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MUMBAI, March 26

TATA Steel on Wednesday informed the BSE that its board had approved in principle a scheme for installing balancing facilities for increasing the production of crude steel from 4 million tonnes per annum (mtpa) to 5 mtpa at an estimated cost of Rs 1,995 crore.

"The board's formal approval to the expansion plan would be obtained in due course," the company's statement to BSE said. Tata Steel had earlier upgraded its `F' blast furnace from a capacity of 0.75 million tonnes to 1 million tonnes. The latest capacity expansion treads similar lines, "the G blast furnace and some others" cited as potential candidates.

Reference to balancing facilities in the BSE notice covers upstream and downstream alterations mandated by capacity hike in crude steel such as raw material intake and melt shop facilities. The Rs 1,995-crore investment includes all these.

Equity analysts tracking the steel sector were comfortable with the explanation given the recent uptrend in steel prices and the company's profit, a 711 per cent PAT rise to Rs 280.23 crore (Rs 34.54 crore) for third quarter in 2002-2003.

Current buoyancy in steel has much to do with export and there have been reports of late citing likely slowdown in steel consumption in key Asian markets. Not only that, the bullish Chinese market is buying steel for now, but wanting its own furnaces for the future (Tata Steel said China would still import high grade products). So, even if irrelevant in the present, these market fears when viewed against a capacity expansion plan cause worry.

Domestic companies such as Ispat, Jindal and Essar have plans to hike capacity (upgradation, de-bottlenecking etc.) and there is reported over-capacity in flat steel products. It is projected to dilute with rising domestic steel offtake, but another round of capacity addition in crude steel could put more steel into the market, they argue.

On the other hand, as equity analysts themselves point out, for a company of Tata Steel's size, capacity enhancements have to happen despite short-term market concerns. The market for steel is so cyclical that one could argue against there being an ideal time for investing. From a tax perspective too, it is good for large companies to have ongoing capital investment.

Finally, Tata Steel's claim of being the lowest globally in hot metal production cost, need not be disturbed by this capacity addition. There is no fixed cost addition and the base of metal production is only going up. Lone concern, would be a fresh round of depreciation, analysts said.

But here again, the impact on profit could be from a higher base than in the previous steel cycle. The company's product portfolio has also grown and for the first nine months of 2002-2003 Tata Steel's net profit was already at Rs 549.33 crore (Rs 82.43 crore) on sales of Rs 6,433.22 crore (Rs 5,446.55 crore). On the BSE, the Tata Steel scrip closed trade on Wednesday at Rs 137.70 (Rs 137.80).

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