It fears that Tata Power’s cash flow could deteriorate

International ratings agency Standard & Poor’s Ratings Services (S&P), on Monday, said it had raised its long-term corporate credit rating on Tata Motors to ‘BB’ from ‘BB-’ with a positive outlook. Simultaneously, it raised the issue ratings on the company's senior unsecured notes to ‘BB’ from ‘BB-’.

“We upgraded Tata Motors because we believe the company’s competitive position and cash flow stability have improved. We assess the company’s business risk profile as ‘fair’,” S&P said in a statement.

The S&P statement said Tata Motors’ “significant” financial risk profile “reflects our expectation that the company’s ratio of consolidated debt to operating profit will be about 2.0x-2.5x in 2013. Our view is based on the improved operating performance of Jaguar Land Rover (JLR), Tata Motors’ fully owned U.K. subsidiary. JLR, which accounted for about 60 per cent of Tata Motors’ consolidated revenues and two-thirds of its operating profit in the fiscal year ended March 31, 2012, outperformed our expectations. We expect JLR to sustain the improvement in its operating performance.”

Tata Power

S&P also revised its outlook on Tata Power Company from stable to negative. In a statement, S&P said it simultaneously affirmed its ‘BB-’ long-term corporate credit rating on the company and its ‘BB-’ issue rating on its senior unsecured notes. “The outlook revision reflects our expectation that Tata Power’s cash flow and financial risk profile could deteriorate over the next six to nine months because the company has breached a debt-to-equity ratio covenant on loans to its Mundra project,” said S&P’s credit analyst Rajiv Vishwanathan. “The availability of loans to the project, which Tata Power’s 100 per cent-owned subsidiary Coastal Gujarat Pvt. Ltd. (CGPL) controls, could therefore be limited.” S&P said it might lower Tata Power’s rating if it was unable to secure a waiver from its lenders on the breach of covenant; or an increase in expenditure due to the Mundra project or otherwise substantially weakens Tata Power’s financial risk profile. A ratio of funds from operations to adjusted debt of less than 10 per cent on a sustainable basis would indicate such deterioration.

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