-EBITDA is near 5x at this point of time?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [23]

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So I think before we look at equity, we also have to look at what other stuff which we are currently planning to do internally. And so there are some things that we have done. For example, there is a very significant CapEx recalibration. All of it has not yet hit in the second quarter because we actually looked -- started looking at it towards the mid of the first quarter, but by the time we started actioning it was the second quarter. And there will be a ramp down on the CapEx numbers to focus on priorities and recalibration and what is critical versus what is discretionary. So that whole framework is what we are certainly working on. So the -- there is a ramp down time also, which will happen.

As you know, we have already announced the reduction when we did so in the first quarter that from about INR 11,000 we are coming down to about INR 8,000 crores. So we are seeing what else we can do. However, you have to also recognize that there are certain CapEx, which is related to sustainability of the business, the criticality of the business, the safety of the business. So those are not something that we can compromise on. Then there are working capital initiatives. And frankly, as far as India is concerned, we've taken very significant steps, especially on the raw material side, stores and spare side, there are new models and new structural changes that we are looking at. In Europe, that activity has started. And I'm very hopeful that by the end of this year, we will certainly have more outcomes because it is critical to do that. The increase that you see in the INR 1 lakh crores to INR 1,11,000 crores has 2, 3 things. One is the increase of about INR 4,000 crores on account of the acquisition of Usha Martin. The second is, there has been a lease impact, which is about, I think, INR 2,500 crores to INR 3,000 crores. So if you do that, it's almost about INR 7,000 crores. Then there are FX issues, which is roughly about INR 650 crores to -- towards that kind of a number. And if you take the first quarter also, I think the total will be close to over INR 1,000 crores. So INR 8,000 crores of that INR 11,000 crores is on account of this. Of the balance, there is about INR 1,000 crores, which we have raised and it is sitting in the cash. So the net impact of the increase is roughly about INR 2,000 crores to INR 2,500 crores, which is on account of the working capital issues, the lesser internal generations to look at, which we -- so the first priority is to reduce that. So whatever has picked up on the working capital should come down based on our plan to reduce the working capital, liquidate the working capital, in which some part of it was conscious, like the finished goods inventory was conscious because holding the inventory, especially at service level gives us much more optionality than to hold it in debt or reduce the production numbers, which has a very significant impact on the cost. So those 2 -- these calibrations are actually done on a monthly basis and we take these calls. So first priority is to liquidate the peak level, which has happened due to the short-term nature of the business. Then the next priority is to pay off the schedule debts, which I said is about INR 600 million this year. In the second half, we have already done INR 370 million and there is a similar number. And we have opportunities to do more if we have the liquidity. The third thing is to then look at what other stuff we can do from an internal generation point of view to reduce it. So $1 billion, obviously, is kind of an all-weather period, not in the time we are just now. But we should certainly -- this is an irreversible process as far as Tata Steel is concerned. And we will certainly look at targeting debt. Even if we are less than that, doesn't matter because we need to keep reducing our debt numbers. And last year, we closed at about debt-to-EBITDA, I think, 3.3 or 3.4 and we will -- our first target is to be at that level. So everything is subservient to those levels of debt and the ratios that we talked about.

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Operator [24]

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The next question is from the line of Indrajit Agarwal from Goldman Sachs.

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Indrajit Agarwal, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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2 questions from my side. First, you talked about some of the cost-saving initiatives in Europe. Can you quantify what kind of benefits on an annual level we can have from these initiatives?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [26]

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So I think the initiatives cover a significant range of activities. I think when we -- at end state level, I would say, around -- it should certainly be about GBP 150 million, but that's at the end state level. There is a path to go towards that. So there is a breakout -- is a breakup of initiatives, which are focused on fixed cost reduction. And there are initiatives which are focused on operating KPI improvement.

If you look at last year and some part of this year, we've also had some operational setbacks, which has increased the cost. And that is the first priority in our colleagues in Europe that they are doing. Similarly, there is a smarter CapEx implementation possibilities that we are working between the European team and the Indian team. As you know, in India, we have significant capabilities now having done not only a 3 million tonne greenfield, but the kind of CapEx that we spend. So we have significant commercial leverage and technical leverage, which we are now combining to do the same stuff with less capital and resources in Europe. And then there are a slew of other activities, which includes taking out -- Europe has multiple sites and how do we actually manage those sites more effectively. And so that we can get more synergies and technical help and there is a lot more work happening between India and Europe at this point of time. So I would certainly say that at the steady state, when we reflect back, we'll certainly have an annual impact of about GBP 150 million, at least, if -- and the opportunities also keep coming up as we dig deeper and we have -- the whole team is working very -- in a focused manner to do that. It doesn't come in a quarter, it doesn't come in even 2 quarters, but you see the trajectory coming in. So 2021 will be a very good inflection point somewhere in the H2 of 2021, where we can define that these are the things that we have done and it's crystallized in a more significant manner.

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [27]

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I think the focus in Europe, as we said before, is to be cash positive. So all their initiatives are focused on unlocking value there as well as managing the cash spend accordingly.

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Indrajit Agarwal, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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But GBP 220 million of cash burn number that you mentioned in first half, that is GBP, right?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [29]

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Yes. Yes.

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Indrajit Agarwal, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Okay. And second question is on working capital, again. So from here on, in the second half, can we assume that there will be a release of working capital instead of buildup of working capital?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [31]

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Yes.

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Indrajit Agarwal, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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All right. And one more question, if I can push through, in the balance sheet of consol, there is a line item in the asset side called right-of-use assets. Can you explain what is this regarding?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [33]

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These are the leased assets under IAS 15.

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Operator [34]

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The next question is from the line of Chintan Shah from Investec Capital.

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Chintan Shah, [35]

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Sir, just continuing with one of the prior questions. Sir, in the last quarter, you had given a beautiful explanation about our debt reduction plan, which included Southeast Asia sale, working capital release and lower CapEx. Sir, can you give something similar, basically, how do we look at the debt levels from now till the year-end given all the 3 variables are something which are broadly in our control?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [36]

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Yes. So -- Chintan, so we have a scheduled repayment of about $500 million in the early part of Q4 in this fiscal. I think there are some of the divestments, which are ongoing. For example, the one in Thailand, we are progressing fairly well. So I'm also hoping that we should be very close to a closure by end of this quarter or early next quarter.

And then we have sold the Canadian assets in the electrical steel. We realized about GBP 25 million, GBP 30 million on that. And there are some of the smaller assets, which is also being looked at. And I think I can safely say that we are looking at all corners of the company across all geographies. We've just closed the Vietnam transaction in Natsteel, Vietnam, for about $5 million and everything comes. So I think we're looking at all areas to see as to how do we monetize assets, investments and ensure that we get to that number. As I said that the debt reduction is an irreversible process and both from our leadership team perspective, Board perspective, this is something that is the primary focus. So we are kind of looking at keep reducing these numbers even if we, as I said, don't get $1 billion, we should be happy to kind of focus on that. Naren?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [37]

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I think, yes, I'll just supplement and link it to what we've said last time. I think there are a few levers. One lever is obviously cost takeouts, so that continues, and maybe getting accelerated because of the pressures from the marketplace.

The second lever is on CapEx. As we've already announced, we have cut the CapEx guidance from what we started off in the beginning of the year, and we keep relooking and recalibrating that. That's the second part.

The third part is obviously EBITDA where we are dependent more on market. Prices have been dropping faster than the cost that we've been able to take out, and hence, the margins squeeze. But as we described some time back, I think the rate of price drop has dropped whereas we expect that the cost takeouts will continue. So while we do expect Q3 prices to be lower than Q2, but we are not giving any specific guidance now simply because of the fact that the market seems to be at a little bit of an inflection point.

The fourth area, which we said is working capital where, again, in the last few months, we have added to inventory, particularly in India, we have not cut production. So as a consequence, there is a bit of an inventory buildup. But we see that getting reversed during Q3 and Q4, and we will release cash from that as well.

So I think the levers, which are in our control, they were continuous, whether it's CapEx optimization, whether it is working capital, yes, it was more adverse for the last 3, 4 months, but we will release working cash from working capital over the next few months. And so what the levers in our hand, we are, I think, doing whatever needs to be done.

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Chintan Shah, [38]

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Sir, what is the number that one should pencil in for CapEx for the second half and the working capital release?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [39]

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So in terms of CapEx, we have given a guidance of around INR 8,000 crores for the full year. For the first half, we have spent about INR 4,500 crores. So second half will be less than what we've spent in the first half. And as Koushik explained, some of our cost spend was already what was pre-committed in Europe before we kind of optimized on the CapEx. In terms of working capital release, at least in the next few months, we expect INR 1,000 crores to be released. And then depending on the markets, we'll look for Q4 to see if something more can happen.

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Chintan Shah, [40]

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Right. Sir, do we have any covenants either for India or Europe, specifically, given the leverage has moved up pretty sharply?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [41]

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So Europe, no, I think we are almost covenant-free from that perspective. India, we do have, but those -- they have significant headrooms at this point of time.

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Chintan Shah, [42]

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That helps. Sir, you have moved to a lower tax rate regime...

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Operator [43]

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Excuse me, Mr. Shah. Sir, may we request that you return to the question queue for your follow-up questions. There are participants waiting for their turn. Mr. Shah?

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Chintan Shah, [44]

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Yes. Yes. I don't know much option. I will get back.

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Operator [45]

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The next question is from the line of Bhavin Chheda from Enam Holdings.

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Bhavin Chheda, Enam Holdings Pvt. Ltd - Analyst [46]

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Sir, your March '19 and even September CWIP is close to INR 17,000 crores. Can we know how much of that would be related to the Kalinga Phase II project? And what is the total projected CapEx now at Kalinga over next 3, 4 years, whatever, what is the total project cost now at Kalinga?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [47]

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CWP -- CWIP is -- has a combination of assets all across the group, which includes, say, India. So Kalinganagar has roughly spent about INR 2,000 crores. And the total project size is about INR 22,000 crores. And as I said...

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Bhavin Chheda, Enam Holdings Pvt. Ltd - Analyst [48]

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Total, sir, you are on INR 24,000 crores?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [49]

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INR 23,500 crores, including the mining investment and so on. So I think we just need to focus -- on your question about the CWIP, I think, it is a mix between Kalinganagar. In Jamshedpur, we have other projects. It is -- there are mining projects like in Khondbond. We have projects in the Canadian number is also pretty significant in Canada, where we are completing the concentrator just now. So it's a mix of -- across the board. Then there is project in Europe, in Netherlands, which is the STAR project, which is also a significant project, which is not fully capitalized. So that's the CWIP of -- across all of the areas.

As far as the spend on Kalinganagar is concerned, I think we will be, as I said, in better shape in the third quarter results if we talk about the next year and the year after, the focus just now is to get the commissioning of the cold rolling mill complex, which helps in the value-added product mix and the pellet plant, which has significantly on the cost side by somewhere in the end of next year.

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Bhavin Chheda, Enam Holdings Pvt. Ltd - Analyst [50]

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Sir, my second question is on, if I see your Slide 11, which gives details of volume and breakup there. So our quarter 2 exports from India were roughly [0.64], which is almost double the quarter 1 number. And I assume the profitability in export was much lower than the domestic profitability. And obviously, this has been due to the demand -- significant demand slowdown. So what should be a model for second half or quarter 3, is this run rate of exports going to continue? Has it come down? Any thought process you can throw on this?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [51]

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Yes. I think for the years, our guidance is around 2.4 million tonnes between Tata Steel BSL and Tata Steel India. So between the Jamshedpur, Kalinganagar and Khondbond plants. The original guidance was around 1.6% when we started the year. So we've increased by 1 million tonnes. We are pretty much doing about 300,000 tonnes a month, which may come down to about 250,000 tonnes a month in Q4 unless the domestic market picks up very sharply. So yes, the export realizations are lower than the domestic realizations, but it contributes positively. And hence, it's better for us to export them to short production.

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Operator [52]

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The next question is from the line of Saumil Mehta from BNP Paribas.

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [53]

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First is on, now we have accumulated losses at Bhushan Steel, and in the new tax regime, how should we look at tax rate over the next 3, 4 years? Will we be under MAT? Any guidance on that?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [54]

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Are you talking about Bhushan itself? Or you're talking about Tata Steel?

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [55]

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Once we are planning to have consol Bhushan Steel in the stand-alone, what can be the tax advantage over there over the next 4, 5 years?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [56]

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So I think we -- from an effective tax rate perspective from -- excluding Bhushan, we would be at about 25% level, which is the option that we have selected. Yes, Bhushan does have accumulated tax losses, which based on Bhushan's tax losses as well as our CapEx spend in ODC, in KPO, in particular, we will have -- we have -- we keep doing this calculation, but I think it will be better to look at it post the merger happens because that is the time when we will get the definitiveness both on the timing perspective.

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [57]

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Okay. Sir, in terms of our auto contracts, have they been renewed? And what is the approximate change we have seen for the 6-month contract what we have?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [58]

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Yes. So some of them have been finalized, not all of them have been finalized. So -- but yes, it is certainly -- I would put it this way, when we contracted the auto prices in April -- March-April, it was reflective of the prices then when we contract. Now it is more reflective of the prices now, though, obviously, auto is always at a higher level than the commercial grades. So it will certainly be lower than what it was in the last -- first 6 months contract, but it would be unfair for me to give a specific number because some of the negotiations are still going on.

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [59]

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Okay. Okay. And just my last question is on, when you say the other trade-related operation, I assume there is a large FX component. Now assuming FX stays stable over the next 6 months or a year, what is the pure ex of FSB EBITDA, the other trade-related which can be done. FY '19, if I look at the number of INR 490 crores, I don't know what was the FX component over there. Going forward, what can be that component?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [60]

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So there are -- I think if I were to articulate the composition of that change, it's been the FX, which has been the maximum part of it. Other than FX, the number is not so significant. It is less than INR 100 crores.

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Saumil Mehta, BNPP Asset Management India Private Ltd - Research Analyst of Equities [61]

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So the last year number of INR 489 crores of that INR 100 crores would be the pure operational, is that a fair assumption?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [62]

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Yes. Yes.

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Operator [63]

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The next question is from the line of Vishal Chandak from Emkay Global.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [64]

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Sir, my first question was with respect to where are we in terms of...

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Operator [65]

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Sorry to interrupt, Vishal. Sir, your voice is breaking up.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [66]

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Okay. Sir, my first question was with respect to the steel prices in the domestic market. With respect to the average of the second quarter, what has been the change so far in industry prices, sir?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [67]

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So let me put it this way. Like I said, so in October, the prices dropped to about INR 1,000 or INR 1,500 compared to September, okay? And currently, we have asked for a price increase of about INR 750. So that's the status as of now. Market seems to have taken the INR 500 to INR 750 price increase, but let's wait till the end of the month. That's when a lot more action happens.

And because the market seems to be at a bit of an inflection point, we don't want to just now give a guidance, which is difficult to give. But like I said, this quarter will be lower than last quarter. How much lower will depend on how much we can pick up in November and December. So that's why we are not giving any specific guidance.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [68]

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And the benefit of coal pricing would be just about $15 for the quarter?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [69]

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Yes. $15 -- let me put it this way, $15 in India, EUR 15 in Europe.

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Vishal Chandak, Emkay Global Financial Services Ltd., Research Division - Research Analyst [70]

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So net-net, with the steel prices also declining and the coal benefit not really adding much, then these spreads should remain more or less at the current levels?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [71]

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So 2 things are happening. Yes, spreads will stop shrinking, may start improving a bit. Secondly, more -- the way I look at it, what is significant for this quarter is the market sentiment changes a bit, you will get a lot more inventory out of the system, and you will release cash because you'll do more sales. That will be the bigger impact. And the spread improvement impacts will come more in Q4.

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Operator [72]

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The next question is from the line of Ashish Kejriwal from IDFC Securities.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [73]

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In stand-alone, if we are looking at the other expenses, that have reduced sharply in the second quarter as compared to the first quarter. So first of all, is there any one-off impact? And if not, how do we see it going forward?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [74]

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So in the stand-alone, the conversion charges and other cost takeouts have happened. So for example, we have got -- because of the lower production in terms of some of these downstream entities, the conversion rates have been lower. There have -- there has been also decrease in rates. There has been busy season in surcharges has been reduced in India on the railway side. Then the purchase of power has been lowered. And the royalties have been lower because the rate of iron ore has come down, and the coal has also come down. And therefore, these are the factors which have actually got in the lower expenses levels.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [75]

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Okay. And sir, secondly, though you have answered in one of the questions of other trade-related operations. But this was primarily only in Tata Steel Global operations with steel where the working capital was affected by Forex fluctuations?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [76]

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Yes, absolutely.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [77]

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Yes. But at the same time, when we are seeing our consol adjusted EBITDA, I think we tried to address that Forex fluctuations in that. Even after that, the number seems to be on the lower side of around INR 4,000 crores. So is there any else which we are missing here?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [78]

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No, I think there is a compensatory impact between Tata Steel Global Holdings and Tata Steel India, that's what you see in the consol because this is post elimination.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [79]

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I mean to say, when we are deriving EBITDA from the P&L, which we report to BSE and the adjusted EBITDA, which we give, there is a difference of this INR 200 crores. And if I'm looking at the segmental, where we are seeing other trade-related operations, there was a delta of around INR 600 crores in this quarter versus last quarter?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [80]

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Yes. Let me -- can we take that and explain to you off-line, is that (inaudible). There is a bridge that we need to explain to you, which we can do that essentially in relation to the INR 500 crores of FX swing on external company debts and receivables at our receivable earnings. And the second quarter was INR 341 crores or plus.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [81]

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So where do we report, sir, that in P&L?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [82]

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In the other expenses on the consol side.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [83]

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Okay. So you're saying INR 341 crores loss was there in first quarter, and this quarter, it increased to INR 500 crores?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [84]

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No, first quarter was INR 164 crores gain and the second quarter was INR 344 crores loss. So that's where you see that swing.

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Ashish Kejriwal, IDFC Securities Limited, Research Division - Research Analyst [85]

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Okay. Okay. Fair enough. And anything on iron ore mining auctions, which are going to happen? Are we going to participate in that?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [86]

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Yes. So we will be -- as the Orissa Government has notified about 18 blocks, I think, we are participating in about 10 of them, I think, some of them for capital and some of them for commercial mining.

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Operator [87]

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The next question is from the line of Ashwani Kumar from Nippon India.

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Ashwani Kumar, [88]

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This is Ashwani from Nippon India Mutual Funds. My question to Mr. Narendran is, are you looking to alternatives when this Thyssen thing failed. Are you looking to selling that part of the business? What has happened there? And second is, did monsoon impact any of the sales situation in the last 2 or 3 months because the monsoon was extended this time. And when the recovery begins to happen, what part of the business basically, because of the demand recovery, you have the scope to increase prices?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [89]

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Yes. Thanks, Ashwani. On the first one, what we had said earlier was the European team should focus on becoming cash positive and drive a transformation program simply because we've also felt that over the last 2, 3 years everyone had been quite distracted by the Thyssen transaction. And we need to get our eye back on to making sure that the operation performs at the levels at which we expected to perform. So that was basically the focus, but we are constantly reviewing the situation, and we are -- we will take a call as we go along. Obviously, nothing is cast in stone. And my first preference is for the business to be able to stand on its own, but we are constantly reviewing if the business is able to do that. So that is as far as the first part of the question is concerned.

The second question, yes, the monsoon did have -- normally has an impact. Every year, the July-September period is the weakest from a demand point of view. So construction activity typically slows down in monsoon, and the consequence of that is felt in steel demand, which was felt this year also. But you're right, the intensity of the monsoon and the prolonged monsoon makes it worse. It also makes it worse that some markets are flooded, some parts of Maharashtra, if you look at Kerala. So there are specific sales in some of those states, which get impacted more because of access issues and business activity slows down because of the floods. So that impact was also there. And we felt that.

Your third question on the recovery and the impact it will have on prices. I think -- for auto, I don't think we will see a price impact. We want to see a demand impact simply because auto contracts of 6 months or whatever we finalize now is only till March, but what helps is if auto demand picks up, then our product mix gets richer because what has effectively happened is while our sales to other segments like distribution and branded business and the industrial products and projects has been consistent and constant or stayed where it should be, but auto shrunk by over 700,000, 800,000 tonnes and a lot of that has found its way in the export market, whereas one of the previous analysts asked, the realizations are low. So the impact on the mix is higher. So if auto picks up, even if the price doesn't increase, overall the consolidated prices improve because of the mix impact. So there even if the price doesn't improve, we see an improvement in the realizations on a consolidated basis.

The other segments are pretty much very fickle. Once restocking starts and prices can move up just like it fell INR 10,000 in the last 1 year, it can also move up quite fast if the demand picks up because we also believe that a lot of people in the system have destocked over the last few months thinking that every month the prices will be lower than the previous months. So the demand shrinkage was a bit exaggerated because of destocking. Similarly, the demand pickup may also get exaggerated when people start restocking. And the last comment I want to make on prices is, all of us from India -- I mean, all the steel companies in India have been exporting into Southeast Asia of our toll price have basically been setting the prices in Southeast Asia. So if the Indian market picks up a bit, we see it having a fallout on Southeast Asian markets, and which is already being felt because since nobody from India is aggressively chasing customers in Southeast Asia, the steel prices in Southeast Asia have also gone up by $10 because Chinese exporters are not very active in Southeast Asia over the last few months. The Russians are quite active, but normally, they slow down during the winter months because of fewer ports being available, et cetera. So I think some of these signals are positive. If there is a demand pickup, then we will hopefully see a much better situation.

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Ashwani Kumar, [90]

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So sir, can one assume that for 60%, 70% of the total volume of Tata Steel India, basically, you -- as the demand picks up, and let's say, even if the prices -- global prices were to remain constant year-on-year, $10, $15, $20 range. Do we have the flexibility to increase prices? Can one basically -- is this hypothesis right?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [91]

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That's correct. That's correct. Also because the imports into India has also been slowing down over the last few months. So there is that situation. I think 60% to 70%, what you assessed is right. Certainly, that level of volume can see a price pickup if the demand picks up.

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Operator [92]

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The next question is from the line of Kamlesh Jain from Prabhudas Lilladher Pvt Ltd.

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Kamlesh Bagmar, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [93]

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Yes. Sir, one question on this Ferro Chrome or the chrome ore business. Sir, the mines which we have got in the auctions, like, say, 97 or 200-odd percent premium, so this profitability, which is around INR 650 crores in the first half, and I believe, yes, annually to be INR 700 crores to INR 800 crores. So what impact would we see once these mines come in operations and Sukinda goes into the fold of the state government?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [94]

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Firstly, I don't want to comment specifically, because we've not been formally intimated on both the mines. We've got some intimation on one mine. But yes, I just want to give you a little bit on the -- yes, the cost of chrome ore will certainly be higher than before because earlier you were getting it at cost, and now we are paying a premium for it. But the value for us is more in the beneficiation that we do, the value addition that we do. We are a very big player in the Ferro Chrome market in India and globally. So it comes from the value addition, it comes from the cost takeouts that we can do run-of-mine efficiently. The other aspect, which I also wanted to mention is Sukinda, even if goes with us, so we had got it would have required significant capital expenditure because we had to do underground mining. We have exhausted most of the resources, which could be accessed through open-cast mining whereas the new mines that we bid for, we don't need to incur significant CapEx because we can do open-cast mining there. So these are -- we've been in this business for almost 100 years. So we look at these very deeply before we quote. And obviously, the business has to make sense. And when we get these mines, we have it for the next 50 years. So we can plan our growth in this business without having the concern about the mines not being available with us. So I think that's the comfort we get. And that's why we have bid what we bid. But I think we're waiting for the formal intimation from the government. I just want to clarify, the premium will no way be 100%. Yes, it's high, but it's less than 100%, okay.

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Kamlesh Bagmar, Prabhudas Lilladher Pvt Ltd., Research Division - Research Analyst [95]

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And sir, lastly, I know you have answered that question many times. I might need to see the October realizations as compared to the July to September average of the realizations, which we have reported in the quarter. So how the gap would be there or how much lower the realizations current would be as compared to the average of the previous quarters?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [96]

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So as I said, Q2, I mean -- or rather you know that Q2 is about INR 4,000 below Q1 as what we've reported. And like I said, I would say, currently, the prices are maybe about INR 2,000 to INR 3,000 in that range below Q2, but let's see what happens in the next couple of months.

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Operator [97]

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We'll move on to the next question that is from the line of Ritesh Shah from Investec Capital.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [98]

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Sir, my first one is, you indicated our interest even in commercial mining for a few blocks. Can you please elaborate on this? And are we trying to recoup, say, hypothetically if Sukinda doesn't come back to us? So that's the first question, sir.

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [99]

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Sukinda -- let me put it this way. Sukinda -- we planned for Sukinda -- the chrome ore business is different, the chrome ore business is like we just described. Sukinda, we don't know yet whether it will be notified for auction or whether it will be reserved for public sector. But we have not waited for that. We have gone ahead and participated in 2 other chrome ore mines. I think we are successful. We are waiting for a -- we've got formal intimation on one. We are awaiting the formal intimation on the other. And that sets us up well to continue our Ferro Alloys business. Maybe the profitability will be a bit lower from -- in the immediate term because of the cost that we have to pay. But over a period of time, we believe we can continue to unlock a lot of value because we know this business, we have the customer relationships, we have the beneficiation facilities and the processing agents with whom we have tied up, which makes us the largest chrome ore player in the country and one of the largest exporter. So that is one part of it.

And these have a bid under T S Alloys, which is going to be called Tata Steel Mining. And Tata Steel Mining is going to be the vehicle for all our commercial mining activities. And for the iron ore mines also, we -- the commercial mines that we will participate in, we will participate in as T S Alloys or Tata Steel Mining as it's going to be eventually called.

And since we have 100 years experience in mining, and particularly in the states of Odisha and Jharkhand, we believe we'd bring a lot to the table to the mining industry in India. So far, we've been a captive player. We are doing 30 million tonnes of mining. So we have one of the largest mining companies in India. And I think the commercial mining vehicle allows us to capitalize on that knowledge and capability.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [100]

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Now that's helpful. Sir, second question is, I'm just taking forward the prior question on the pricing part. If one looks at the Chinese steel prices haven't declined year-to-date to the extent what you have seen in, say, Europe or U.S. or India. Sir, what would you ascribe this? Is it to Tangshan? Or is it to scrap? And how would you couple this thing up with the Turkish sanctions? So what I'm fearing is, are we looking at more prices or price declines locally? Or [EDDs] will be a savior over here. And if you can couple this with how has a behavior for Essar Steel been in the marketplace? Have they been chasing market share? Or is that they are playing a level pay increase?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [101]

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Okay. Let me try and answer some, if not, all the questions. Basically, it would be unfair to blame the Chinese for the situation we are in. I think if I were to say so, China is only market where the demand has grown more than what anyone expected. As you would probably be knowing, the demand in China grew at about 9% to 10% in the last 8, 9 months. So China has actually consumed 80 million to 90 million tonnes more steel than they did last year, which is almost the production in India. So as a consequence, the exports out of China have stayed stable at around 5 million tonnes a month, which I think the world can live it. And they have not been the price setters in Southeast Asia, which has been one of the biggest importing markets for steel over the last many years, right?

So I think the price setters in Southeast Asia has been India and Russia. Russia is well poised because their cost structure is similar to people like us in India because they have their raw materials. So hence, if they can export profitably, I mean, apart from the Indian producers, I think the Russians are the people who are best poised to export profitably. And hence, Russia and India have been setting the prices. But of late, as I mentioned, we are not seeing Russia as active as they were. And the Indian market picks up a bit, I suspect the Indian exporters, including us, will not be as active as we were. And as we may see prices move up in Southeast Asia, which we've started seeing some signs of.

The prices -- the fact that China demand has been strong is also one of the reasons why the coking coal and iron ore prices have not dropped as much as one would expect, because the rest of the world is expecting them to drop more because the domestic prices in all markets have been dropping. But because the Chinese markets have been strong, the coking coal and iron ore prices have not dropped.

In fact, I guess you know that over the last few weeks, there have been exports of steel into China from Japan, Korea, India. So China is actually pulling in steel rather than pushing out steel, right?

As far as Turkey is concerned, Turkey has been a bit more of a disruptor in Europe because when the U.S. had sanctions, Europe becomes the easiest market for Turkey to send steel to. Imports into Europe has been about 30 million tonnes, which has been pretty high level, considering the demand is about 160 million tonnes. But the European Union is also taking some steps to provide some support, and we see that playing out as well.

And I think with the U.S. moving the sanctions, we expect the pressure from Turkey to be a bit less in Europe. What is interesting is over the last few days, the scrap prices have also gone up in U.S. And normally, the rebar long product prices dynamic is set by scrap prices and Turkish prices. So hence, we've seen the long products prices actually started going up even in India about 3, 4 weeks back before the flat product prices. So the Turkey, U.S. scrap dynamic will play out more in long products. And the China iron ore coal dynamic will play out more in the flat products.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [102]

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Sir, locally, behavior of SR Steel in the market, how does it impact the pricing, specifically, we have anti-dumping duty in place?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [103]

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I wouldn't want to specifically comment on one of my peers. But all I can say is when the steel prices drop, from a Tata Steel point of view, our job is to make sure that our cost position ensures that we have the last man standing. We don't want to be the only person standing, but I think the ability of people to keep dropping prices is limited if they were to look at the economics. And I think -- I hope some in the industry whose cost structures are higher will rationalize on that because ultimately, it doesn't make sense if you're not covering a variable cost. And I think some of -- some in the industry are close to that.

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Ritesh Shah, Investec Bank plc, Research Division - Analyst [104]

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Sir, just last question, a quick yes or no is fine. Sir, will we be looking at Bhushan Power and SR Steel if at all the existing bidders take a U-turn or something?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [105]

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No, not at all.

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Operator [106]

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We'll move on to the next question, that is from the line of Nitij Mangal from CLSA.

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Nitij Mangal, CLSA Limited, Research Division - Research Analyst [107]

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Firstly, could you provide some details on this waiver of intercompany loan at Tata Steel Europe and the conversion into equity? These are loans between which entities and the quantum of that? And on the same line, do you also see need for anymore equity infusion into Tata Steel Europe? That's the first question, please.

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [108]

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So Nitij -- so can you repeat the second question?

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Nitij Mangal, CLSA Limited, Research Division - Research Analyst [109]

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I was wondering if you see any need for more equity infusion into Tata Steel Europe given the profitability levels are?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [110]

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Okay. So the first question is the intercompany conversion was about GBP 3 billion. And we also had the tax impact was more on account of the interest accrued, which we have also waived. Therefore, the deferred tax liability was reversed.

As far as equity in BSE is concerned, as I think we've also on the call been saying that we need the company to be first cash neutral and then cash positive. This will happen on 2 counts or needs to happen on 2 counts, which is working on the internal transformation program that is currently being undertaken by the company, which will have a rollout period over the period of next couple of quarters. And therefore, we would not want to, in fact, from March -- sorry, April to September till date, we have not put in any capital into Tata Steel Europe directly, and we would maintain that way. I think there is a very sharp focus on managing Tata Steel Europe within Tata Steel Europe. While in these difficult times, there has been increase in the working capital financing, which is fine. But -- and the reason why I'm saying fine is because it will be paid back by the company, not by Tata Steel. And I think that is something that is clearly on the table for the European management team to deliver. So I think, we are not seeing that at this point of time -- not seeing as in we would not want that to be at this point of time. And the answers to the challenges needs to come from within, while it has often not happened in the past, but just now, I think we have got a significant menu of opportunities to reduce or rather increase the internal cash flows to be self-sufficient.

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Nitij Mangal, CLSA Limited, Research Division - Research Analyst [111]

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Okay. And you mentioned the quantum was GBP 3 billion, right?

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Koushik Chatterjee, Tata Steel Limited - CFO & Executive Director [112]

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That is converted over the -- yes, that was accumulated over last 12 years or 13 years. And this will also helps in Tata Steel Europe to kind of have their own balance sheet, which ensures that they can take some more capital from the external market on a short-term basis if required. But certainly, no long-term debt on Tata Steel Europe.

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Nitij Mangal, CLSA Limited, Research Division - Research Analyst [113]

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Okay. And secondly, I want to understand what kind of changes are happening on the auto contract pricing? And how much of that effect has already gone through the second quarter?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [114]

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Second quarter, there is no effect of auto contract pricing because they were prices for H1 largely. So hence, the auto prices have been constant from April to September. What I explained earlier was the last contracts were reflective of the prices prevailing then, which was in March, April. And H2 contracts, which have been negotiated with some of the auto customers are reflective more of the prices prevailing now, of course, the premiums that we always get for auto. I wouldn't want to give a specific number because some of the negotiations are still going on. But hopefully, in the next month or 2, we would have closed all of that. But certainly, the H2 auto contracts will be lower than the H1 auto contracts.

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Operator [115]

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Ladies and gentlemen, we'll be taking the last question, that is from the line of Rohan Jain from ICICI Securities.

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Rohan Jain, [116]

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Just a quick question on the chrome ore mines. So just wanted to know, what is the capacity difference between Sukinda and between the 2 mines which is dispersed?

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Thachat Viswanath Narendran, Tata Steel Limited - CEO, MD & Director [117]

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So if we get both the mines, we will be pretty much be able to get to the levels at which we are operating at Sukinda in the next 3 years or 4 years.

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Operator [118]

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Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to management for the closing comments.

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Samita Shah, Tata Steel Limited - Group Head of Corporate Finance & Risk Management [119]

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Thank you, everyone, for joining us on this call. If there are any specific questions, we will be happy to take them off-line. Thanks, again, and good day to all of you.

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Operator [120]

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Thank you. Ladies and gentlemen, on behalf of Tata Steel Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines. Thank you.