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Rating Action:

Moody's downgrades Tata Motors to Ba3; outlook negative

20 Jun 2019

Singapore, June 20, 2019 -- Moody's Investors Service has downgraded Tata Motors Limited's (TML) corporate family rating (CFR) and the company's senior unsecured instruments rating to Ba3 from Ba2.

The outlook remains negative.

RATINGS RATIONALE

"The downgrade reflects the sustained deterioration in TML's credit profile, with weaker than anticipated credit metrics -- led by the weak performance of its 100% owned subsidiary Jaguar Land Rover -- and our expectation that it will take longer than we had previously expected for the company's free cash flows to return to positive territory," says Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

See also Moody's press release on the downgrade of Jaguar Land Rover Automotive Plc's (JLR) ratings to B1 negative https://www.moodys.com/research/Moodys-downgrades-Jaguar-Land-Rovers-ratings-to-B1-outlook-negative--PR_403403.

TML's credit metrics for the fiscal year ending March 2019 (fiscal 2019) were significantly weaker than Moody's previous expectations, with consolidated debt/EBITDA leverage of 5.3x and adjusted EBITA margins of just about 0.9%, both breaching the downgrade triggers for the earlier Ba2 ratings. While the company's restructuring efforts should prevent a further deterioration in its credit metrics, Moody's expects leverage will remain around 5.0x, EBITA margins weak and under 3%, and cash flows will remain negative for at least the next 18-24 months.

"The negative outlook on TML's ratings principally reflects the execution risks related to the timely turnaround of JLR's operations amid a subdued operating environment, driven by rising competition, the potential for a 'no-deal' Brexit, and the possibility of US tariffs," adds Chaubal, who is also Moody's Lead Analyst for TML.

"In addition, India's auto sector also faces challenges from slowing sales due to overcapacity, tightening liquidity, and a shrinking dealer network," says Chaubal.

JLR's credit profile has been under pressure for some time now. Challenging Chinese markets, persistent weakness in diesel car sales in Europe and the UK, and the business shift towards electrification, hybrid and full electric vehicle options to support the overall model line-up will require continued significant investments, pressuring JLR's free cash flow generation.

Although JLR accounted for 48% of TML's group unit sales in fiscal 2019, it generated 75% and 24% respectively of consolidated revenue and EBITDA for TML's automotive business, and accounted for 63% of consolidated debt; based on Moody's adjustments. Given these large contributions, the weakening credit metrics at JLR have a direct and immediate impact on the group's consolidated results and weigh on TML's credit profile.

On balance, and despite the challenging industry conditions, TML's ex-JLR operations — comprising the commercial vehicles (CVs) and passenger vehicles (PVs) operations in India — reported a better performance, supported by cost rationalization measures and new product launches.

Looking ahead, Moody's expects auto demand will revive somewhat from the reelection of the government, likely normal monsoon season, stable fuel prices, and the pre-buying ahead of the country's migration to the equivalent of Euro VI emission norms.

Moody's expects TML's fiscal 2019 new launches -- 48 in its CV offering and five new launches in PVs -- along with efforts to improve customer service and engagement will help it achieve above-industry-average growth rates, as well as an improved market share in its respective segments.

While an industry leader in CVs in India with a solid 45% market share, the company's PV business has just turned around, with TML achieving an estimated 6.3% share in fiscal 2019, up from 4.6% in fiscal 2016. The ability of the PV business to sustain this improvement will therefore remain a key rating sensitivity, especially amid slowing, although mid-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, when needed.

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. Continued tightening of emissions standards and regulations across most major markets, driven by environmental concerns, also require 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 for hybrid and electric vehicles among different consumers presents a challenge for OEM's including JLR and to some extent also, Tata Motors.

Ownership and control are also key to Moody's assessment of governance risk. In particular, concentrated ownership and control raise the potential for conflicts of interest and/or related party transactions that are not aligned with creditor interests. TML is 38.4% owned by Tata Sons and various other entities of the Tata group. Moody's views governance risk as moderate with no overall impact on TML's ratings, at the current time.

WHAT COULD CHANGE THE RATING DOWN/UP

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

Specific credit metrics Moody's will watch for a downgrade include consolidated debt/EBITDA at levels above 6.0x, and EBITA margins remaining below 2%, both on a sustained basis.

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

Although unlikely within the next 12-18 months, upward ratings pressure could occur if: (1) JLR's operating performance improves, causing its credit metrics to strengthen; (2) TML further strengthens its market shares in the Indian CV and PV markets; (3) the improving profitability of TML's business —excluding JLR — is sustained; and (4) TML maintains consolidated debt/EBITDA below 4.5x, generates positive free cash flows, and demonstrates EBITA margins in excess of 4%, all on a sustained basis.

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 Jaguar Land Rover Automotive Plc (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 38.4% owned by the Tata group entities at 31 March 2019.

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 - 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

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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