International ratings agency Fitch Ratings has placed Tata Motors Limited's long-term issuer default rating of 'BB' on Rating Watch Negative (RWN) to reflect the increasing risks of a disorderly Brexit for its fully-owned subsidiary Jaguar Land Rover Automotive plc.
JLR, which accounts for the majority of Tata Motors’ earnings before interest, tax, depreciation and amortization (EBITDA) generation, has a significant production bias to the UK despite a reasonable degree of geographic diversification in its sales mix.
Trade barriers and logistic issues arising upon a disorderly Brexit could have an impact on JLR's competitive positioning, and lead to significantly lower sales and profitability and higher working-capital needs. This is likely to outweigh improving operating performance in the firm’s India business, and lead to significantly lower cash generation and higher leverage than our rating case.
The rating action follows a similar action on JLR's rating on Monday.
“We aim to resolve the RWN in the next few months, when we will have more clarity over the outcome of Brexit negotiations and its impact on Tata Motors Limited. This could lead to a downgrade by at least one notch,” said a Fitch statement.
Production imbalance in the JLR business exposes Tata Motors’ credit profile to a no-deal Brexit scenario, whose likelihood has risen over the past few weeks.
JLR sells about 20% of its vehicles in both continental Europe and the US, but manufactures them quasi-exclusively in the UK. This exposes it to increased tariffs and supply-chain disruptions from a disorderly Brexit, which could undermine its competitive positioning and affect cash generation, said the statement.
The JLR's efforts to diversify its production base will ease the imbalance in the medium term but vulnerabilities remain high in the short term.
The JLR business also faces risks from a fluid global tariff situation, its weakening competitive positioning in China, and the impact of tightening emission regulations on its product portfolio, which is focused heavily on diesel.
The potential impact of a disorderly Brexit on cash generation would outweigh growth in the India business, resulting in a substantially weaker Tata Motors’ consolidated financial profile.