Steel Is ‘Toys For Big Boys’- Koushik ChatterjeeFebruary 17, 2021
The most critical, and lasting, lessons though have been learnt in managing capital structure. Three things Chatterjee said stood out.
- The renewed focus on generating internal capital.
- Balancing de-leveraging with growth.
- Making cost containment a culture.
“If you look at any company and especially in our case, if you’re collecting say 5,000 crore of revenue in a month and spending about 4,500 crore. Suddenly, that 5,000 becomes zero and your cost structure, typically in a steel industry or in a process industry cost structures have a significant amount of fixed costs and a significant amount of costs which are sticky and not just switch on, switch off. So in those kind of a circumstances, how do you manage these costs when your collections have suddenly fallen off the cliff.”
The first focus was on raising revenue, say via exports to countries that were still open. The next in line was paring costs, renegotiating payments, slowing capital projects worth Rs 23,000 crore. Chatterjee and his team started daily cash calls, which they continue to this day.
“Capital structure is actually the muscles on which you will grow in the future. So reset that capital structure very quickly and carefully, which means that you have to start at—how do you generate more internal capital? The starting point is looking at spend reviews, questioning each and every spend that you have, classifying into the ‘must-have spends’ to ‘good to have spends’ to ‘discretionary spends’ and you get back into the basics and try to actually do cost takeouts of a very different nature. So, that’s one starting point.
Then is the capital allocation towards growth. When do you actually restart your existing projects, etc. How do you do it more smartly than before? What do you need to do yourself and what do you need to put onto say a rental model? What are those assets that you can play arbitrage with? The third thing is, all of this will lead to the kind of capital structure that is to be designed basis where you want to go and how you need to achieve that goal.”
At the same time Tata Steel had committed it would deleverage its balance sheet by half a billion dollars each year.
“At a point in time we had the option of managing the debt or reducing the debt versus calibrating growth. So, either you grow or you de-lever. But post the pandemic, there is a balance of both. That’s why I went back to the spend review — that you start by focusing on what kind of internal capital one would like to generate or one would focus to generate and ensure that we can achieve both growth as well as deleveraging the balance sheet. That’s a transformation programme that is not just the finance manager’s job. We have a team of cross-functional guys who are doing these reviews 24×7, actually working with the business guys and saying, we need more, do it differently, is there a different way of working or a different way of looking at these costs? How do you categorise these costs in ensuring that we don’t remain hostage to the past? We need to look at cost differently. So, there is a very different cost structure that can come out after this pandemic.”
And, a cost culture that can reshape enterprise in India, Chatterjee said.
“It has a lasting impact when you actually change the culture, people focusing on cash, people focusing on productivity and people focusing on ensuring that every spend has a value behind it which is more than the spend. When you bring this culture right down the line and onto the shop floor and into your larger ecosystem, it has a very different multiplier effect which lasts for a long period of time. So, one cannot leave that as a one-off exercise, one has to continue that exercise. If you say that, look, we have recovered from the pandemic now we are back to our own ways, then we would have lost all the benefits and not taking care of the opportunities that we have created in the last pandemic.”
Opportunities that might prepare the company better for the next turn in cycle — up or down. Because, as champion cyclist Greg LeMond once said — “It never gets easier, you just go faster.”