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Rating Action:

Moody's downgrades Tata Motors to Ba2; outlook stable

13 Jul 2018

Singapore, July 13, 2018 -- Moody's Investors Service has today downgraded to Ba2 from Ba1 the corporate family rating (CFR) for Tata Motors Limited (TML).

At the same time, Moody's has downgraded the company's senior unsecured instrument ratings to Ba2 from Ba1.

The rating outlook is stable.

RATINGS RATIONALE

"The downgrade to Ba2 reflects our expectation of continued weakness in TML's consolidated credit metrics over the next two years, led by its wholly owned subsidiary Jaguar Land Rover Automotive Plc (JLR, Ba2 stable)," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

Although JLR accounted for 48% of TML's group unit sales in the fiscal year ending March 2018 (fiscal 2018), it generated 78% and 76% respectively of the TML's reported consolidated revenues and EBITDA for the automotive business. Given this large contribution, weakening credit metrics at JLR have a direct and immediate impact on TML's consolidated results.

Notwithstanding the improvements in TML's Indian automotive business, it continues to operate at a higher leverage, with an estimated reported debt/EBITDA of 4.8x as of 31 March 2018. As such, the improvements are not sufficient to compensate for JLR's weakening metrics.

TML's consolidated adjusted debt/EBITDA rose to an estimated 3.8x as of March 2018 from 3.0x a year ago and is likely to remain elevated over the 12-18 months. At the same time, large capital and product development expenditure at JLR of GBP4.5 billion annually will keep free cash flows negative. Moreover, Moody's also expects that rising commodity prices and a challenging operating environment for JLR will keep TML's EBITA margins below 3%.

Meanwhile TML's ex-JLR operations, in particular the India business, will continue to improve, on the back of favorable industry dynamics, the company's upcoming product launches and focus on cost rationalization measures.

Moody's expects India's commercial vehicle (CV) industry to grow by mid-teen percentages over the next 12-18 months. TML is the market leader in this segment -- commanding a solid 45% of the market -- and will likely continue to introduce new products, sustaining its recent track of above-industry-average growth rates, thus modestly strengthening its overall market share.

TML's share of the passenger vehicle (PV) market also increased to an estimated 6.5% Q4 fiscal 2018 from 4.9% in Q1 fiscal 2018, but TML's low capacity utilization levels and cash burn in PVs are a drag and thus a rating concern.

Moody's expects the Indian PV market to grow at high-single digit percentages over the next 12-18 months, and for TML to further grow its market share through new product launches and efforts to improve its customer service and engagement.

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 stable outlook reflects JLR's relative strength and Moody's expectation that although capital spending and product development requirements will remain high over the next two years, TML's sizeable consolidated cash balances, strong operating cash flow and long-dated debt maturity profile will allow the company time for its free cash flow to return to positive.

The stable outlook also reflects TML's leadership position in CVs in India, in turn underpinning strong growth prospects for its ex-JLR operations.

WHAT COULD CHANGE THE RATING DOWN

Any pressure on JLR's Ba2 ratings will have an immediate impact on TML's ratings.

Downward rating pressure could also emerge if TML's ex-JLR businesses are unable to sustain their performance because of weak market conditions, input cost pressure, disappointing new products or a significant decline in its market share, resulting in lower revenue and declining earnings and cash flow.

Credit metrics indicative of downward rating pressure include adjusted debt/EBITDA exceeding 5.0x and a significant weakening in EBITA margins from their current levels.

WHAT COULD CHANGE THE RATING UP

Given JLR's large contribution to TML's consolidated earnings and cash flow, JLR's ratings would need to be upgraded for any upward pressure on TML's ratings.

In addition, TML's ex-JLR businesses would need to show growth with improving profitability. For example, through a strengthening of its already solid market leading position in commercial vehicles and an increased share in the passenger vehicle market, such that it regains its #3 position.

Consolidated metrics for a higher rating include adjusted debt/EBITDA below 4.0x and a reduction in its negative free cash flows. A structural improvement in profitability with EBITA margins sustained at levels of at least 4% would also be key for a higher rating.

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 the 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, Brazil, and 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 36.4% owned by the Tata group entities as of 30 June 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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