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

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Tata Sons infusing USD 914 million (around Rs 6,542 crore) equity in Tata Motors is credit positive for the company but the country's largest automobile manufacturer faces acute challenges in sluggish economic growth, weak liquidity, and tight financing norms, Moody's Investors Service said on Tuesday. Moody's assigned a Ba3 rating to the proposed senior unsecured notes to be issued by Tata Motors. The rating outlook is negative, Moody's said in a statement.

"The Ba3 ratings reflect Tata Motors Ltd's (TML) leading market position in commercial vehicles (CVs) in India, 100 per cent ownership of the premium/luxury car manufacturer Jaguar Land Rover Automotive Plc, and ownership by Tata Sons, which results in a one-notch uplift, reflecting our expectation of continued parental support, when needed," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

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

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

"We view the preferential allotment as a credit positive because TML plans to apply the proceeds towards reducing its debt," adds 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."

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. In addition, JLR has 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 in India "face acute challenges, with sluggish economic growth, weak liquidity, tight financing norms, and low rural income negatively affecting consumer sentiment," the statement said.

TML's passenger vehicle (PV) sales volumes declined by 41 per cent in the first half of 2019-20, while CV volumes declined 29.5 per cent over the same period.

Last week, 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 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.

"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," it said.

In particular, low capacity utilization levels for PVs, the segment's low profitability (reported EBITDA margin of 0.1 per cent in fiscal 2019 and an EBITDA loss of 21.4 per cent in H1 fiscal 2020), pose a severe drag and key rating concern, Moody's said.

"The negative outlook primarily reflects the challenges faced by TML's operations excluding JLR, from the Indian auto sector's slowing sales due to weak demand, overcapacity and tightening liquidity.

"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 US tariffs," it said.

Moody's said Tata Motor's ratings could be downgraded if JLR's ratings are downgraded or the performance of its businesses -- excluding JLR -- remains weak amid subdued market conditions, input cost pressures, disappointing new product sales, or a decline in market share, in turn resulting in weakening earnings and cash flow.

The rating outlook could return to stable if the outlook on JLR's B1 ratings returns to stable; and TML's Indian operations, that have been under pressure for the last 2-3 quarters, improve significantly; both resulting in an improving trajectory of TML's credit metrics, it said.

"Although unlikely over the next 12-18 months, upward rating pressure could build if JLR's operating performance and consequently its credit metrics improve; TML arrests the sharp decline in volumes in its CV and PV businesses in India, and gains market share; the Indian PV business generates sustainable positive EBITDA; and the effect of these are reflected in a sustained improvement in credit metrics," it added.

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