MUMBAI: Moody's Investors Service on Friday downgraded Tata Motor's senior unsecured instrument ratings to Ba2 from Ba1, but maintained a stable rating outlook.
"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)," said Kaustubh Chaubal, Vice President and Senior Credit Officer, Moody's.
Although JLR accounted for 48 per cent of TML's group unit sales as on March, 2018, it generated 78 and 76 per cent of consolidated revenues and EBITDA respectively.
"Given this large contribution, weakening credit metrics at JLR have a direct and immediate impact on TML's consolidated results," Moody's said noting that the improving financials are insufficient to compensate for JLR's weakening metrics and considering its large capital and product development expenditure of GBP4.5 billion annually that will keep free cash flows negative.
Moreover, rising commodity prices and a challenging operating environment for JLR will keep Tata Motor's EBITA margins below 3 per cent.
Moody's expects India's commercial vehicle industry to grow by mid-teen percentages over the next 12-18 months, but low capacity utilization and cash burn in passenger vehicles will be a drag and thus a rating concern.
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.However, any pressure on JLR's Ba2 ratings will have an immediate impact on TML's ratings, Moody's noted.
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.