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Rating Action:

Moody's downgrades Tata Motors to B1; changes outlook to negative

18 Jun 2020

Singapore, June 18, 2020 -- Moody's Investors Service (" Moody's"), has downgraded Tata Motors Limited's (TML) corporate family rating (CFR) and the company's senior unsecured instruments rating to B1 from Ba3.

The outlook on all ratings has been changed to negative from ratings under review.

This rating action concludes the review for downgrade initiated on 26 March 2020.

RATINGS RATIONALE

"The downgrade reflects the sustained deterioration in TML's credit profile and our expectation that it will take longer than we had previously expected for the company's credit metrics to return to levels appropriate for a Ba3 CFR," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

TML's credit profile was already under pressure due to lower auto sales and falling demand in TML's key markets even prior to the coronavirus outbreak.

"The pandemic has amplified the pressure on TML's cash flows and will likely result in a prolonged period of weak credit metrics. We expect the company's adjusted EBITA margin to remain negative in the fiscal year ending in March 2021 (fiscal 2021), while its adjusted debt/EBITDA will stay above 10.0x," adds Chaubal, who is also Moody's Lead Analyst for TML.

TML's credit profile is more in line with a B2 rating; however, Moody's expectation of extraordinary support from its parent Tata Sons Ltd., in times of need, results in a one-notch uplift of the CFR to B1. Tata Sons and other Tata Group companies have been a supportive shareholder over the years, as reflected in various equity injections including the most recent $927 million equity infusion in October 2019, taking the Tata Group shareholding in TML (upon conversion of warrants) to approximately 46.4%.

TML's operations include its 100%-owned premium car manufacturer Jaguar Land Rover Automotive Plc (JLR, B1 negative), as well as its commercial vehicles (CV) and passenger vehicles (PV) businesses in India, TML India.

Today's rating action reflects the acute challenges faced by TML India from the Indian auto sector's slowing sales stemming from sluggish economic activity, weak liquidity, tight financing norms, and poor consumer sentiment.

Although TML commands a 43% market share in India's CV segment, Moody's expects around 25% decline in its wholesale unit sales in fiscal 2021 on the back of a 34% decline in fiscal 2020. Such weak demand prospects put additional pressure on its credit profile as this segment has subsidized the loss-making PV operations for several years.

TML India's PV business continues to lose market share and reported losses in fiscal 2020. Moody's expects TML to curb the unit sales decline to around 10% in fiscal 2021 from 37% the prior year, reflecting the company's new model launches compliant with the transition to Bharat VI emission norms from 1 April 2020. That said, TML India's ability to quickly turn around this business remains challenged, especially since the PV segment is crowded with domestic and large multinational automakers. The company is also in the process of transferring TML India's PV operations into a newly formed wholly owned subsidiary to allow the entry of a strategic partner.

Moody's notes TML India's just announced capex reduction and cost saving programs that should help the company in reducing the cash burn.

Meanwhile, JLR -- which continues to dominate TML's consolidated revenue and EBITDA -- is weakly positioned at its B1 negative rating. While the challenges posed by the pandemic will significantly weigh on JLR's performance for fiscal 2021, resulting in negative free cash flow and an adjusted debt/EBITDA higher than 10.0x, the UK subsidiary was on a positive trajectory prior to the pandemic. Moody's believes that a degree of market recovery, ongoing model launches, including refreshes and the company's extended restructuring program, will lead to an improvement in JLR's performance by fiscal 2022.

See also Moody's press release on the confirmation of JLR's B1 rating; outlook negative: https://www.moodys.com/research/--PR_426437

Outlook

The negative outlook reflects the considerable operating challenges and downside risks that TML faces through fiscal 2022 while implementing its restructuring plan -- in India and at JLR -- and attempting to restore its competitive position in the face of the coronavirus pandemic.

Liquidity

TML's consolidated liquidity is adequate, mainly driven by JLR's GBP3.7 billion ($4.6 billion) of cash and short-term investments at 31 March 2020 and the company's fully undrawn committed GBP1.9 billion ($2.4 billion) revolving credit facility due July 2022. However, JLR's liquidity is not easily transferable and Moody's does not expect TML to extract any cash, at least not until JLR returns to generating profits and can afford to pay dividends in line with its financial policies of up to 25% of net income.

In contrast, TML India's liquidity is weak. Moody's anticipates TML India's cash sources: cash of $700 million at 31 March 2020, an $200 million undrawn multi-year revolver (maturing in 2022), equity injection of $300 million from Tata Sons with the warrant conversion, and $130 million INR bond issuance in the current quarter to be insufficient to meet capital expenditure and debt repayments (including short-term debt) aggregating $2.1 billion over the next 18 months to September 2021. A part of this shortfall could be funded from a long term $400 million loan that the company is in the process of raising. As well, 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.

ESG considerations

The widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The global automotive industry is one of the sectors most severely impacted by the outbreak. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

In addition, meeting regional emission requirements, particularly those relating to CO2, is one of the most pressing and challenging objectives facing the auto industry over the medium to long term. The continued tightening of emission standards and regulations across most major markets, driven by environmental concerns, also requires investments into greater efficiency and electrification to maintain compliance and avoid fines or additional costs.

Accordingly, environmental considerations are a material consideration for this rating action, because these trends restrict the company's -- and in particular JLR's -- ability to reduce certain investments. The varying pace of adoption of hybrid and electric vehicles among different consumers presents a challenge for original equipment manufacturers (OEMs), including JLR and to some extent also TML.

The modest contribution of TML's alternate fuel vehicle (AFV) units to its global light vehicle unit sales exposes it to fast-evolving and stringent regulations on emissions and AFVs in its key markets of China, the US, and Europe. However, Moody's notes TML's continuous investments in preparing for the future as well its stated policy that all new JLR models launched from 2020 will have hybrid or electric variants. And in India, TML transitioned to producing Bharat VI (the equivalent of Euro VI emission norms) compliant vehicles from April 2020.

Ownership and control are key to Moody's assessment of governance risk, with concentrated ownership having either a positive or negative influence on corporate performance. Whereas concentrated ownership and control can raise potential conflicts of interest and/or related-party transactions that are not aligned with creditor interests, the concentrated ownership with Tata Sons has benefited TML and its creditors. TML is 42.4% owned by Tata Sons and various other entities of the Tata Group, and pro-forma the preferential allotment of shares and conversion of warrants, the Tata Group will own 46.4% in TML. Consequently, Moody's views governance risk as moderate with no overall impact on TML's ratings.

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

TML's ratings could be further downgraded if (1) JLR's ratings are downgraded; or (2) TML India's performance 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.

Specific metrics indicative of a downgrade include TML's leverage remaining above 8.0x or EBITA margins remaining below 2%, both on a sustained basis.

Any change to Moody's assumption of support from Tata Sons could also prompt a revision to the one-notch uplift incorporated in TML's ratings.

The rating outlook could return to stable if the outlook on JLR's B1 ratings returns to stable and TML India's operations improve significantly, both resulting in an improving trajectory of TML's credit metrics.

The rating could be upgraded over the longer term if (1) JLR's operating performance and consequently its credit metrics improve, resulting in a rating upgrade; (2) TML India arrests the sharp decline in CV and PV sales volumes; (3) the Indian PV business generates sustainable positive EBITDA and restores the profitability of the CV businesses to at least pre-coronavirus levels; and (4) the effects of these are reflected in a sustained improvement in TML's consolidated credit metrics.

Specific metrics indicative of an upgrade include TML's leverage falling below 6.0x, EBITA margins rising above 3% and positive free cash flow generation, all for sustained periods.

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.

Tata Motors Limited (TML) is the flagship automotive company of India's largest conglomerate, Tata Sons and its group of companies. Incorporated in 1945, TML is the largest manufacturer of commercial and passenger vehicles in India. The company's products include light, medium and heavy vehicles, such as trucks, pick-ups and buses, utility vehicles and passenger cars.

TML's acquisition of Jaguar Land Rover Automotive Plc (JLR) in 2008 diversified the group's profile through JLR's presence in the international markets of the UK, Europe, the US, China, Russia and Brazil, and the introduction of a diversified product range that includes JLR's product suite across luxury cars.

TML is listed on the Bombay Stock Exchange, the National Stock Exchange and the New York Stock Exchange. As of March 2020, TML was 42.4% owned by Tata Sons and other Tata Group companies. Pro-forma the just announced preferential allotment of shares and conversion of the warrants, the Tata Group shareholding in TML will increase to 46.4%.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

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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