Tata Steel Bets Big on Expansion and Green Technology, Raises Balance Sheet Concerns

Tata Steel Ltd has presented a daring investment plan that includes, among other things, a new capacity, a new range of products, and a new low-carbon technique, which led to a rapid increase in its stock price but at the same time raised the issue of increased financial risk.

The company's stock jumped almost 6% during the last three trading days after its board sanctioned three large-scale capital expenditure projects, an acquisition, and a memorandum of understanding (MoU). The proposed initiatives are directed towards increasing production capacity, taking backward and forward integration to the next level, improving the product mix, and fast-tracking Tata Steel's shift towards environment-friendly operations.

One of the most important aspects of the expansion plan is the sanctioning of the increase in the capacity of Neelachal Ispat Nigam Ltd (NINL) from 1 million tonnes per year (mtpa) to 4.8 million tonnes per annum (mtpa), where Tata Steel presently operates a 1 mtpa facility. The project also involves a new iron ore mine which will supply the new facility with the required raw material. The whole project is expected to make a significant contribution to the long products portfolio of Tata Steel, particularly in the case of the retail construction segment which offers relatively higher margins and demand growth.

Along with the above, the board has also said 'yes' to investments in high-end manufacturing technologies that utilize low-carbon steel making processes, which coincide with Tata Steel’s sustainability principles and commitment to reducing carbon footprints across the globe.

Nevertheless, market experts are still taking a wait-and-see stance. ICICI Securities is of the opinion that Tata Steel is at the beginning of a very aggressive capex cycle while the global steel margins are still pressuring the industry. The brokerage forecast that the investments' timing might lead to increased leverage and a difficult situation in the company’s balance sheet if expected recovery in profitability does not happen.

In the long run, the expansion might put Tata Steel’s competitive position on a stronger ground which, at the same time, investors will keep an eye on the company's debt levels, cash flows, and margin recovery as the indicators of whether the company is able to support this capital-intensive growth phase without difficulty.