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Rating Action:

Moody's changes Tata Motors' outlook to stable from negative; affirms B1 ratings

14 May 2021

Singapore, May 14, 2021 -- Moody's Investors Service has today changed the outlook to stable from negative on Tata Motors Limited (TML). At the same time, Moody's has affirmed TML's B1 corporate family rating (CFR) and B1 senior unsecured ratings.

"The rating affirmation and change in outlook to stable reflect the continued recovery in TML's consolidated revenue and profitability from the trough during the pandemic in the first quarter of the fiscal year ending March 2021. We expect the recovery to sustain over the upcoming 12 to 18 months, strengthening TML's credit metrics, with debt/EBITDA leverage tracking below 4.0x and EBITA margin of 3%-4%," says Kaustubh Chaubal a Moody's Vice President and Senior Credit Officer.

"Our adjusted free cash flows for TML will likely stay negative with its continuous product development and capital expenditure, although the improving profitability and leverage support our view that the imminent risk of a downgrade has now been averted," adds Chaubal, who is also Moody's Lead Analyst on TML.

RATINGS RATIONALE

Today's action follows Moody's affirmation and change in outlook to stable from negative on the B1 ratings of TML's wholly owned UK subsidiary, Jaguar Land Rover Automotive Plc (JLR) earlier this week.

See Moody's recent rating action on JLR for the affirmation of its B1 ratings and its outlook stabilization https://www.moodys.com/research/--PR_446225.

Moody's views JLR's new strategy and financial targets, announced in February 2021 towards electrification, improving profitability and free cash flow generation as positive. Moreover, Moody's expects JLR to deliver credit metrics appropriate for its B1 rating during the fiscal year ending March 2021 (fiscal 2021) and to sustain the improving trajectory. JLR's restructuring efforts and its solid growth in China, as well as the recovery in other key markets such as Europe and North America over the coming quarters, will improve its profits and leverage. JLR constitutes half of TML's global unit sales, but accounts for almost 80% of TML's consolidated revenues and Moody's adjusted EBITDA. Given these large contributions, JLR's improving credit metrics have a direct and immediate impact on TML's consolidated metrics and influence its credit profile.

Meanwhile, TML's operations other than JLR -- TML India, which comprises commercial vehicles (CVs) and passenger vehicles (PVs) in India -- will be challenged during the current quarter because of lower unit sales amid the severe second wave of COVID cases causing localized lockdowns in the country.

As a result, Moody's revised its real inflation-adjusted GDP growth forecast down to 9.3% for fiscal 2022 from 13.7%. Even so, Moody's believes the impact of the second wave to be less severe on the economy given lockdowns are more localized, as opposed to a nationwide lockdown at the start of the pandemic in 2020. As of now, Moody's expects the negative impact on India's economy to be limited to the current quarter.

Moody's forecasts for TML India assume that the company achieves April 2021 unit sales for the first half of fiscal 2022, before climbing to March levels for the rest of fiscal 2022. In April 2021, unit sales for TML's CVs declined by around 60% and 15% for its PVs from March 2021 levels. In Moody's view, the forecasts reflect reasonable prospects, given the start of a cyclical upturn in India's CVs following six years of declining volumes and TML's position as India's leading CV manufacturer.

In addition, the increased use of personal transportation options, as opposed to public transport will keep PV demand solid, although this segment has long been a drag on TML India. The company revitalized its PV product suite, enabling it to reach the number three position with an 8% share in fiscal 2021, up from 5% a year prior, despite fierce competition from multinational and Indian automakers. Success from new product launches earlier this year such as The New Safari and HBX expected to be launched later in 2021 along with its other products such as Altroz, Nexon, Harrier and its variants constitute a wide offering across hatchback, sedans and SUVs, which should help TML to further strengthen its market position.

Over the longer term, the Government of India's scrappage policy for steel to phase out old vehicles should also support demand for CVs and PVs. Furthermore, TML's 70% market share in the electric vehicle segment places it in a good position to ride on the country's efforts to achieve ambitious electrification targets for 2030, from a modest electrical vehicle penetration of less than 1% as of fiscal 2021.

Moody's also favorably notes TML India's various cost rationalization measures that have translated into a substantial reduction in its EBIT breakeven point (on a reported basis) during the nine months ended December 2020 from fiscal 2019 levels.

The B1 CFR reflects TML's leading market position in CVs in India; 100% ownership of premium/luxury car manufacturer, JLR; its improving market position in PVs in India and the improving trajectory of its financial metrics. The CFR also incorporates a one-notch uplift, reflecting Moody's expectation of extraordinary support from its parent Tata Sons Ltd. in times of need.

The CFR also incorporates the risks associated with the inherently cyclical automotive industry.

OUTLOOK

The stable outlook reflects Moody's expectation of a continued recovery in auto sales in each of TML's operating markets. The stable outlook also incorporates Moody's view that any impact from the resurgence in coronavirus infections in India would be limited to the current quarter.

LIQUIDITY

TML's consolidated liquidity is adequate, driven by JLR's GBP4.5 billion ($6.3 billion) of cash and short-term investments as of 31 December 2020 and the company's fully undrawn committed GBP1.9 billion ($2.7 billion) revolving credit facility, which comprises GBP1.31 billion ($1.84 billion) maturing March 2024 and the balance in July 2022. However, JLR's liquidity is not easily transferable and Moody's does not expect TML to receive any cash from the subsidiary, at least not until JLR generates profits and can pay dividends in line with its financial policies of up to 25% of net income.

In contrast, TML India's balance sheet liquidity is weak. TML India's cash sources include cash of $850 million as of 31 December 2020, a $200 million undrawn multi-year revolver (maturing in 2022), and an equity injection of $350 million from Tata Sons with the warrant conversion in Q4 fiscal 2021. Moody's expects these cash sources to be insufficient to meet capital expenditure and debt repayments (including short-term debt) aggregating $2.2 billion over the next 21 months to September 2022.

That said, Moody's estimates that TML India's cash flow from operations should aid in reducing the deficit, although intra-year working capital volatility will cause continued reliance on short-term 364-day working capital facilities to tide over temporary mismatches. Thanks to its association with the Tata brand, TML also continues to have strong access to the domestic capital markets and has long-standing relations with Indian and multinational banks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given its dominance to TML, a sustained improvement in JLR's credit metrics leading to its rating upgrade will be a precursor for upgrade pressure to build on TML's B1 rating.

A continuous improvement in TML India's sales, profitability and free cash flow generation will also be key for a higher rating.

Specific metrics indicative of an upgrade include leverage below 6.0x, EBITA margin above 3% and positive free cash flow generation, all for sustained periods. Any further financial support from Tata Sons to recapitalize the business or restore financial stability that substantially improves credit metrics could result in a review of Moody's current one-notch uplift in the ratings.

Although unlikely given the stable outlook, negative momentum could develop over TML's ratings if there is downgrade pressure on JLR's ratings or if TML India's performance fails to improve amid subsequent pandemic waves, rising costs, low new product sales or a decline in market share, resulting in weakening earnings and cash flow.

Specific metrics indicative of a lower rating include leverage above 8.0x or EBITA margin below 2%, on a sustained basis. Change in Moody's assumption of support from Tata Sons could also prompt a revision of the one-notch ratings uplift.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Automobile Manufacturer Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062773. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Tata Motors Limited (TML) is the flagship automotive company of India's largest conglomerate, Tata Sons. TML is India's largest manufacturer of commercial and passenger vehicles. Its products include light, medium and heavy vehicles, such as trucks, pick-ups and buses, utility vehicles and passenger cars.

Through wholly owned UK subsidiary, Jaguar Land Rover Automotive Plc (JLR), TML's product suite includes luxury cars and it operates in the UK, Europe, the US, China, Russia and Brazil.

TML is listed on the Bombay Stock Exchange, the National Stock Exchange and the New York Stock Exchange. As of March 2021, TML was 46.4% owned by Tata Sons and other Tata companies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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 - Senior 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

Ian Lewis
Associate Managing Director
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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