Railway a New Growth Path for India's Tata Steel

In today’s times of global financial stress, when steel majors all over are under tremendous bottom-line pressure, railway tracks are charting a new growth path for India’s Tata Steel.

Earlier in the week, Tata Steel UK Holdings (TSUKH), the wholly owned subsidiary of Tata Steel, launched a state-of-the-art facility in France that will produce super hardened train track, also called “stress free” rails, which will be three times tougher than normal rail.

TSUKH has invested about $65 million USD in the plant.

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The launch has even invited comment from Moody’s Investors Service. According to a report in The Economic Times, Moody’s said TSUKH may see an upward swing in its profitability in the current financial year after the opening of the heat treatment plant at its Hayange plant in France’s Lorraine region, no doubt bringing some cheer to the Tata Steel head honchos and employees.

The new plant will more than double TSUKH’s annual output of heat-treated rail to 125,000 tons from 55,000 tons, enough to secure its position in the rail infrastructure market.

“In the fiscal year ending March 2014, we expect TSUKH, which generates around 55 percent of Tata Steel’s revenue, to show better operating margins,” Moody’s said.

Henrik Adam, Tata Steel’s Chief Commercial Officer, told reporters after the new plant announcement that the heat treatment plant would open up new European market opportunities for the company, especially to serve customers in Germany, Switzerland, Belgium, The Netherlands, Luxembourg, and Scandinavia. The heat treatment plant will also allow Tata Steel to support existing markets such as Brazil, Gabon, Mauritania and South Africa, as well as metro rail systems in Hong Kong, India, and Singapore.

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Already on Tata’s client list  are some high-profile customers like UK’s Network Rail, which owns and operates UK rail infrastructure. It has chosen to source 95 percent of its rail from Tata Steel until 2019, with an option to extend until 2024. The deal involves supplying up to 1 million tons of rail.

TSUKH also announced it would build a $24 million furnace at its Stocksbridge, UK site, which it expects to be commissioned by 2015.

Since 2000, TSUKH has invested over $320 million in its other advanced rail manufacturing facilities at Scunthorpe in the UK.

Earlier this year, the company revealed it was supplying 60,000 tons of rails to the Haramain railway project linking the holy cities of Mecca and Medina. Steel for the project will be made at the Scunthorpe plant before it’s rolled into rails in lengths of 25 meters at the plant, as well as at Hayange.

But all this does come with a note of caution: Despite its expressed optimism on the rail track business, Moody’s, has pointed out that while a turnaround in TSUKH would benefit the profitability of Tata Steel, the steel firm’s free cash flow would remain negative in the coming quarters due to ongoing projects requiring Capex in India and a build-up of working capital brought on by higher production in Europe.

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