Fitch cuts Tata Motors’ credit rating over Europe, India worries

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Fitch Ratings has downgraded the long-term credit rating of Tata Motors by one notch to BB- from BB due to both domestic as well as JLR-related factors.

The rating agency further kept a negative outlook on the company’s rating, pointing to various factors such as further uncertainty in Britain over its exit from Europe, increasing crackdown on diesel vehicles in Europe and a marked slowdown in both commercial and passenger vehicle sales in India.

All these are expected to drag down Tata Motors’ profitability in the next 2-3 years and increase its relative debt levels (leverage), it added.

“The downgrade reflects the reduction in Fitch’s expectations for TML’s profitability and free cash generation in the next two to three years.

“Fitch revised its estimates because business risks have increased in both its India operations and its fully owned UK-based subsidiary, Jaguar Land Rover Automotive plc (JLR, BB-/Negative), while TML is likely to invest to bolster its long-term competitiveness. This will result in sustained deterioration in TML’s financial profile, including its leverage,” it said.

Fitch had cut JLR’s rating on 16 July 2019 over concerns about Brexit and European regulations.

“Uncertainty around an orderly outcome of Brexit negotiations and the evolving global tariffs situation pose risks, in particular to TML’s JLR business, which faces a significant level of production-sales mismatch due to concentration of its production base in the UK.

“JLR’s heavy reliance on the sales of diesel variants exposes it to unfavourable regulations in Europe. JLR plans to offer electric variants for all of its models by 2020, but unexpected delays could dampen sales performance,” it added.

On the domestic front, Fitch said: “Growth trends in monthly sales volume of passenger and commercial vehicles in India have worsened after turning negative in December 2018 due to constrained liquidity at non-bank lenders and excess capacity caused by relaxation of axle load standards for commercial vehicles.

“In particular, TML’s sales volumes fell by more than 20% in the first quarter of the financial year ending 31 March 2020 (FY20). Fitch expects a low double-digit decline for FY20 because of still-weak liquidity at lenders and slowing GDP growth.”

However, Fitch said it expect India’s auto sales volumes to stabilise “gradually”. However, it added, a prolonged weakness in sales would exert further pressure on leverage.

The Negative Outlook, it said, reflects expectations of elevated leverage and a risk of further deterioration in TML’s profitability.

Indian auto sales have been impacted in recent months due to liquidity crunch faced by non-bank lenders after a case of a default at one of the biggest such companies.

Relaxation of axle load standards have also hit demand for trucks.

TML’s sales volumes fell by more than 20% in the first quarter of the financial year ending 31 March 2020 (FY20).

Fitch said it expects a low double-digit decline for FY20 because of still-weak liquidity at lenders and slowing GDP growth.

The introduction of BS6 emission standards from April 2020 will raise production costs and therefore could affect industry volumes and automakers’ margins, Fitch added.

“TML is likely to achieve a timely and smooth transition of its existing models to BS6, but at the cost of a further increase in capex.

“New product launches will help TML sustain its leading market position in commercial vehicles and make gradual gains in passenger vehicles, in our view,” it added.

JLR

Tata Motors’ UK unit Jaguar Land Rover or JLR currently accounts for majority of TML’s consolidated operating profit.

The UK company would need large investments to keep up with trends in emission regulations, alternative drive trains, automation and shared mobility, and this could hurt cash flows, Fitch said.

Moreover, global factors, including the US-China trade war, could further complicate things.

JLR’s sales volumes in China continued to decline by 29% yoy in 1QFY20, following a 34% fall in FY19, reflecting poor market conditions.

“Fitch believes the risks in other markets, notably Europe, have also risen with the auto cycle maturing after years of growth. We believe progress in JLR’s cost-cutting initiatives and new model launches will lead to margin improvement, but this will be more gradual considering the increased risks in key markets.”

Fitch expects TML’s consolidated net leverage, measured by adjusted net debt/EBITDAR, to increase to 2.6x in FY20 and 2.9x in FY21, from 2.1x in FY19.

TML cut its capex, notably in its JLR business, in FY19.

“Nonetheless, we expect higher capex in India and the JLR business as TML continues to invest in new models and a new modular chassis and electrification, including investment in a new battery facility.”

Fitch did not see any liquidity problems on the immediate horizon for Tata Motors.

“TML’s readily available cash balance of INR315 billion at FYE19 was adequate to meet less than INR200 billion of debt (both excluding the financial-services business) maturing in FY20.”

It pointed out that the company has undrawn committed credit facilities – including GBP1.9 billion (INR175 billion) available to JLR and INR15 billion to TML as of 31 March 2019.

“Fitch expects TML’s liquidity to adequately cover negative FCF forecast for FY20. TML has a balanced debt-maturity profile over the next few years, but sustained negative free cash generation in our rating case points to dependence on debt refinancing.

“TML’s liquidity profile could worsen significantly if the considerable operational risks in JLR’s business materialise, leading to higher levels of free cash deficit and reduced ability to refinance,” it added.

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