FITCH ON TATA MOTORS

Fitch Ratings has affirmed India-based Tata Motor Limited’s (TML) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB’. The Outlook is Stable.

KEY RATING DRIVERS

Robust Financial Profile: TML’s consolidated financial profile remains robust. The company’s consolidated net leverage remained low at 1.09x in FY13 (FY12: 1.24x) while EBITDA interest cover was 6.91x (FY12: 7.95). The strong credit metrics largely reflect strong sales and profitability at TML’s UK-based subsidiary Jaguar Land Rover Automotive PLC (JLR; BB-/ Stable).

Fitch expects TML’s financial profile to remain robust despite its large capex plans. The company invested INR187.6bn during FY13, which is likely to increase further during the next three years as it spends on product development and new technology, and on expanding production capacity at JLR. The agency expects capex to be largely funded from operational cash flows. TML’s strong financial flexibility, and the large cash balances (2QFY14: GBP2.7bn) and undrawn committed facilities (2QFY14: GBP1.3bn) at JLR also contribute to the robust financial profile.

Strong Performance of JLR: JLR’s strong sales and profitability momentum in FY11-13 have been underpinned not only by buoyant underlying demand for premium vehicles, but also by a strengthened product portfolio and a number of successful model launches (including the Range Rover Evoque, Range Rover Sport, and Freelander 2). JLR’s January-November 2013 sales volume increased across all regions, including in Europe, despite an overall decline in sales given the weak market conditions. Fitch expects the performance of JLR to remain strong over the medium term with stable profitability and rising sales volume supported by its strong brand positioning, favourable operating environment and new product launches.

Weak Standalone Performance: The standalone performance of TML continues to remain weak. The company’s sales volume continues to be impacted by weak auto demand in India on account of high fuel prices, high borrowing costs and weak consumer sentiment given the economic uncertainty. The domestic sales volume of TML’s commercial vehicles fell by 23.7% and that of its passenger vehicles dropped by 36% during the April-November 2013 period.

TML also faces rising competition across all its segments. While the company has maintained its strong market position in the commercial vehicle segment with over 50% market share, its share of the passenger vehicle market declined. Fitch expects demand to continue to remain weak in the near term, but an improvement in economic growth and TML’s plans for new product launches could support a turnaround in the company’s performance.

Linkages with Tata Group: The FC IDR of TML continues to benefit from a one-notch uplift on account of potential support from the Tata Group. Fitch assesses the linkages as moderate in line with its Parent and Subsidiary Rating Linkage methodology. Any weakening of linkages between the group and TML, and/or the group’s inability to provide support would likely affect the ratings negatively.

RATING SENSITIVITIES

Negative: Future developments that may collectively or individually lead to negative rating actions include:

- a weakening of linkages between the Tata Group and TML

- consolidated financial leverage (excluding TML’s auto financing subsidiary Tata Motors Finance Limited) exceeding 2.0x on a sustained basis due to reduced sales or profitability (at TML, JLR or both), or due to higher than expected debt levels

Positive: Future developments that may collectively or individually result in positive rating actions include:

- strong growth in sales volume for TML (standalone) and JLR through increased geographic and product diversification, while maintaining strong profitability