Tata Motors’ India operations face acute challenges: Moody’s

Moody’s assigns ‘Ba3 rating’ to the proposed senior unsecured notes to be issued by Tata Motors, says sluggish economic growth, weak liquidity, tight financing norms, and low rural income negatively affecting consumer sentiment

Moody’s rating outlook for Tata Motors is negative.

Moody’s Investors Service has assigned a Ba3 rating to the proposed senior unsecured notes to be issued by Tata Motors Ltd (TML, Ba3 negative).

“The rating outlook is negative,” Moody’s said in a statement.

The proposed notes rank

pari passu with TML’s existing senior unsecured notes and are therefore rated at the same level as these notes and TML’s Ba3 corporate family rating (CFR), it added.

“The Ba3 ratings reflect TML’s leading market position in commercial vehicles (CVs) in India; 100% ownership of the premium/luxury car manufacturer Jaguar Land Rover Automotive Plc (JLR, B1 negative); and ownership by Tata Sons, which results in a one-notch uplift, reflecting our expectation of continued parental support, when needed,” said Kaustubh Chaubal, a Moody’s Vice President and Senior Credit Officer.

On 25 October, TML announced that it will make a preferential allotment of equity shares and convertible warrants to Tata Sons for a $914 million equity injection, of which $548 million will be paid immediately, and the balance over a period of 18 months.

Tata Motors narrows loss on JLR turnaround

Pro-forma the preferential allotment and the conversion of the warrants, Tata Sons’ shareholding in TML will increase to 46.4% from the current 38.4%.

“We view the preferential allotment as a credit positive because TML plans to apply the proceeds towards reducing its debt,” added Mr. Chaubal, who is also Moody’s Lead Analyst for TML.

“The equity injection also reflects Tata Sons’ continued support, and will somewhat reduce the pressure on TML’s balance sheet stemming from the weak operating performance of its India business, even as JLR delivers some improvement,” he said.

JLR continues to make progress on its cost savings and efficiency plan with the aim to achieve GBP1.0 billion in cost savings by March 2020, having delivered GBP0.5 billion up to September 2019, he said.

In addition, JLR has also achieved GBP1.5 billion of its GBP1.7 billion target on capital expenditure and working capital improvements as of September 2019.

Looking ahead, Moody’s expects JLR’s adjusted debt/EBITDA to improve from 10.6x at March 2019 to 6.0x over the next 12 months.

However, TML’s operations excluding JLR — in particular CVs and passenger vehicles (PVs) in India (Baa2 negative) — face acute challenges, with sluggish economic growth, weak liquidity, tight financing norms, and low rural income negatively affecting consumer sentiment, it said.

TML’s PV sales volumes declined by 41% in the first half of the fiscal year ending March 2020, while CV volumes declined by 29.5% over the same period.

On November 7, Moody’s changed its outlook on India’s sovereign ratings to negative from stable, reflecting increasing risks that the country’s economic growth will remain materially lower than in the past.

“While government measures to support the economy should help to reduce the depth and duration of India’s growth slowdown, prolonged financial stress among rural households, weak job creation, and, more recently, a credit crunch among non-bank financial institutions, have increased the probability of a more entrenched slowdown,” Moody’s said.

Therefore, although TML will likely deliver slightly better volumes in H2 fiscal 2020 as festive demand picks up, Moody’s remains skeptical about the long-term impact of short-term government stimulus measures for the auto industry. In particular, low capacity utilisation levels for PVs, the segment’s low profitability (reported EBITDA margin of 0.1% in fiscal 2019 and an EBITDA loss of 21.4% in H1 fiscal 2020), pose a severe drag and key rating concern.

The negative outlook also reflects the negative outlook on JLR and the execution risks related to a sustained turnaround in JLR’s financial performance amid a subdued operating environment, uncertainty around Brexit, and the possibility of U.S. tariffs.