Tata Motors’ (TML) operations excluding JLR, in particular, commercial vehicles and passenger vehicles in India, face acute challenges, with sluggish economic growth, weak liquidity, tight financing norms, and low rural income negatively affecting consumer sentiment, Moody's Investors Service said on Tuesday, even as it added that the preferential allotment of equity shares and convertible warrants to Tata Sons for a $914 million equity injection is credit positive.

"We view the preferential allotment as credit positive because TML plans to apply the proceeds towards reducing its debt," said Kaustubh Chaubal, a Moody's Vice-President and Senior Credit Officer, who is also Moody's Lead Analyst for TML. "The equity injection also reflects Tata Sons' continued support, and will somewhat reduce the pressure on TML's balance sheet, stemming from the weak operating performance of its India business, even as JLR delivers some improvement."

TML's PV sales volumes declined by 41 per cent in the first half of the fiscal year ending March 2020, while commercial vehicle volumes declined by 29.5 per cent over the same period.

Moody's Investors Service has also assigned a Ba3 rating to the proposed senior unsecured notes to be issued by Tata Motors Ltd (TML, Ba3 negative). The rating outlook is negative, Moody’s said in a statement.

“The proposed notes rank pari passu with TML's existing senior unsecured notes and are, therefore, rated at the same level as these notes and TML's Ba3 corporate family rating (CFR),” it said.

"The Ba3 ratings reflect TML's (1) leading market position in commercial vehicles (CVs) in India; (2) 100 per cent ownership of the premium/ luxury car manufacturer Jaguar Land Rover Automotive Plc (JLR, B1 negative); and (3) ownership by Tata Sons, which results in a one-notch uplift, reflecting our expectation of continued parental support, when needed," said Chaubal.

On 25 October, TML had announced that it will make a preferential allotment of equity shares and convertible warrants to Tata Sons for a $914 million equity injection, of which $548 million will be paid immediately, and the balance over a period of 18 months.

JLR on track to meet cost savings target

JLR continues to make progress on its cost savings and efficiency plan with the aim to achieve GBP 1.0 billion in cost savings by March 2020, having delivered GBP 0.5 billion up to September 2019, Moody’s said. In addition, JLR has also achieved GBP1.5 billion of its GBP1.7-billion target on capital expenditure and working capital improvements as of September 2019. Looking ahead, Moody's expects JLR's adjusted debt/EBITDA to improve from 10.6x at March 2019 to 6.0x over the next 12 months, it added.

Although TML will likely deliver slightly better volumes in H2 fiscal 2020 as festive demand picks up, Moody's remains sceptical about the long-term impact of short-term government stimulus measures for the auto industry, it said.

In particular, low capacity utilisation levels for PVs, the segment's low profitability (reported EBITDA margin of 0.1 per cent in fiscal 2019 and an EBITDA loss of 21.4 per cent in H1 fiscal 2020), pose a severe drag and key rating concern, it added.

Moody's expects a reversal in working capital in H2 fiscal 2020 and the equity injection from Tata Sons to be applied towards debt reduction, causing leverage to stay in the 5.7x-6.2x range over the next 12 months.

The negative outlook primarily reflects the challenges faced by TML's operations, excluding JLR, from the Indian auto sector's slowing sales due to weak demand, over-capacity and tightening liquidity, it said.

“The negative outlook also reflects the negative outlook on JLR and the execution risks related to a sustained turnaround in JLR's financial performance amid a subdued operating environment, uncertainty around Brexit, and the possibility of US tariffs,” it said.

On what could change the rating, Moody’s said that TML's ratings could be downgraded if JLR's ratings are downgraded; or the performance of its businesses -- excluding JLR -- remain 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 that Moody's would consider for a downgrade include leverage rising above 6.0x and EBITA margins falling below 2 per cent, 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, it said.

On the other hand, Moody's said the rating outlook could return to stable if the outlook on JLR's B1 ratings returns to stable; and TML's Indian operations, that have been under pressure for the last two-three quarters, improve significantly; both resulting in an improved trajectory of TML's credit metrics.

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