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Rating Action:

Moody's affirms Tata Motors' Ba2 ratings; changes outlook to negative from stable

14 Nov 2018

Singapore, November 14, 2018 -- Moody's Investors Service has changed the outlook on Tata Motors Limited's (TML) corporate family rating to negative from stable.

At the same time, Moody's has affirmed the corporate family rating and the company's senior unsecured instruments ratings at Ba2.

RATINGS RATIONALE

"The negative outlook reflects our expectation that the weak operating performance of TML's wholly owned subsidiary, Jaguar Land Rover Automotive Plc (JLR), will likely continue over at least the next 12-18 months, in turn weighing on TML's earnings and consequently also the rating trajectory." says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

On 13 November we downgraded JLR's ratings to Ba3 negative from Ba2 stable, reflecting the sustained deterioration in the operating and credit profiles of the UK-headquartered premium car manufacturer.

Over the first half of the fiscal year ending March 2019 (1H FY2019), JLR's operating performance further weakened and has remained well below Moody's expectations. This has been mainly caused by more difficult market conditions in China and the continued weakness in diesel car sales in Europe and the UK.

During 1H FY2019, JLR reported a decline in retail volumes of 4.1% -- while wholesale volumes were down 10.1% -- compared with 1H FY2018.

This fall resulted in a decline in revenues of 8.9% or GPB1.1 billion to GBP10.9 billion and EBITDA of GBP836 million (7.7% reported EBITDA margin), down from GBP1,188 million in 1H FY2018.

Reported EBIT was a negative GBP232 million versus a GBP398 million profit in 1H FY2018.

JLR's leverage -- expressed as adjusted debt/EBITDA -- increased to 4.8x at September 2018, up from 2.5x at March 2018, as a result of negative free cash flow of GBP2.2 billion in 1H FY2019 compared with GBP1.1 billion of negative free cash flows in FY2018.

While JLR has announced cost savings and an efficiency plan yielding GBP2.5 billion in cost savings over the next 18 months, Moody's cautions against the prospects of a rapid turnaround within 2H FY2019.

Heightened market risks -- including uncertainties regarding Brexit risks and associated costs, weakening car demand in China, rising input costs from higher raw material prices, and rising fuel prices -- could dent the extent of costs savings or the timelines for the proposed turnaround.

Meanwhile, TML's ex-JLR operations, in particular, its commercial vehicles (CVs) and passenger vehicles (PVs) businesses in India, continue to improve, mirroring favorable industry dynamics, the company's recent product launches, and the focus on cost rationalization measures.

Moody's favorably notes that the strongly performing ex-JLR operations now account for one half of the company's consolidated EBITDA. Consequently, as of 30 September 2018, in contrast to JLR's adjusted debt/EBITDA of 4.8x, Moody's estimates TML's consolidated leverage was around 4.3x.

Looking ahead, Moody's expects the strongly performing ex-JLR businesses to continue providing cushion to consolidated metrics, with adjusted debt/EBITDA comfortably maintained at levels of 3.4x-3.8x over the next 12-18 months.

Moody's expects rising commodity prices and a challenging operating environment for JLR to keep TML's EBITA margins below 3%. And while somewhat reduced, JLR's capital and product development expenditure of around GBP4 billion annually is still high and will keep free cash flows negative.

Moody's expects India's commercial vehicle sales volumes to grow by mid-teen percentages over the next 12-18 months. TML is the market leader in this segment -- commanding a solid 46% share -- and will likely continue to introduce new products, sustaining its track record of above-industry-average growth rates, and thus modestly strengthening its overall market share.

TML's share of the Indian PV market also increased to an estimated 6.2% in 1H FY2019 from 4.6% in FY2016 with the business finally achieving breakeven after years of being a drag. The PV business' ability to sustain this improvement will therefore remain a key rating sensitivity, especially amid slowing, although still high single-digit, growth rates and tightening financing conditions in India.

TML's ratings continue to incorporate a one-notch uplift from its parent Tata Sons Ltd., reflecting Moody's expectation of extraordinary support from Tata Sons, should the need arise.

OUTLOOK

The negative outlook reflects JLR's weakening credit profile and the significant challenges in accomplishing a rapid turnaround amid heightened market risks and headwinds from rising input costs and fuel prices, as well as adverse impacts from the outcome of the Brexit negotiations.

The negative outlook also reflects the execution risks associated with JLR's ability to achieve its announced cost and efficiency improvements, against its need to maintain high levels of investments towards reducing emissions and for its electrification strategy.

WHAT COULD CHANGE THE RATING DOWN/UP

The ratings could be downgraded if: (1) there is any pressure on JLR's ratings; or (2) TML's ex-JLR businesses deliver sub-par performances because of weak market conditions, input cost pressures, disappointing new products, or a significant ceding of market share, all potentially resulting in lower revenue and declines in earnings and cash flow.

Specific credit metrics Moody's will watch for a downward rating action include consolidated debt/EBITDA exceeding 4.5x, and EBITA margins remaining below 4%, both on a sustained basis.

Any revision to Moody's support assumptions from Tata Sons will also prompt a revision to the one-notch uplift in TML's ratings.

Given the negative outlook, an upgrade within the next 12-18 months is less likely. However, it could be envisaged if: (1) JLR's operating performance improves; (2) TML further strengthens market shares in India in CVs and PVs; (3) the improving profitability of TML's ex-JLR operations is sustained; and (4) TML maintains consolidated debt/EBITDA below 3.5x, generates positive free cash flows, and demonstrates EBITA margins in excess of 5.5%, all on a sustained basis.

A stabilization in JLR's outlook would be a precursor for TML's ratings outlook to return to stable.

The principal methodology used in these ratings was Automobile Manufacturer Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Tata Motors Limited (TML), incorporated in 1945, is the largest manufacturer of commercial vehicles and a leading manufacturer of passenger vehicles in India. Its products include light, medium, and heavy-duty commercial vehicles, such as trucks, pick-ups and buses, utility vehicles and passenger cars.

TML's acquisition of JLR in June 2008 has diversified the group's profile through JLR's presence in key markets, such as the UK, Europe, the US, China, Russia and Brazil, and the introduction of a diversified product range that now includes the addition of JLR's luxury cars and vehicles.

TML is listed on the Bombay Stock Exchange, the National Stock Exchange of India and the New York Stock Exchange. It was 37.3% owned by the Tata group entities as of 30 September 2018.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kaustubh Chaubal
VP-Sr Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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