Fitch Ratings upgrades Tata Motors on improving business performance

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JLR contributes most of the company’s profits

Fitch Ratings has upgraded its rating on Tata Motors by one notch, pointing to the automaker’s improving business performance.

“The upgrade reflects the sustained improvement in TML’s Indian automotive business over the last two years, supported by growing commercial vehicle volumes, successful new product launches in the passenger vehicle segment, as well as the management’s renewed focus on meeting medium-term capital needs in its Indian operations via internally generated funds,” the ratings agency said.

“We expect TML will continue to grow its India business and capture more market share over the medium-term,” it added.

Tata Motor’s unit Jaguar Land Rover Automotive’s strong credit profile also contributed to the upgrade, Fitch added.

JLR accounted for close to 85% of its parent’s operating profit in the fiscal year ended on 31 March 2016.

The ratings provided by agencies like Fitch are used by banks and other lenders to evaluate the creditworthiness of companies who take loans from them.

Tata Motors’s default rating has now been increased to ‘BB+’ from ‘BB’ with a ‘stable’ outlook. In comparison, Fiat Chrysler Automobiles N.V. is rated BB-.

INDIA RECOVERY

Fitch noted that Tata Motors was getting more traction in India’s car market.

“TML’s renewed focus on passenger vehicles in the last two years has translated into successful launches in the segment. For example, the launch of the Tata Tiago in April 2016 drove double-digit volume growth in TML’s passenger-vehicle segment for 9M FY17.”

However, the company’s commercial-vehicle division’s reported more muted volume growth of about 1% over the same period (FY16: 3%) as the Indian government’s demonetisation of large notes at the end of 2016 took a toll on demand.

“We expect demand for commercial vehicles to improve in the next 12-18 months supported by improving economic activity. TML’s Medium & Heavy Commercial Vehicle business has historically been a strong performer, and boasts a domestic market share of more than 50%,” it said.

India operations will continue to see sustained volume growth, but EBITDA margin will remain at around 3%-4% because of intense competition in passenger vehicles, and rising raw material and marketing costs, the agency predicted.

JLR GROWTH

JLR reported strong volume growth of 17% yoy in 9MFY17, underpinned by strong contribution from the new Jaguar F-PACE, which offset the decline in the Land Rover Discovery and discontinuation of the Land Rover Defender over the same period.

“We expect JLR’s Land Rover products – mainly luxury SUVs – to continue to benefit from robust demand in both developed and developing markets. JLR’s launch of the new Jaguar XE and F-PACE fill in important gaps in JLR’s product portfolio. JLR’s strategy to target high-end customers with premium products resulted in higher EBITDA margin than its rating peers, who have a higher mix of mass-market offerings.”

Fitch said it expects JLR to continue to report volume growth of about 7%-8% over FY17-FY20 and EBITDA margin to stabilise at around 14% due to increasing economies of scale as volumes grow.

INVESTING FOR GROWTH

Fitch said it expects Tata Motors to invest around 3.2 billion pounds in JLR in FY17 to fund capacity expansion, engine manufacturing, vehicle architecture and new technologies to meet carbon emission requirements.

The investments include a new manufacturing facility for JLR in Slovakia with an initial capacity of 150,000 units that is targeted for completion by 2018.

“These are likely to contribute to negative free cash flow in FY17, despite improving cash flows from operations. TML will also have about Rs 40 billion of annual capex for its Indian business, mainly for new launches of passenger vehicles.

“We expect TML’s financial profile to remain strong over the medium term in spite of the high capex, supported by improving operating cash flows and the INR74.3 billion rights issue in FY16. We expect TML’s leverage (net adjusted debt/EBITDAR) to remain around 1.0x over the medium term,” it said.

OUTLOOK

Fitch said it does not expect any positive rating action in the medium term as it takes time for the group to increase scale to a level that is similar with its global peers.

Positive rating action may result if the company materially increases the volume and breadth of its products, while maintaining profitability and a strong financial profile, it added. 

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