Mumbai: Moody’s Investor Service has downgraded Tata Motors Limited’s (TML) corporate family ratings (CFR) and the company’s senior unsecured instruments rating to Ba3 from Ba2. The downgrade, according to the rating agency, is led by weak performance of TML’s 100% subsidiary Jaguar Land Rover (JLR).
"The downgrade reflects the sustained deterioration in TML's credit profile, with weaker than anticipated credit metrics — led by the weak performance of JLR and our expectation that it will take longer than we had previously expected for the company's free cash flows to return to positive territory," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.
According to Chaubal, the negative outlook on TML's ratings reflects the execution risks related to the timely turnaround of JLR's operations, primarily in China, amid subdued global environment, driven by rising competition, no-deal Brexit scenario, possibility of US tariffs and the ongoing weakness in diesel car sales in Europe and the UK. Furthermore, adoption of electric and hybrid vehicle technologies along with other disrupting trends such as connectivity, shared mobility and autonomous cars in the automotive industry demands continued investments thereby putting JLR’s free cash flow under pressure. Notably, with annual revenues of ₹223,514 crore in FY19, JLR accounted for about 75% of Tata Motors consolidated revenues.
In line with that, Moody’s has also downgraded the CFR of JLR to B1 from Ba3 and the probability of default rating (PDR) to B1-PD from Ba3-PD. Concurrently, the rating agency has also downgraded the instrument ratings on the bonds to B1 from Ba3, keeping its outlook negative.
"The downgrade reflects Moody's expectation that leverage will remain elevated and free cash flow negative for fiscal years 2020 and 2021 as JLR seeks to turn around performance in China, executes its restructuring program and continues to invest in its future model line-up including electrification", said Tobias Wagner, vice-president and Senior Analyst at Moody's. JLR had reported investment of GBP 3.8 billion in R&D, product development and expanding manufacturing footprint during the last fiscal.
“JLR accounted for 63% of consolidated debt for Tata Motors, based on Moody's adjustments. Given these large contributions, the weakening credit metrics at JLR have a direct and immediate impact on the group's consolidated results and weigh on TML's credit profile," the credit rating agency said.
Meanwhile, the demand slowdown in India, tightening liquidity, overcapacity and a shrinking dealer network has also impacted Tata Motor’s downgrade. The company had reported 15% growth in its wholesales (including exports) to 732,428 units in FY19 driven by new product launches, which along with cost rationalization, powered TML’s passenger vehicle (PV) division achieve EBIDTA breakeven during the last fiscal.
For FY20, Moody’s expects revival in auto demand on the back of stable government at the center, likely normal monsoon, stable fuel prices and anticipated pre-buying ahead of implementation of the BSVI emission norms from 1 April 2020.
JLR’s sales were down 12% to 42,370 units in May and 10% to 240,471 units during January – May period. Meanwhile, Tata Motors Group global wholesales in May 2019, including JLR, were at 82,374 units, down 23% year-on-year. Going forward, TML’s management, under JLR’s turnaround plan, aims to improve cash flow by about GBP 2.5 billion on the back of reducing capex (GBP 1 billion), inventory correction and working capital improvement (GBP 0.5 billion) and improving profitability (GBP 1 billion) by end FY20.