Speed breaker: S&P downgrades Tata Motors
Tata Motors’ standalone vehicle sales improved 47% in the first half of the current financial year but that of JLR fell 9% during the period.
S&P Global ratings on Tuesday downgraded Tata Motors’ (TML) long-term credit rating to ‘BB-’ from ‘BB’ citing falling profitability of its passenger vehicles subsidiary JaguarLand Rover (JLR), and noted that the rating can be lowered in case the proposed turnaround plan of JLR fails.
The rating agency also downgraded JLR in equal measure and both the companies have been kept on credit watch with negative implications.
The move by the rating agency comes close on the heels of Moody’s revising its outlook on TML to negative from stable and that for JLR to ‘Ba3 negative’ from ‘Ba2 stable’. This is the second instance in the current financial year that the two leading rating agencies have downgraded TML and JLR, earlier being in July.
“We expect India-based Tata Motors’ leverage to deteriorate over the next 12-18 months, given the ongoing cash losses at its European subsidiary JLR, despite its turnaround plans,” S&P said in a release. While retaining its ‘Ba2’ rating for the Indian car manufacturer, Moody’s too had noted that an upgrade is unlikely in the next 12-18 months.
JLR has chalked out cost-cutting and efficiency plans which could potentially result in savings of £2.5 billion in the next 18 months, but S&P notes that the target amount to be aggressive. “Our base case assumes only about £1.5 billion of such cost cuts and working capital reduction, albeit over a longer period. We believe such drastic cost cutting measures in a short period could dampen sales growth or disrupt the supply chain,” said the release.
S&P also expects JLR to have significant negative free operating cash flows over the next two years, in turn weakening financial ratios for TML. The agency has revised free operating cash outflows estimate to £2 billion in FY19 from earlier estimate of £1 billion, and £1.8 billion from £700 million for FY20. The revision comes after JLR reported a cash outflow of £2.3 billion in the first half of FY19.
Tata Motors has reported a consolidated loss of Rs 1,048 crore in the September quarter and `1,902 crore in the June quarter, mostly under pressure from JLR business. JLR has been facing multiple headwinds, including Brexit, slowing sales in China which fell 44% in the September quarter due to dealership issue and tepid diesel car sales in Europe and the UK.
TML made a quarterly loss in the September quarter despite a net profit of `109 crore in Indian operations and remaining the market leader in the commercial vehicle segment commanding 46% market share. Tata Motors’ standalone vehicle sales improved 47% in the first half of the current financial year but that of JLR fell 9% during the period.
While S&P expects TML’s commercial vehicle operations to remain the backbone of the company’s financials, the size of the operations is miniscule compared with JLR business which is spread over many countries including the UK, US and Brazil, among others.